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May 27, 2026

Contributors: Anthony J. Licavoli Jr., CPA, Brian D. Hayward, CPA

The BasicsÌý

• An IC-DISC can turn aÌýportionÌýof export income into lower-taxed qualified dividend income. By paying a commission to a separate IC-DISC entity, a qualifying exporter may convert income otherwise taxed at ordinary rates into incomeÌýultimately taxed to shareholders at preferential dividend rates, creating permanent federal tax savings.Ìý

• Many exporters may qualify. Manufacturers, distributors of U.S.-made products, and certain businesses providing engineering, architectural, or software-related export activity may be eligible if they meet the qualified export rules, including the U.S.-content and foreign-use requirements.Ìý

• The benefit depends on proper setup and ongoing compliance. A company must makeÌýa timelyÌýIC-DISC election, satisfy the 95% qualified export receipts and 95% qualified export assets tests, and calculate the commission under IRS rulesÌý—Ìýgenerally usingÌýthe greater of 4% of qualified export receipts or 50% of export taxable income, subject to applicable limitations.ÌýÌý

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For U.S. companies expanding their footprint in the global marketplace, the quest for tax efficiency is a top priority. While many tax incentives have come and gone with recent legislative shifts, the Interest Charge Domestic International Sales Corporation (IC-DISC)ÌýremainsÌýone of the mostÌýeffectiveÌýtools available for U.S. exporters to reduce their federal tax liability.Ìý

If your business manufactured products in the U.S. and sold them abroad,Ìýdistributed US-made products abroad,Ìýor provided engineering or architectural services for foreign projects, you may be sitting on a significant tax savings opportunity.Ìý

What isÌýan IC-DISC?Ìý

An IC-DISC is a separate domestic corporation formed by a U.S. exporter. ItÌýdoesn’tÌýrequire office space, employees, or even tangible assets to function. Instead, it serves as a “tax-exempt” vehicle that allows aÌýportionÌýof export profits to be taxed at the lower capital gains rate rather than the higher ordinary income rates.Ìý

By paying a commission to the IC-DISC, the exporting company (the “parent”) receives a deduction at ordinary income tax rates. The IC-DISC then pays out those funds as dividends to its shareholders, which areÌýgenerally taxedÌýat the preferential qualified dividend rate,Ìýcurrently 20% (plus the 3.8% net investment income tax, if applicable).Ìý

Does Your Company Qualify?Ìý

To take advantage of an IC-DISC, a business must meet severalÌýqualified exportÌýcriteria.ÌýGenerally, theÌýincentive is available to:Ìý

• Manufacturers:ÌýCompanies that produce goods in the U.S. where at least 50% of the value is attributable to U.S.Ìýinputs.Ìý

• Distributors:ÌýBusinesses that purchase U.S.-made products and sell them to foreign customers.Ìý

• Service Providers:ÌýSpecifically, those providing engineering or architectural services for construction projectsÌýlocatedÌýoutside the U.S.Ìý

• Software Developers:ÌýCompanies licensingÌýcertainÌýsoftware for use outside the U.S.Ìý

The Core Benefits: More Than Just a Rate ReductionÌý

The primary driver for an IC-DISC is the permanent tax savings created by theÌýrateÌýarbitrage between ordinary income and qualified dividends. However, the benefits extend further:Ìý

1. Increased Cash Flow:ÌýThe tax savings can be reinvested back into the business to fund expansion,ÌýpurchaseÌýequipment, or increase R&D efforts.Ìý
2. Liquidity for Shareholders:ÌýItÌýprovidesÌýa structured way to get cash out of the company and into the hands of owners at a lower tax cost.Ìý
3. No Operational Disruption:ÌýBecause the IC-DISC is a “shell” corporation for tax purposes, it does not require changes to your day-to-day manufacturing or sales operations.Ìý
4. Estate Planning Opportunity:ÌýIC-DISC shares can sometimes be owned by retirement accounts or family trusts, providing a unique vehicle for wealth transfer.Ìý

How the IC-DISC Calculation WorksÌý

The commission paid to the IC-DISC is typically the greater of:Ìý

• 4% of qualified export receipts, orÌý

• 50% of the net income derived from qualified export receipts.Ìý

Because these calculations can becomeÌýcomplex,Ìýespecially when considering marginal costing or “grouping” ofÌýtransactions,Ìýwe recommend working with a tax professional to ensure you’reÌýutilizingÌýthe method that yields the highest possible deduction.Ìý

IC-DISC Planning ConsiderationsÌý

While the IC-DISC is a “permanent” incentive, it requires strict adherence to IRS compliance rules toÌýmaintainÌýits status.Ìý

• The 95% Test:ÌýAt least 95% of the IC-DISC’s assets must beÌýqualified export assets,Ìýand 95% of its gross receipts must beÌýqualified export receipts.Ìý

• Timely Commission Payments:ÌýCommissions must be paid to the IC-DISC withinÌý60 daysÌýof the end of the tax year.Ìý

• Ultimate Foreign Use:ÌýTheÌýproductsÌýsold to foreign parties need to beÌýultimately usedÌýoutside of the U.S.Ìý

• FormÌý1120-IC-DISC:ÌýThis specialized tax return must be filed annually, even though the entity itself pays no federal income tax.
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Your TakeawayÌý

In an era of fluctuating tax policy, the IC-DISC stands out as a stable, IRS-sanctioned method for U.S. exporters to remain competitive on the global stage. If you have not reviewed your export structure recently, you may be overlooking a meaningful opportunity to improve your bottom line.Ìý

²ÝÝ®ÊÓƵ’s international tax team is ready to help you evaluate your eligibility and model the potential savings an IC-DISC could bring to your organization. To connect with one of our specialists,ÌýclickÌýhere.Ìý

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Frequently Asked QuestionsÌý

Q: Can S Corporations and Partnerships use an IC-DISC?Ìý

A: Yes. WhileÌýthe IC-DISC is a C corporation, its shareholders can be individuals, S corporations, or partnerships. The flow-through nature of these entities allowsÌýthe individualÌýowners toÌýbenefitÌýfrom the qualified dividend rates.Ìý

Q: Is there a minimum export volumeÌýrequired?Ìý

A: There is no legal minimum, but because there are costs associated with forming andÌýmaintainingÌýthe entity, a business typically needs at least $2Ìýmillion to $3Ìýmillion in annual export sales for the tax savings to outweigh the administrative costs.Ìý

Q: Does the product have to be shipped directly from the U.S.?Ìý

A:ÌýGenerally, yes. The goods must be “exported”—meaning they are sent from the U.S. to a foreign destination for use, consumption, or disposition outside the U.S.Ìý