United States: How To Achieve Tax Savings On Exported Manufactured Products

In the Midwest, America's heartland, we are home to more than one-third of all manufacturing jobs in the United States and generate more than $100 billion in revenue from exports each year. Considering the recent history of trade deficits, unemployment and the weakening U.S. dollar, exports are a key positive aspect of the U.S. economy.

Many Wisconsin companies are obtaining tax savings by taking advantage of the Interest Charge-Domestic International Sales Corporation ("IC-DISC"), a little-known provision in the Internal Revenue Code. An IC-DISC permits an exporter to pay tax on a portion of its exports at only the 20% dividend rate. With the compromise in Washington effective beginning in January 2013, which has created a permanent rate differential between ordinary income (taxed at a top rate of approximately 40%) and dividends (taxed at 20%), now is the time to form an IC-DISC.

"Several of our portfolio companies have benefited from forming an IC-DISC and will continue to benefit," said Paul Stewart of PS Capital, LLC. "By using an IC-DISC to produce tax savings on exported products, these companies enjoy enhanced cash flows that are generally used to fund capital investment, job creation and other working capital needs, thereby allowing them to further grow their businesses.

"The increase in U.S. manufacturing jobs is good for our overall economy," Stewart added. "The IC-DISC is a no-brainer for those businesses that qualify to use this vehicle."

To achieve these benefits, (1) the owners of the exporter form an IC-DISC, (2) the exporter pays a tax-deductible commission to the IC-DISC and (3) the IC-DISC pays a dividend to the owners of the IC-DISC.

Under the Internal Revenue Code, an IC-DISC is a U.S. corporation that is not subject to the regular U.S. corporate income tax and, as a result, the IC-DISC does not pay tax on the commission received from the exporter. When the IC-DISC pays a dividend to the owners, the owners will pay tax at a 20% rate. If the exporter is a flow-through entity, such as an S corporation, a partnership or most limited liability companies ("LLCs"), the reduction in tax is twenty percentage points. In effect, the exporter is converting a 40% tax on income representing the amount of the commission to a 20% tax.

Calculating the Tax Savings

T he commission that a manufacturing company pays an ICDISC from sales of exported property should generally be an amount constituting either:

  • 4% of gross export sales or
  • 50% of the pre-tax income from exports.

An exporter can use either method to achieve the greatest IC-DISC commission possible. The IC-DISC rules permit using different methods of paying commissions based on different product line sales, by recognized industry or trade usage, or even by transaction. As a rule of thumb, the "pre-tax income from exports" method results in the largest IC-DISC commission when exports have a net pre-tax margin of 8% or greater (producing a benefit of approximately $100,000 for every $1 million of pre-tax income from exports). On the other hand, the "gross export sales" method provides the largest IC-DISC commission when the net pre-tax margin is less than 8% (producing a benefit of approximately $8,000 for every $1 million of gross export sales).

Case Study 1:

Sam, a U.S. citizen, owns WisCo, a Wisconsin LLC that is disregarded for U.S. tax purposes. WisCo has gross export sales of $6 million of low-margin products. Using 4% of the "gross export sales" method, WisCo will deduct a commission paid of $240,000, reducing Sam's U.S. tax by $96,000 (40% of $240,000). When the IC-DISC distributes the cash representing this commission as a dividend to Sam, Sam pays U.S. tax of $48,000 ($240,000 at a 20% tax rate on the dividend). As a result, the impact of the 4% of "gross export sales" method when combined with the 20% tax rate yields a tax savings of $48,000 ($96,000 less $48,000). T he tax savings would be even greater if WisCo were a C corporation because the earnings that are shielded by the IC-DISC commission and then converted to dividend tax rates when distributed from the IC-DISC create tax efficiency that would otherwise not exist within a C corporation.

Requirements for Export Property

Sales of export property qualify for the IC-DISC benefit. Export property includes traditional U.S. manufactured products. There are three requirements for a sale of export property to result in paying a commission to an IC-DISC:

  1. The property must be manufactured, produced, grown or extracted in the United States. The exporter can satisfy this requirement via the safe harbor of the cost of its U.S. activities constituting 20% of the cost of goods sold. In the alternative, the exporter may try to satisfy this requirement under subjective standards, using either the substantial transformation test (the product looks different than the materials) or by establishing that the U.S. activities are generally considered manufacturing in the industry.
  2. The export property must have a maximum foreign content of 50%. The exporter can satisfy this requirement by showing that the cost of foreign materials does not exceed 50% of the exporter's sales price.
  3. The export property must be held primarily for sale, consumption or disposition outside the United States. The exporter can satisfy this requirement with proof that the export property leaves the United States within twelve months of it being manufactured. Although this is a requirement, it is also an opportunity to expand the amount of sales that qualify for the benefit by including sales to U.S. distributors who sell the product abroad.

