Today, the use of an IC-DISC (Interest Charge Domestic International Sales Corporation) generates permanent tax savings for U.S. exporters, with additional tax savings provided by the Domestic Production Activities Deduction (“DPAD”).
Tax reform proposals that would have the biggest impact on U.S. exporters are:
- The corporate income tax rate and its applicability to pass-through companies,
- Capital gains tax rate and whether it continues to apply as the rate for qualified dividends,
- The potential elimination of the 3.8% passive income tax, and
- Border adjustments.
Currently, the use of an IC-DISC can produce permanent federal tax savings of up to 15.8%. This is calculated as the difference between the highest individual income tax rate of 39.6% and the sum of the highest qualified dividend tax rate of 20% plus the 3.8% passive income investment tax (39.6% – 23.8% = 15.8%).
If the existing DISC regime remains and the capital gains tax is set at 50% of the corporate income tax rate, the IC-DISC benefit would be 10%, assuming a 20% business income tax (20% – 10% = 10%). Border adjustments would eliminate any income tax on export-related taxable income and the use of an IC-DISC would be limited to tax deferral or other special purposes.
While tax reform is uncertain, exporters should be taking full advantage of the permanent tax savings already provided by an IC-DISC today. Serious consideration should also be given to deferring DISC dividends, as long as future individual income tax rates are expected to drop.
Contact us to learn how to maximize export related tax savings, model the impact of tax reform proposals, or just to keep abreast of rules directly impacting exporters.