If you export U.S. made products to any foreign countries (including Canada and Mexico), you may be able to save as much as 20% on your federal income taxes by forming an “IC-DISC,” the IRS permitted way of achieving this tax savings.
Here’s a summary of how it’s done:
1. Form a new “C” Corporation with the same owners as your current manufacturing corporation.
2. Grant a commission contract to the new corporation, which will pay the new corporation for the overseas sales of your U.S. made products.
3. When your existing corporation pays the commissions, they are deducted at a 35% tax rate, but the IRS does not tax the money paid into the new corporation.
4. The new corporation pays out the commission to the shareholders as a dividend at a 15% tax rate. So you pay tax at 15% on money that was deducted at 35%, resulting in a tax savings of 20%.
It is important to note that the IC-DISC is totally legitimate, and offers considerable incentive to manufacturers. It can also benefit some service providers.
Cynthia Umphrey helps families and business owners make significant personal and professional life decisions. Ms. Umphrey calls upon over 10 years of experience in estate planning, probate administration, business structuring and business exit planning to guide you though life's most important choices.