The Biden Administration and the IC-DISC: A Conversation with David Spray, Founder of Export Advisors

March 25, 2021
We recently spoke with David Spray, founder of Export Advisors, about the impact of the Biden presidency on the IC-DISC.

David Spray is a serial entrepreneur with more than 30 years of diversified business experience. He started Export Advisors in 2009 because he saw an opportunity to provide a unique value proposition for companies that were considering an IC-DISC, or interest charge domestic international sales corporation. Although other CPA firms and general tax consulting firms focused some of their efforts on IC-DISCs, Spray was aware of no firm that focused solely on this space.

Given the complexity and unique nature of the IC-DISC, Spray believed that a need existed for a firm that focused solely on the IC-DISC. He also felt that the prevailing fee structure offered by the existing firms was not very compelling financially for business owners considering the establishment of an IC-DISC.

Spray’s passion is to add substantial value to entrepreneurs who own privately held companies. Since the inception of Export Advisors, the firm has added more than $200 million in tax savings to hundreds of U.S. companies.

We recently spoke with Spray about the impact of the Biden presidency on the IC-DISC.

What exactly is an IC-DISC?

The IC-DISC, or interest charge domestic international sales corporation, dates back to 1971 and has gone through several iterations. The most current form has been around since 2001.

U.S. Congress created the IC-DISC to encourage U.S. companies to export more U.S.-produced goods. The IC-DISC is a separate entity and is considered a “paper entity” in that it has no employees or physical presence. Its sole purpose is to facilitate more U.S. exports.

Who can benefit from an IC-DISC, and what are the requirements to qualify?

The ideal candidate for an IC-DISC is a company that meets the following criteria:

  • Privately held, closely held U.S. company
  • Exports at least $5 million annually of a U.S.-produced product; U.S.-produced means that it has at least 50% U.S. content
  • Predictably profitable, year after year (i.e., tax savings are very compelling)

Additionally, we find that commodity traders and brokers are great candidates for an IC-DISC. In fact, more than half of our clients are scrap metal exporters. Other types of commodity brokers may not be as good of a candidate for an IC-DISC.

For example, companies that export crude oil or its primary derivatives are not good candidates because crude oil is specifically excluded. This dates back to the 1970s when the U.S. was a net importer of petroleum. Congress never imagined that the day would come when the U.S. would become a net exporter of petroleum. However, companies that export products that are further refined, such as white oils and lubricants, do qualify for the IC-DISC.

Other commodity brokers may be a good candidate so long as a portion of the manufacturing process occurs in the U.S. For example, if a company is exporting coffee that was grown outside of the U.S. and nothing was done to it in the U.S., that would not qualify. However, if the green coffee beans were brought to the U.S. and then were further processed, that would likely qualify.

What have the tax benefits been for IC-DISCs, and how are they calculated?

Since 2001, the primary benefit of the IC-DISC is the tax rate differential between ordinary income and dividend income. This differential differs depending on whether the company is a C corporation or flow-through entity (for example, S corporation, LLC or partnership). For flow-through companies, the spread has varied over the years to as high as 20% and as low as 13%. For C corporations, the spread has varied between 21% and 35%.

The operating company is allowed to pay a “sales commission” to the IC-DISC. This sales commission is approximately equal to the export income of the company and is a deductible business expense of the operating company, thereby reducing the company’s taxes by 37% (assuming that the company is a flow-through entity).

Because the IC-DISC is effectively a nontaxable C corp, the IC-DISC itself pays no taxes. However, when it distributes the income to the shareholders, the shareholders are taxed at the dividend rate, which is currently 23.8% for the top tax bracket. Thus, for flow-through companies, that differential would be 13.2%. So, for every dollar that is paid to the IC-DISC, the tax savings would be 13.2%.

For C corporations, the savings are even greater because the companies are double taxed, meaning that the corporation first pays 21% in taxes, and shareholders are then taxed again at the dividend rate of 23.8%. But because the IC-DISC eliminates the corporate tax layer, the savings would be 21% of every dollar paid to the IC-DISC.

There are other ways that the IC-DISC can be utilized, such as having a Roth IRA own the IC-DISC. This strategy can be a tremendous intergenerational wealth transfer tool, but it is more complex and may be too complicated for the scope of this interview. For those who are interested in this, we recommend speaking with your wealth planner.

How could President Biden’s tax plan impact the value of IC-DISCs? Walk us through the possible scenarios.

President Biden’s proposed tax plan could potentially reduce the benefit of the IC-DISC, but it could also increase its value.

In general, Biden wants to raise taxes on the highest income earners. In isolation, this would increase the “spread” between ordinary tax rates and dividend tax rates, which would make the IC-DISC more valuable.

However, he has also indicated that he wants to eliminate the preferential (that is, lower) dividend tax rate. If this happens, then it would effectively eliminate the IC-DISC tax savings for flow-through companies (such as S corps, LLCs, partnerships and sole proprietors). On the flipside, it would make the IC-DISC even more valuable for C corps.

Here is a summary of the various scenarios and their impact:

  Scenario 1 Scenario 2 Scenario 3
Change No changes to the tax laws Ordinary tax rates increase for both C corps and individuals,
but capital gains and dividend rates stay the same
Ordinary tax rates increase for both C corps and individuals,
and the preferential dividend tax rate is eliminated
Impact None The IC-DISC is more valuable for both C corps and pass-through entities The IC-DISC is more valuable for C corps and substantially less valuable for S corps

There are any number of additional scenarios, but these are the three that we are being most asked about.

There’s certainly a lot that will play out in the coming months that we will be keeping a close eye on. Dave – thanks for your time!

This information has been provided by a third party and is intended for informational purposes only, and the views expressed are the views of that third party.

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