U.S. exporters leaving tax dollars on the table

Forming interest charge domestic international sales corporations can save U.S. exporters a great deal of taxes, but many qualifying taxpayers don’t know about them.
By Allison L. Evans, CPA, Ph.D.; Jonathan Harris; and James H. Irving, CPA, Ph.D.

U.S. exporters leaving tax dollars on the table
Photo by Daniel Barnes/iStock

U.S. exporters—including, but not limited to, manufacturers—that create an IC-DISC (interest charge domestic international sales corporation) can enjoy potentially large tax savings with relatively low initial costs. Congress created the IC-DISC in a manner that allows it to exist primarily on paper, and the Treasury Department further clarifies in Regs. Sec. 1.992-1(a) that this type of entity enjoys a "relaxation of the general rules of corporate substance." By incorporating an IC-DISC, exporters can transform at least one-half of their taxable income from qualified export receipts into a qualifying dividend, which could reduce the tax bill on that portion of their income by approximately 40% (and the overall tax bill on exports by approximately 20%).


To qualify as an IC-DISC, a company must be an eligible corporation, must meet the qualified gross receipts and the qualified export assets tests, have one class of stock, and make a timely election. The IC-DISC cannot be an S corporation, a registered investment company, an insurance company, a personal holding company, a tax-exempt corporation under Sec. 501, or a bank or trust company (Sec. 992(d)).

At least 95% of the company's receipts each tax year must be qualified export receipts (Sec. 992(a)(1)(A)), which are defined under Sec. 993(a) and include:

  1. Gross receipts from the sale, exchange, or other disposition of export property.
  2. Gross receipts from the lease or rental of export property used outside the United States.
  3. Gross receipts for services related to any qualified sale, exchange, lease, rental, or other disposition of export property.
  4. Gross receipts from the sale, exchange, or other disposition of qualified export assets (other than export property).
  5. Dividends on stock of a related foreign export corporation (as defined in Sec. 993(e)).
  6. Interest on any obligation that is a qualified export asset.
  7. Gross receipts for engineering or architectural services for construction projects located or planned outside the United States.
  8. Gross receipts for the performance of managerial services in furtherance of a DISC's production of other qualified export receipts.

Thus, under this test, many types of companies can be exporters qualified to use an IC-DISC, beyond those that manufacture and directly sell to foreign entities. U.S. manufacturers that sell their products to other U.S. companies where they are used as a component of an exported good (e.g., tires for an automobile) meet the qualifications. Software developers and agricultural cooperatives can also qualify, as well as distributors of U.S.-made or U.S.-grown products. Domestic architectural or engineering services working on foreign construction projects (even those in the planning stage) meet the definition of an exporter. Companies that rent or lease export property used outside the United States and those that provide services related to the sales of export property (such as warranty claims or repairs) are also entitled to use an IC-DISC. To qualify, any export property must be made primarily of nonimported materials.

The qualified export assets test (Sec. 993(b)) requires the adjusted basis of the corporation's qualified export assets at the close of the tax year to equal or exceed 95% of the sum of the adjusted basis of all of the corporation's assets. Those assets are:

  • Export property (defined in Sec. 993(c)).
  • Assets used primarily in connection with the sale, lease, rental, storage, handling, transportation, packaging, assembly, or servicing of export property, or to perform engineering or architectural services described in (7) above or managerial services in furtherance of the production of qualified export receipts described in (1), (2), (3), and (7) above.
  • Accounts receivable and evidences of indebtedness that arise by reason of transactions of the corporation or of another corporation that is a DISC and that is a member of a controlled group that includes a corporation described in (1), (2), (3), (4), (7), or (8) above.
  • Money, bank deposits, and other similar temporary investments reasonably necessary to meet the corporation's working capital requirements.
  • Obligations from a "producer's loan" (defined in Sec. 993(d)).
  • Stock or securities of a related foreign export corporation (defined in Sec. 993(e)).
  • Obligations issued, guaranteed, or insured, in whole or in part, by the Export-Import Bank of the United States or the Foreign Credit Insurance Association in those cases where those obligations are acquired from the Export-Import Bank or Foreign Credit Insurance Association or from the seller or purchaser of the goods or services with respect to which the obligations arose.
  • Obligations issued by a domestic corporation organized solely to finance sales of export property under an agreement with the Export-Import Bank under which the corporation makes export loans guaranteed by the Export-Import Bank.
  • Amounts (other than reasonable working capital) on deposit in the United States that are used during the period provided for by the IRS to acquire other qualified export assets.

