Why IC-DISCs Work !    

The primary reason DISCs Work as a Subsidy for Exporters is because Congress originally set up DISCs as a Subsidy Program in 1971, based on the deferral of Tax concept, on a portion of their Export Profits.  While popular with Public Companies, it never quite caught on with non Public Exporters. 

The original DISC program was deemed to be illegal by our trading partners and was terminated by congress in 1984 and reconstructed as an IC-DISC in 1985. The IC was added to overcome the objections to the DISC, that it did not pay interest on the original deferral.  Ergo the IC-DISC, which the World Trade Organization accepted.  

However, Smaller Exporters never quite accepted the concept that borrowing money from the U.S. Treasury was in fact a viable subsidy and simply ignored the concept until the Tax Act of 2003.  This Act woke up a sleeping giant in IC-DISCs,  because of one provision, The maximum Tax Rate on Qualified Dividends for individual Taxpayers would be 15%.

It just so happened that deep in the DISC Regulations,  Reg. 1.995-1(d)(1), stated that Any amount includible in a shareholder's gross income as a dividend with respect to the stock of a DISC..... pursuant to paragraph(b) of this section shall be treated as a dividend for all purposes of the Code.

It would appear that even if Congress did not intend this result for IC-DISCs, it will be with us until Congress, either amends the Qualified Dividends Definition to exclude IC-DISCs, or eliminates the special Tax rate for such dividends for all Taxpayers.

In the meantime the benefit is usually equal to 10% of the net Export profit, if the Margin is 8% or more, up to 20% of the Net Profit if the Margin is less than 8%.

Basic IC-DISC Guidelines: 

1. Only Shipments made on or after the date of Formation qualify.
   
   
2. The benefit is only at the individual Shareholder level.         
       
   
3. Indirect Exports via distributors qualify. Statement required from distributor stating that certain goods were in fact reshipped "intact" within 12 months. (May not become a component).   
      
   
4. One of the most important administrative steps is the filing of the 4876A Election within 90 days of formation and to keep verification of the mailing date.  This currently seems to be the only provision the IRS is concerned with and,  if they make a mistake it may take months to correct.                                   
   
   
5. The IC-DISC is normally on a calendar year, because it must adopt the tax year of the majority shareholder.  If a pass through Vehicle ie.  S or LLC,  owners form an IC-DISC they have the choice of their entity owning the stock or owning it individually because the Tax benefit will still be at the shareholder level.  Our advice has always been to own the stock individually since it gives each owner maximum flexibility.
   
   
6. Closely held, has nothing to do with any limit on Export Dollar Volume, it only refers to whether it is a Public Company, owning Stock as a Corporate shareholder,  ineligible for Qualified Dividend Tax Rates. 
   

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