Saving on your federal income taxes is yet another reason to start exporting. If your company manufactures or processes goods in the U.S. you can set up a Domestic International Sales Corporation (“DISC”) and save up to 20% in federal income taxes on a portion of your qualified export income. To qualify, the goods must be made in the U.S. with no more than 50% imported materials.
A DISC is a “paper” corporation set up to receive commissions based on your export income. The DISC is not required to provide any services or have an office, employees, or tangible assets. Its sole purpose can be to receive tax-deductible commissions from your corporation and distribute these funds to its shareholders as dividends. The qualifying export income funneled through the DISC is paid out to the shareholders as dividends and taxed at the qualifying dividend tax rate of 20% as opposed to the ordinary individual income tax rate of as high as 40%, resulting in a 20% reduction in tax rate on these funds.
Setting up a DISC for tax purposes will not affect your day-to-day dealings. Creating a DISC involves establishing a U.S. corporation that elects to be identified as such for tax purposes (the owner(s) of your company will be the DISC’s shareholders). Once you obtain a tax identification number for the new corporation, a DISC election can be made on IRS Form 4876A. Your principal corporation then enters into a commission arrangement with the newly created DISC.
Rejoice for the tax incentive for exporters from our Members of Congress.
Think about a DISC as a possible opportunity.
Have a good day.