For a new corporation, the election to be treated as an IC-DISC must be made within 90 days of the beginning of the year. For existing corporations, it must be made within the 90-day period before the election is to be effective. All who are shareholders on the first day of the tax year for which the election is to be effective must consent (Sec. 992(b)(1)).


Congress created the present-day IC-DISC, a C corporation that is tax-exempt for federal income tax purposes, in the Deficit Reduction Act of 1984, P.L. 98-369, though its roots date to DISC legislation enacted by President Richard Nixon's administration in 1971 (P.L. 92-178). Its value as a tax planning tool in 1984 was limited to tax deferral. When Congress granted preferential tax treatment to qualifying dividends in the Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27, the value of an IC-DISC increased dramatically, becoming an opportunity for permanent tax savings for as long as Congress renewed the preferential tax rate on dividends.

The use of IC-DISCs as a tax-savings tool also increased when Congress passed legislation in 2000 to end the use of foreign sales corporations (P.L. 106-519) and in 2004 to repeal the extraterritorial income exclusion (P.L. 108-357), both of which were ruled illegal subsidies by the World Trade Organization. After those tax law changes, the IC-DISC provisions became the strongest tax incentive supporting the export of domestic products and services. In the American Taxpayer Relief Act of 2012, P.L. 112-240, Congress made the preferential dividend tax rates permanent. By doing so, it eliminated the largest remaining area of risk surrounding IC-DISCs.


An IC-DISC can be set up in two ways. As a commission IC-DISC, which the IRS reports is the most popular form, the exporter and the IC-DISC enter into a commission agreement whereby the IC-DISC serves (at least on paper) as a sales agent. Despite this supposed role, the IC-DISC is not required to have an office or any employees, and it does not have to own any tangible assets or perform any services. Thus, creating and maintaining it is not overly burdensome for the exporter, especially in comparison to the tax savings this structure can yield; and its use is not visible to the customer. Under the alternative IC-DISC structure, the buy-sell IC-DISC, the IC-DISC will actually take title to the goods and sell them outside the United States (requiring an actual sales force). Since the commission IC-DISC format is the less burdensome and more widely used, it is the focus of the remainder of this article. The different requirements and tax results between these two forms of IC-DISCs are beyond the scope of this article.

When using a commission IC-DISC, the exporter pays an agreed-upon commission (up to a maximum of the greater of 4% of its qualified export receipts or 50% of its taxable income from qualified export receipts) to the IC-DISC and deducts the commission payment, reducing its taxable income subject to tax at ordinary tax rates. For a partnership or LLC exporter, ordinary rates can be as high as 39.6% with the possibility of another 0.9% in additional Medicare tax (S corporation ordinary income is not subject to the 0.9% tax). Since the IC-DISC is tax-exempt, it will not pay tax on the commission income.

The IC-DISC will subsequently pay a dividend to its shareholders equal to the commission payment, meaning those dollars will be taxed at the preferential qualifying dividend tax rate, a maximum of 20% (23.8% after including the 3.8% net investment income tax). Based on these maximum rates for partnerships or LLCs, the differential equals 16.7 percentage points (15.8 for S corporations), or approximately 40% of the initial income tax bill on those commission dollars. The table, "Federal Income Tax Savings Example for Partnership/LLC Exporters," illustrates the federal income tax savings using these maximum rates for one year of export activity.

Federal income tax savings example for partnership/LLC exporters

Federal income tax savings example for partnership/LLC exporters

While the rate spread is smaller for C corporation exporters (from 35% to 23.8%), the magnitude of annual tax savings could be greater if the exporter was already making dividend payouts to its shareholders before creating an IC-DISC, since those nondeductible dividend dollars were being taxed twice—once as ordinary income to the exporter and again as a dividend at the shareholder level.

If the IC-DISC retains the commission income instead of timely distributing it to its shareholders, the IC-DISC shareholders will pay a small interest charge based on T-bill rates (equal to 2.4% in 2015) on the deferral of the tax payment. (The IC-DISC shareholders can only defer the tax payment up to the first $10 million of export gross receipts.)

