Unlocking Export Tax Savings: Understanding the IC-DISC

One of the most often overlooked tax-saving opportunities available to U.S. businesses is the Interest Charge Domestic International Sales Corporation, or IC-DISC. While the name may sound complex, the concept is relatively straightforward - and the potential tax benefit can be significant. This incentive is specifically aimed at companies that export U.S.-manufactured goods, whether they’re sending heavy equipment overseas or shipping fine art to international collectors.

Despite its relatively narrow scope, the IC-DISC remains one of the few tax strategies expressly sanctioned and preserved by Congress, offering exporters a way to permanently reduce their federal tax liability.

What Is the IC-DISC?

The IC-DISC was created by Congress in 1971 to promote U.S. exports by offering favorable tax treatment to export income. While the original DISC rules were more aggressive, the modern version - codified and restructured in 1984 and reaffirmed in the 2004 Jobs Act - is a well-established, legitimate tool for exporters.

At its core, an IC-DISC is a paper corporation - set up as a C-Corporation - that receives a commission on a U.S. company's export sales. This commission is deductible to the operating company, and once received by the IC-DISC, it can be distributed to the shareholders as qualified dividends, taxed at the lower capital gains rate (typically 15%–20%) instead of the higher ordinary income rate.

Even S-corporations and LLCs can benefit from an IC-DISC structure, provided the IC-DISC is formed and maintained as a separate C-corp.

How Does the Basic Calculation Work?

The IRS allows the commission paid to the IC-DISC to be calculated using the greater of:

• 4% of gross export receipts
• or 50% of combined taxable income (CTI) from qualified export sales.

This flexibility allows companies to optimize the commission amount depending on their business model. For many high-margin businesses, the 50% CTI method yields the better result, while the 4% gross receipts method can be more advantageous for volume exporters with lower profit margins.

After the commission is calculated and paid to the IC-DISC, that income - now housed in a separate entity - can be distributed to shareholders as dividends, qualifying for lower tax rates. That spread between the ordinary income tax rate on business income and the qualified dividend rate is where the tax savings lie.

How Do You Qualify?

Not every company can set up an IC-DISC. There are specific criteria both the company and the products sold must meet:

1. Export Property Requirement: The goods must be manufactured, produced, grown, or extracted in the United States, and must be destined for use outside the U.S.
2. Ownership and Structure: The IC-DISC must be a domestic C-corporation with a single class of stock and must elect IC-DISC status with the IRS via Form 4876-A.
3. Qualified Gross Receipts: At least 95% of the IC-DISC’s gross receipts must come from qualifying export transactions.
4. Qualified Assets Test: At least 95% of the IC-DISC’s assets must be qualified export assets (e.g., receivables from export sales).

In addition to these technical requirements, the company must maintain proper records and transfer pricing documentation to support the commission calculation.

Working Example

Let’s say you have an S-Corporation that generates $1 million in net export income from qualified export sales. Under the IC-DISC rules, you're allowed to pay a commission of up to $500,000 (i.e., 50% of CTI) to your IC-DISC.

• This $500,000 is deductible to the S-Corp, reducing the S-Corp’s pass-through income.
• The IC-DISC then distributes that $500,000 as a qualified dividend, taxed at the favorable 20% capital gains rate.
• To keep the comparison fair, we also apply the 20% QBI deduction (qualified business income) to the S-Corp income in the non-IC-DISC scenario.

Here’s how the numbers stack up...

Without IC-DISC

• $1,000,000 in S-Corp income
• Less 20% QBI deduction = $200,000
• Taxable income = $800,000
• Tax at 37% = $296,000

With IC-DISC

• S-Corp retains $500,000 (the other $500,000 is paid as deductible commission)
• $500,000 less QBI deduction (20%) = $400,000
• Tax at 37% = $148,000
• IC-DISC distributes $500,000 as a qualified dividend taxed at 23.8% = $119,000
• Total tax = $267,000

Export Scenario

Total Tax Owed

• Without IC-DISC: $296,000
• With IC-DISC: $267,000

Net Savings: $29,000!

That’s a 4.1% tax savings on $1 million of net export income. As the export sales and/or the net income on export sales increases, this benefit will continue to increase. For example, using $2million as the net export sales number would save about $58,000 is cash tax savings. The key takeaway is that the IC-DISC still provides a permanent tax arbitrage, even for S-Corp owners already benefitting from the QBI deduction.

Who Might Qualify for IC-DISC?

Although often associated with industrial manufacturers, the scope of who qualifies for an IC-DISC is broader than many realize. A few examples include:

• Visual Artists: A U.S.-based painter selling original works to collectors in Europe or Asia could qualify if the art is considered “produced in the U.S.” and physically exported.
• Farmers and Agricultural Producers: U.S. growers exporting cotton, grains, or wine can leverage the IC-DISC to reduce taxable income from foreign sales.
• Resellers and Distributors: U.S. companies buying domestic-made equipment and exporting it - such as machinery dealers - may also qualify, provided they don’t materially alter the product outside the U.S.
• Manufacturers of Niche Products: Whether it’s custom software on hardware, medical devices, or even consumer goods, as long as the product meets the export property definition and is shipped abroad, it’s worth considering.

Conclusion

The IC-DISC is one of the rare tax strategies that offers a permanent tax benefit - not just a deferral. For qualifying businesses, it transforms a portion of ordinary income into qualified dividends, offering meaningful tax savings year after year. While setup and compliance require careful planning, the rewards often far outweigh the administrative burden.

If your business exports U.S.-made products - or even components or intellectual property - then the IC-DISC is a strategy you shouldn’t ignore. It’s a testament to how the U.S. tax code still offers real incentives to businesses contributing to global trade.