What Are the Requirements to Qualify for an IC-DISC?

An Interest Charge Domestic International Sales Corporation (IC-DISC) is a federal tax incentive for companies that export products. It is a separate corporate entity established to act as a commission agent for a U.S. exporter, allowing the business to achieve a lower federal tax rate on its foreign sales income. The structure operates by having the exporter pay a commission to the IC-DISC, which generates a tax deduction for the exporter.

Initial Formation and Election Requirements

To benefit from an IC-DISC, a company must first form a separate corporation that meets several foundational requirements. The entity must be a domestic C corporation organized under the laws of a state or the District of Columbia. This corporation is often a “paper” entity, meaning it does not need to have employees, tangible assets, or a physical office to be valid. Its primary purpose is to serve as a conduit for export-related commissions.

The IC-DISC is permitted to have only one class of stock. This stock must have a par or stated value of at least $2,500. This minimum capitalization must be maintained on each day of the taxable year.

The corporation must maintain its own separate identity from the exporting company. This includes having its own bank account and maintaining a distinct set of books and records. These steps ensure the IC-DISC’s financial activities are clearly delineated from those of the related exporter.

The final step is making a formal election with the Internal Revenue Service (IRS) by filing Form 4876-A, Election To Be Treated as an Interest Charge DISC. This form requires the corporation’s name, address, employer identification number (EIN), the date the taxable year begins, and consent from all shareholders. The election must be filed within 90 days after the beginning of the first taxable year for which the corporation wishes to be treated as an IC-DISC.

The Qualified Export Receipts Test

Once formed, an IC-DISC must meet two operational tests each year to maintain its status. The first is the Qualified Export Receipts (QER) test. This rule requires that for a given taxable year, at least 95% of the corporation’s total gross receipts must be classified as qualified export receipts.

Qualified export receipts are derived from specific foreign sales transactions. The most common source is from the sale or disposition of “export property,” which is property manufactured, produced, grown, or extracted in the United States and sold for direct use outside the U.S. The property must also have no more than 50% of its fair market value attributable to imported articles. Other activities that generate qualified receipts include:

• Gross receipts from the lease or rental of export property for use by the lessee outside of the United States.
• Income from services that are related and subsidiary to a qualified sale or lease of export property, such as installation or maintenance.
• Interest earned on any obligation that is a qualified export asset, such as accounts receivable from export sales.

Certain types of income are explicitly excluded from being QERs. This includes receipts from the sale of property intended for use within the United States and receipts from any sales subsidized by the U.S. government. Failing to meet the 95% QER test can jeopardize the IC-DISC’s status, though provisions may allow a company to make a special distribution to shareholders to cure a failure.

The Qualified Export Assets Test

The second operational requirement is the Qualified Export Assets (QEA) test, which focuses on the IC-DISC’s balance sheet. At the end of its taxable year, the adjusted basis of the corporation’s qualified export assets must be at least 95% of the sum of the adjusted basis of all its assets.

Qualified export assets are directly linked to generating qualified export receipts. The most prominent QEAs include:

• Export property held as inventory for sale or lease to foreign customers.
• Accounts receivable and other debts that arise from transactions generating QERs.
• Assets used in connection with the sale, lease, storage, handling, transportation, or packaging of export property.
• Money, bank deposits, and other temporary investments needed to meet the corporation’s working capital needs.
• A “producer’s loan,” which is a loan made by the IC-DISC back to a domestic producer of export property.

Like the receipts test, a failure to meet the 95% asset test can be cured through a special distribution to shareholders after the close of the tax year.

Annual Compliance and Commission Payouts

After the close of the fiscal year, the IC-DISC must file an annual information return, Form 1120-IC-DISC, Interest Charge Domestic International Sales Corporation Return. This return reports the IC-DISC’s income and demonstrates its compliance with the two 95% tests. The due date for this form is the 15th day of the 9th month after the end of the corporation’s tax year, and no extensions are permitted.

A commission agreement, which can be oral or written, must be in place between the IC-DISC and the exporting company. The exporting company must pay a reasonable estimate of the commission to the IC-DISC within 60 days of the close of its tax year. If the final calculated commission is higher than the initial estimate, the remaining balance must be paid.

To realize the tax benefit, the IC-DISC must distribute its income to its shareholders. The IC-DISC itself is not subject to federal income tax on its commission income; instead, shareholders are taxed on these distributions. The income is treated as a qualified dividend, taxed at rates of 0%, 15%, or 20%, depending on the shareholder’s taxable income. For shareholders with income above certain thresholds, an additional 3.8% Net Investment Income Tax may also apply.