For an exporter organized as a flowthrough entity, the IC-DISC would ideally be a subsidiary of the manufacturing company. Any dividend paid from the IC-DISC subsidiary to the flowthrough parent would ultimately flow through to the individual shareholders at the preferential tax rates. For a C corporation exporter, the company would generally set up an IC-DISC as a sister company, most likely owned by the individual shareholders of the exporter. Under this structure, the IC-DISC should pay the dividend directly to its shareholders to avoid double taxation.


The IRS received 2,592 returns filed by IC-DISCs in 2010, a significant increase from the 425 returns received in 2004 immediately following the repeal of the extraterritorial income exclusion. Similarly, 2010 gross receipts by exporters filing as an IC-DISC totaled $45.1 billion, a 750% increase from 2004 export gross receipts of $5.3 billion.

Based on 2010 tax return information, manufactured products comprised 84.3% of the filings, while nonmanufactured products and services accounted for the remaining 15.7%.

According to filings of Form 1120-IC-DISC, Interest Charge Domestic International Sales Corporation Return, IC-DISCs distributed $516.2 million to shareholders in 2010. Though this number is significant, it could be much higher if more qualifying companies created IC-DISCs. The Census Bureau reports that in 2010, export sales from manufacturers alone totaled $682.9 billion. IC-DISC export receipts from all activities equaled less than 7% of that number. By linking statistics for exporters provided by the U.S. Census Bureau detailing North American Industry Classification System industries and legal forms of organization, we estimate that nearly 12,000 manufacturing exporters organized as flowthrough entities had not yet formed an IC-DISC, amounting to $1 billion in annual tax savings left on the table (even before considering exporters that are C corporations or those with nonmanufactured products and services). As export sales continue to grow (they totaled $847.8 billion for manufacturers as of 2014, a 24% increase since 2010), the magnitude of potential tax savings continues to increase as well.


Once the IC-DISC is created, its shareholders must timely file Form 4876-A, Election to Be Treated as an Interest Charge DISC, to make a valid election. The IC-DISC must maintain at least $2,500 in capital and keep its own books and records. It is required to file an annual tax return (Form 1120-IC-DISC) using the same tax year as the principal shareholder.


  • States vary on their treatment of IC-DISCs. While many states grant tax-exempt status to IC-DISCs consistent with federal income tax treatment (e.g., Delaware, Michigan, and New York), other states do not (e.g., California, Maine, and Massachusetts). Thus, for some exporters, this tax benefit is a federal benefit only.
  • Once the IC-DISC is formed, it must continue to meet maintenance requirements to retain its tax-exempt status. (For more about these requirements, see "Tax Clinic: Benefits of Interest Charge Domestic International Sales Corporations," The Tax Adviser, Dec. 2014, www.thetaxadviser.com/issues/2014/dec/tax-clinic-01.html.)
  • The exporter does have to make the commission payment to the IC-DISC. While the cash flow concern is not as great for an IC-DISC parent structured as a flowthrough entity (since it would essentially pay the commission and receive an equivalent amount as a dividend), it is more of a concern for C corporation exporters with low liquidity.
  • Forming an IC-DISC does not limit a company's use of the Sec. 199 domestic production activities deduction.
  • Exporters cannot use the IC-DISC structure to create a tax loss.
  • The shareholders of the IC-DISC are not required to be the same as the shareholders of the U.S. exporter. Awarding IC-DISC shares may help reward certain employees. Share ownership may also be used toward estate planning goals.


IC-DISCs are a rare exception to the basic accounting tenet of substance over form. CPAs who provide services to exporters should investigate the IC-DISC as a way to bring value to their clients. (For more on other international consulting opportunities, see "Accounting Across Borders," JofA, May 2014.) U.S. exporters that qualify to be IC-DISCs should investigate this underused tax subsidy, one that can generate significant permanent tax savings each year.

About the authors

Allison L. Evans (evansal@uncw.edu) is an EY Faculty Fellow and associate professor of accountancy at the University of North Carolina—Wilmington in Wilmington, N.C. Jonathan Harris (jonathan.harris1@ey.com) is a member of the tax staff at EY in Charlotte, N.C. James H. Irving (irvingjh@jmu.edu) is an associate professor of accounting at James Madison University in Harrisonburg, Va.

To comment on this article or to suggest an idea for another article, contact Sally P. Schreiber, senior editor, at sschreiber@aicpa.org or 919-402-4828.

AICPA resources


"Benefits of Interest Charge Domestic International Sales Corporations," The Tax Adviser, Dec. 2014

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