What Is a Domestic International Sales Corporation?

An Interest Charge Domestic International Sales Corporation, commonly known as an IC-DISC, is an export tax incentive provided by the Internal Revenue Service. Its primary function is to allow United States exporters to defer income tax on a portion of their earnings from foreign sales. This structure was established to encourage the export of goods manufactured in the U.S. and enhance the global competitiveness of domestic companies. The entity itself is a “shell” corporation, meaning it has no employees or physical operations.

The core of the IC-DISC structure involves an exporting company creating this separate corporate entity. The exporting company then pays a commission to the IC-DISC based on its export sales. This commission is a deductible business expense for the exporter, which lowers its taxable income. The IC-DISC itself is a tax-exempt entity.

This tax deferral is not without cost. Shareholders of the IC-DISC must pay an annual interest charge to the IRS on their share of the deferred tax liability. Shareholders can only defer tax on income attributable to up to $10 million of qualified export receipts each year. Any income from receipts over this threshold is automatically distributed to shareholders and taxed annually.

IC-DISC Qualification Requirements

The entity must be established as a C corporation under the laws of any U.S. state or the District of Columbia. A fundamental rule is that the corporation can only have one class of stock. This requirement ensures a straightforward ownership structure without preferential treatment for different types of shareholders.

The corporation must maintain at least $2,500 in par or stated value of its outstanding stock on each day of the taxable year. The IC-DISC must also maintain its own separate bank account and a distinct set of books and records, separate from those of the exporting company it serves, to clearly track its financial activities.

Beyond the initial setup, an IC-DISC must meet two tests annually to maintain its qualified status. The first is the 95% Qualified Export Receipts (QER) test. This test mandates that at least 95% of the corporation’s gross receipts for the tax year must come from qualifying export activities, such as revenue from the sale or lease of export property for use outside the United States.

The second annual test is the 95% Qualified Export Assets (QEA) test. This rule requires that at least 95% of the corporation’s assets, measured by their adjusted basis at the end of the tax year, must be qualified export assets. These assets include the export property itself, working capital needed for export activities, and specific financial instruments like producer’s loans.

The IC-DISC Formation and Election Process

A new C corporation must first be legally formed according to the laws of a specific state. This involves filing articles of incorporation and fulfilling any other state-level requirements for creating a new corporate entity. This newly formed corporation will serve as the vehicle for the IC-DISC election.

Once the C corporation is established, the next step is to prepare the necessary information for IRS Form 4876-A, Election to Be Treated as an Interest Charge DISC. This form requires specific details about the corporation, including its legal name, address, and its Employer Identification Number (EIN). You will also need to provide the date the corporation was formed, the state of incorporation, and the tax year for which the election is to become effective.

A part of completing Form 4876-A is obtaining consent from all shareholders. Each person or entity holding stock in the newly formed corporation as of the beginning of the first taxable year must sign the consent statement on the form. This signifies their agreement to the corporation being treated as an IC-DISC for tax purposes.

With the form fully completed and signed, the final action is to file it with the appropriate IRS service center. The mailing address for submission is specified in the instructions for Form 4876-A. The filing deadline is strict: the election must be filed within 90 days after the beginning of the corporation’s first taxable year as an IC-DISC. Missing this 90-day window will prevent the corporation from qualifying as an IC-DISC for that year.

Calculating and Paying IC-DISC Commissions

To ensure commissions are not arbitrary, the IRS provides two “safe harbor” pricing methods for calculating the maximum allowable amount. The first method is based on 4% of the qualified export gross receipts. This is a straightforward calculation where the commission is 4% of the total revenue from qualifying export sales. For example, if an exporter has $2 million in qualified export sales, the maximum commission under this method would be $80,000.

The second method is based on 50% of the combined taxable income (CTI) from export sales. This approach requires calculating the net profit from those sales by subtracting the cost of goods sold and other allocable expenses from the gross export receipts. The IC-DISC commission can be up to 50% of this resulting net income. For instance, if the $2 million in export sales generated a net profit of $300,000, the commission could be as high as $150,000. The exporter can choose the method that yields the larger commission each year.

After the commission is paid to the IC-DISC, the funds are then distributed to the IC-DISC’s shareholders. These shareholders are typically the same individuals who own the operating company. The tax advantage arises here: these distributions are taxed to the shareholders as qualified dividends. The top federal rate for qualified dividends is 20%, though a 3.8% Net Investment Income Tax may also apply. These rates are significantly lower than the ordinary income tax rates that would have applied to the profit had it remained in the operating company.

Annual Compliance and Reporting

The most significant annual obligation is the filing of IRS Form 1120-IC-DISC, the Interest Charge Domestic International Sales Corporation Return. This informational return details the IC-DISC’s gross income, receipts, and distributions for the tax year. The due date for this return is the 15th day of the ninth month after the end of the corporation’s tax year.

Another deadline relates to the payment of the commission itself. The commission owed by the operating company to the IC-DISC for a given tax year must be paid within a specific timeframe. According to IRS regulations, this payment must be made within 60 days following the close of the operating company’s tax year. Timely payment is a strict requirement for the commission to be considered a valid deduction for the operating company and qualified income for the IC-DISC.