What Is an IC-DISC?
An Interest-Charge Domestic International Sales Corporation (IC-DISC) is a separate C-corporation formed specifically to receive commissions on export sales under IRC Sections 991 through 997. The commissions are deductible by the operating company (reducing ordinary income taxed at up to 37% in 2025) and taxable to the IC-DISC shareholders as qualified dividends (taxed at the preferential 20% federal rate). The IC-DISC creates a tax arbitrage of approximately 17 percentage points between the ordinary income rate and the qualified dividend rate.
As discussed in "Billionaire Wealth Strategies" (Jim Dew, 2024), Chapter 9, the IC-DISC falls under the "A" (Arbitrage) component of the DEAPR framework.
How Does an IC-DISC Work?
The business forms a separate IC-DISC entity as a C-corporation that makes the IC-DISC election under IRC Section 992. The operating company pays the IC-DISC a commission on qualifying export receipts. Under IRC Section 994, the commission is limited to the greater of 4% of qualified export gross receipts or 50% of combined taxable income attributable to qualified export receipts.
The operating company deducts the commission as an ordinary business expense, reducing its taxable income at ordinary rates of up to 37% (2025). The IC-DISC distributes the commission to its shareholders as qualified dividends under IRC Section 995(b)(1), taxed at the preferential 20% rate. The 3.8% Net Investment Income Tax under IRC Section 1411 may also apply, bringing the effective rate to 23.8% for high-income shareholders.
The net effect under current tax law: income that would have been taxed at 37% is instead taxed at 20% to 23.8%, producing a rate reduction of 13.2 to 17 percentage points on every dollar of qualifying export revenue flowing through the IC-DISC structure. The IC-DISC itself pays no federal income tax; it is treated as a pass-through entity for the commission income.
Under IRC Section 995(f), the IC-DISC must pay an annual interest charge to the IRS on the tax-deferred portion of accumulated IC-DISC income, calculated using the T-bill rate. The interest charge is modest relative to the tax savings but must be factored into the overall cost-benefit analysis.
Qualifying export property under IRC Section 993(c) includes goods manufactured, produced, grown, or extracted in the United States and sold for direct use, consumption, or disposition outside the United States. The goods must have no more than 50% of their fair market value attributable to imported components.
When Do Entrepreneurs Use IC-DISCs?
Manufacturers with international sales use the IC-DISC even when their production is entirely domestic, provided the goods are ultimately exported. The export destination qualifies the revenue, not the manufacturing location.
Software companies with international licenses qualify when software is exported to foreign customers. The digital delivery of software does not disqualify the revenue if the end user is located outside the United States.
Service businesses with deliverables sent abroad may qualify in limited circumstances. Architecture, engineering, and design firms with international projects can use the IC-DISC for the export component of their revenue, though service income is generally more restricted than goods.
Agricultural exporters selling farm products to foreign buyers qualify under IRC Section 993(c). The U.S. agricultural export market is substantial, and many farming operations overlook the IC-DISC benefit.
How Does Dew Wealth Approach IC-DISC Planning?
The IC-DISC is a frequently overlooked tax incentive for entrepreneurs with any export component. Many business owners are unaware that their revenue qualifies, especially when their product is sold to a U.S. distributor who then exports the goods. The Fractional Family Office® identifies qualifying export revenue during the annual tax planning review and coordinates IC-DISC formation with the corporate attorney and tax advisor.
The IC-DISC requires a separate corporate entity, annual tax filing (Form 1120-IC-DISC), compliance with transfer pricing rules under IRC Section 994, and ongoing tracking of qualifying export receipts. However, the administrative cost is minimal compared to the tax rate reduction for businesses with meaningful export revenue.
The IC-DISC is not appropriate for purely domestic businesses with no export component. The commission must be based on actual qualifying export transactions, and the IRS can challenge IC-DISC arrangements where the pricing does not reflect arm's-length terms or where the qualifying export receipts are overstated. Proper documentation of the export chain from manufacture to final delivery outside the United States is essential.
Frequently Asked Questions
Does my company need to export directly?
Is the IC-DISC structure expensive to maintain?
Can the IC-DISC be combined with Section 199A?
Disclosure
Certain portions of this publication may contain a discussion of potential benefits and results as of a specific prior date. Due to various factors, including changing market conditions and regulations, such discussion may no longer be reflective of current potential benefits and/or results. Please remember that past performance may not be indicative of future results. Different types of investments and strategies involve varying degrees of risk, and there can be no assurance that any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Dew Wealth or any of its advisory representatives), or any non-investment-related services, will be suitable for your portfolio or individual situation, or prove successful.
The potential savings and benefits discussed represent typical results based on the experience of existing clients. Individual results can and will vary based upon a variety of factors, such as the client’s investment and financial circumstances, tax bracket, current insurance policy terms and insurance needs, and overall objectives. Neither the scope nor nature of the firm’s services should be construed as guarantees of a particular outcome. Dew Wealth Management, LLC (“Dew Wealth”), an SEC-registered investment adviser located in Scottsdale, Arizona, provides the Fractional Family Office services described herein. Registration is not an endorsement of the firm by securities regulators, nor is it an indication that the adviser has attained a particular level of skill or ability.
The content herein is intended to serve as informational material only and is intended exclusively for the use of the person named herein. If you are not the intended recipient, please refrain from further dissemination and return or destroy all copies of this material in your possession. This content is not representative of any particular client experience or outcome and is instead intended to provide general information regarding the potential time and money savings that could be experienced, based on various assumptions, inputs, and data sources. Among other things, the results of the calculators are derived from your inputs, and consequently, errors or omissions in entering your data into the calculator could result in materially inaccurate outputs. Dew Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party and included or relied upon herein and takes no responsibility for same. Client experiences and outcomes can and will vary from those reflected herein, and these informational outcomes should not be construed as a direct or indirect guarantee of similar future results.
Not all services will be necessary or appropriate for all clients, and the potential value and benefit of the adviser’s services will vary based upon a variety of factors, such as the client’s investment and financial circumstances, tax bracket, current insurance policy terms and insurance needs, and overall objectives. Clients are free to accept or reject any recommendations provided by the firm and may choose to implement accepted recommendations with the professional(s) of the client’s choosing. The effectiveness and potential success of the adviser’s services can depend on a variety of factors, including but not limited to the manner and timing of implementation, coordination with the client and the client’s other engaged professionals, and market conditions.
Dew Wealth Management, LLC (“Dew Wealth”) is neither a law firm nor an accounting firm and does not provide legal or tax advice. Website visitors and clients should consult an attorney or tax professional regarding their specific legal or tax situation. Dew Wealth is not an insurance agency, but certain Dew Wealth representatives maintain insurance licenses in their individual capacities to allow for consultation on insurance needs and products. Neither Dew Wealth nor any individual insurance agent associated with Dew Wealth receives commission-based compensation for insurance sales. Past performance does not guarantee future results. All investing comes with risk, including the risk of loss.
By accessing, using, or receiving this Document, the Recipient acknowledges and agrees to be bound by the terms and conditions outlined at DewWealth.com/IP.