As the global marketplace continues to evolve, U.S. businesses that export goods and services can take advantage of powerful tax-saving strategies to boost profitability. One of the most valuable—but often overlooked—options is the Interest Charge Domestic International Sales Corporation (IC-DISC). This specialized tax-exempt entity allows exporters to reduce their federal tax liabilities, improve cash flow, and enhance long-term financial planning.
This article—the first in a two-part series—explains how IC-DISCs work, who qualifies, and why this strategy may be worth exploring for your business.
What is an IC-DISC?
An IC-DISC is a type of C corporation designed to incentivize U.S. businesses to export products by offering favorable tax treatment on export income. While the IC-DISC itself is tax-exempt, it acts as a conduit to shift income from the exporting company to its shareholders in a tax-advantaged way.
How Does an IC-DISC Work?
To benefit from IC-DISC tax advantages, a U.S. exporter creates a separate C corporation that qualifies as an IC-DISC. This entity must elect IC-DISC status by filing IRS Form 4876-A within 90 days of the start of the tax year.
Once established, the operating company pays the IC-DISC a commission based on its qualified export sales. The commission can be calculated using either:
- 4% of gross export receipts, or
- 50% of the combined taxable income from export sales, whichever is greater.
This commission is a tax-deductible expense for the operating company, which reduces its corporate tax liability. The IC-DISC receives this income tax-free and distributes it to shareholders as qualified dividends, which are taxed at the favorable capital gains rate (typically 15–23.8%). This results in overall tax savings despite the currently low corporate tax rate because double taxation can be avoided on the commission.
Additionally, shareholders may defer tax on up to $10 million of export income each year by choosing not to distribute dividends. However, this deferral is subject to an annual interest charge, based on the 1-year Treasury bill rate (4.93% as of April 29, 2025).
Importantly, the IC-DISC is a paper entity: it doesn’t require employees, office space, or direct involvement in operations. It functions in the background while the exporter continues handling day-to-day sales, invoicing, and shipping. The result is a seamless structure that allows for tax efficiency without operational disruption.
Key Benefits of Using an IC-DISC
The IC-DISC structure offers numerous benefits for U.S. businesses engaged in international trade. Below are some of the most significant advantages:
- Reduced Federal Tax Burden: The core benefit is tax savings. Export income paid to the IC-DISC becomes deductible to the operating company.
- Improve Cash Flow: Distributing income through dividends instead of salary or retained earnings increases liquidity for shareholders and owners.
- Deferral Opportunities: Undistributed IC-DISC income may be loaned back to the operating company—providing working capital while deferring taxes.
- Low Cost of Capital: By reinvesting tax-efficient earnings into operations, businesses can reduce their reliance on outside financing.
- Incentives for Key Employees: Ownership interests in the IC-DISC can be structured to reward managers or executives, linking compensation to export performance.
- Estate Planning and Succession: An IC-DISC can serve as a planning tool for transferring wealth in a tax-advantaged manner to the next generation.
What Does This Mean for Exporters?
In daily operations, not much changes. The IC-DISC functions like an internal commission-based sales agent—without the need for staff or office space. It must maintain its own books and records, but it’s invisible to customers and minimally disruptive to existing workflows.
Proper setup and ongoing compliance are critical. However, for businesses with qualified export income, the structure can yield long-term tax savings and financial flexibility.
Ready to Explore Whether an IC-DISC Fits?
If your business earns income from exports, contact CPM’s Business and Tax Law team to evaluate whether an IC-DISC fits your tax strategy. Our experienced professionals are here to help you implement and maintain this tax-saving structure with care and compliance. Stay tuned for Part Two of this series: Implementing and Managing Your IC-DISC Structure Effectively.
