IC-DISC: A Powerful Tax Savings and Planning Tool for Privately Held U.S. Companies

Uncover or Improve IC-DISC Tax Savings – It’s Not Just for Exporters

You may be missing a federal tax incentive that has no effect on business operations, and that is even recommended by the U.S. Department of Commerce. Privately held U.S.-based businesses continually seek strategies to boost cash flow, reduce taxes, and remain agile in international trade, especially in an increasingly competitive marketplace. If your company sells or manufactures at least partially U.S.-produced goods that are expected to be used or consumed abroad (including Canada and Mexico), the Interest Charge Domestic International Sales Corporation (IC-DISC) may provide significant advantages. The IC-DISC is a powerful but often overlooked and underutilized tool. Properly implemented, the IC-DISC can translate such activity into immediate, permanent tax savings, supporting growth and opening the door to new structuring options.

What Is an IC-DISC?

The IC-DISC is a provision in the U.S. tax code (sec. 991-997 and related Treasury regulations) designed to encourage domestic production and expand American exports. However, it is important to note that a company need not be the producer of goods, nor even the exporter, to benefit. At its core, an IC-DISC is a separate corporation that receives commissions, typically for nothing more than being properly qualified as an IC-DISC, as intended by Congress and explicitly defined in the tax code and regulations. The commissions are based on qualified sales made by a U.S. company. This arrangement allows a portion of a company’s qualified income – at least half of its net taxable income – be taxed at the qualified dividend rate (23.8% maximum rate) rather than at ordinary income rates (as high as 40.8%), often resulting in meaningful tax savings for company owners.

The good news is that the recently enacted One Big Beautiful Bill Act did not directly alter the core structure of the IC-DISC, though there may be indirect changes that impact IC-DISC calculations and benefits. Your CBIZ tax professionals can advise on how these changes interact with IC-DISC strategy.

How Does the IC-DISC Structure Typically Work?

Here’s how the strategy typically unfolds:

• Formation: A U.S. company establishes an additional, separate corporation that elects IC-DISC status with the IRS. This entity must meet certain formal requirements, such as being incorporated domestically and deriving most of its income from eligible sales (typically the direct or indirect export sales of the related operating company, or exports by its customers).
• Commission Agreement: The operating company pays a commission to the IC-DISC. The commission is calculated using IRS-allowed formulas, typically as a percentage of qualified export sales or the company’s export income.
• Tax Savings: The commission is a deductible expense for the operating business, reducing its taxable income at ordinary tax rates. The IC-DISC, which is generally not subject to federal income tax on qualifying commission income, distributes this income to its shareholders, who are typically the owners of the operating company. These distributions are taxed at long-term capital gains (dividend) rates, which are always lower than ordinary rates.
• Interest Charge on Deferral: If the IC-DISC retains any of its earnings, shareholders pay a small interest charge to the IRS, which is intended to offset the benefit of deferring tax on the distributed income.

Strategic Advantages for Companies

While tax savings are the most apparent benefit, using an IC-DISC offers several broader advantages:

• Enhanced Cash Flow: The primary result is improved after-tax cash flow, giving companies greater flexibility to reinvest in growth, enter new markets, or weather industry downturns.
• Ownership Flexibility: IC-DISC shares can be owned directly by individuals, family trusts, or even retirement plans, providing additional planning opportunities around succession or family wealth transfer.
• Employee Incentives: Companies can use IC-DISC ownership structures as part of executive compensation packages, potentially motivating key employees by giving them equity in the entity.
• Competitive Pricing: The savings realized through IC-DISC structures can allow exporters to offer more competitive prices internationally or allocate resources to product development or marketing.

Who Can Benefit?

IC-DISC benefits are available to a range of businesses, including manufacturers, producers, farmers, software providers, and even architectural or engineering firms whose services relate to foreign construction projects. Typically, companies with at least a few million dollars in annual exports or other eligible sales find that the advantages outweigh the minimal compliance and administrative costs.

A common mistake is to only consider the IC-DISC if your company produces and exports products. As an example, CBIZ identified savings exceeding $100,000 annually for an Ohio parts producer selling components to domestic companies. Because the components were incorporated into products manufactured abroad, they are explicitly eligible for IC-DISC savings. Other examples include services provided by a Utah engineering firm to a domestic company for its client’s factory in Mexico.

Most believe that IC-DISC requires a foreign customer, but such services can be provided to domestic companies as long as the construction project is located outside of the US. CBIZ IC-DISC specialists have identified numerous additional examples across software, food, packaging, distribution, recycling, and other non-traditional, IC-DISC-eligible sales and industries. Additionally, through our long-term collaboration with alliance partner Quantitax IC-DISC Services, savings claims have increased significantly by using a “transaction-by-transaction” approach, as explicitly defined in the IC-DISC regulations, to calculate allowable commissions. In addition to optimizing the commission computations, the required compliance is also created using Quantitax proprietary software.

Implementing the IC-DISC Structure

Adopting this strategy involves the following steps:

• Evaluate Potential Eligible Sales: Companies should analyze their existing activity to determine how much meets the major requirements for IC-DISC eligibility. This includes a requisite amount of domestic content, production, growth, processing, or packaging (though it need not be performed by the taxpayer) and an expected use outside the United States. An IC-DISC specialist should be consulted, as it can be easy to exclude potentially eligible sales. IC-DISC regulations provide taxpayer-friendly provisions that expand eligibility far beyond direct exports. Even products that may return to the United States may be eligible in certain cases. Typically, a conservative estimate of potential savings can be constructed very quickly and easily.
• Incorporate and Elect: After confirming eligibility, a separate corporation is formed, and the IC-DISC election is filed with the IRS.
• Draft Agreements: Legal commission agreements define the relationship between the exporter and the IC-DISC.
• Maintain Compliance: Separate books and records must be kept, and annual informational tax returns for the IC-DISC are required. Specialists familiar with IC-DISCs

Conclusion

For qualifying taxpayers, an IC-DISC can be a powerful lever to lower effective tax rates and unlock resources for expansion and innovation. It is not a one-size-fits-all tool—careful planning, compliance, and ongoing consultation with experienced tax professionals are key to realizing its full value.  As businesses seek an edge in global markets, the IC-DISC is among the top tax and structuring strategies for sustainable growth. Work with your tax advisor to understand how this valuable tool can support your business growth objectives. For those already using the incentive, savings may increase with more detailed, taxpayer-friendly commission calculation methods that are explicitly defined and encouraged under the IC-DISC regulations. Redeterminations of prior-year commissions can also be performed.

Contact our international tax team for more information.