Case Study 2:

USAco sells widgets to a widget distributor in Buffalo. One of the Buffalo distributor's biggest customers is a Toronto company. If properly documented, the widgets re-sold by the Buffalo distributor to the Toronto company satisfy the destination test, thereby allowing USAco to use the IC-DISC vehicle even though it is not the direct exporter. In addition, if the Buffalo distributor is unrelated to USAco, the Buffalo distributor could also take advantage of an IC-DISC on the resale.

Moreover, even if the Buffalo distributor conducts an assembly activity that attaches the widgets to another product for export, USAco could still receive the IC-DISC benefit.

It is further noted that many exporters inadvertently fail to include products sold to Canadian customers because they transport these products by ground freight as opposed to air or boat.

Requirements to Qualify the IC-DISC

To qualify as an IC-DISC, the domestic corporation must pass both a "qualified export receipts" test and a "qualified export assets" test. The IC-DISC entity passes both tests if (1) it only receives a commission for export sales and (2) it distributes the cash representing that commission to its shareholders prior to the end of the year. The ICDISC rules require that the shares have a par value of $2,500 and its owners should deposit that amount in a bank account for the IC-DISC. The IC-DISC must elect IC-DISC status by filing a Form 4876-A with the IRS within 90 days of incorporation.

The IC-DISC Structure

As the previous case studies have illustrated, an IC-DISC can be a brother-sister entity of a flow-through entity (S corporation, LLC or partnership) that exports its manufactured products. The same federal tax benefits are available if the IC-DISC is a subsidiary of an exporting flow-through entity.

Case Study 3:

The owner of an S corporation, U.S. individual, would like to implement an IC-DISC to save taxes on exports. However, due to covenants in a line of credit with its bank, the S corporation cannot form an IC-DISC as a brother-sister entity because the commission would siphon funds from the bank's potential lien. As a result, the S corporation owns the IC-DISC. The commission reduces the ordinary income of the S corporation that would otherwise be taxed to U.S. individual at a 40% rate. The subsequent dividend is a separately stated item of income of the S corporation such that the U.S. individual pays tax at only a 20% rate.

An IC-DISC should not be a subsidiary of a C corporation because the IC-DISC dividend is not eligible for a dividends received deduction. As a result, the C corporation would pay tax on the IC-DISC dividend and, accordingly, would not receive a benefit. However, the owners of the C corporation may own the IC-DISC as a brother-sister entity. If the exporter is a C corporation, the current reduction in tax is generally 32 percentage points as a result of only a single level of tax on the corporate earnings that the commission represents.

Case Study 4:

U.S. individual owns a C corporation. By forming an ICDISC as a brother-sister entity, U.S. individual moves earnings away from the C corporation and pays only a single level of tax at a 20% rate.

If a C corporation has many owners, the IC-DISC could be owned by a trust, whose beneficiaries would be the owners of a C corporation. Under this structure, the trust would be able to distribute the dividends to the beneficiaries without having to worry about constantly changing the ownership of the IC-DISC to replicate the ownership of the C corporation's shares.


Many manufacturing companies do not realize that direct and indirect exports of manufactured products qualify for IC-DISC treatment. A detailed analysis of the sales channels for manufactured products often results in the conclusion that the IC-DISC vehicle is available to yield tax savings. However, execution is critical to ensure that the ICDISC and the export sales qualify for this benefit. Implementation considerations should include the following:

  • incorporate the IC-DISC before the export sales begin (waiting until December to form the IC-DISC will result in only December sales qualifying);
  • analyze the export sales, which includes sales of parts to (1) U.S. customers that attach such parts to products that the U.S. customers ultimately export and (2) Canadian customers that receive shipment by ground transportation;
  • prepare a commission agreement between the IC-DISC and the exporter;
  • prepare and file the Form 4876-A that elects IC-DISC status within 90 days of incorporation; and
  • prepare a manual that contains guidelines for the exporter's operating procedures, which includes a checklist/calendar to determine when the client should complete various activities – such as how the exporter should determine that the IC-DISC has satisfied the various requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Strasburger & Price, L.L.P.
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Strasburger & Price, L.L.P.
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions