Save the 'IC-DISC' Export Tax BreakDean Zerbe and Jim Young
You're right, Mr. President: Exports mean more U.S. jobs now and in the future—and good-paying ones at that. We share your goal of at least doubling exports of goods and services around the world in the next five years, if not sooner. Ninety-five percent of the world's customers and fastest-growing markets are beyond our borders, and U.S. companies are primed to take advantage. Equally important, as you said recently, is that we do so "in a manner that is deficit-friendly."
One proven export-incentive provision is somewhat in jeopardy unless the government acts: the Interest-Charge Domestic International Sales Corp., known as the "IC-DISC." Fortunately, members of both parties in Congress are working to protect this little-known provision. They need help, particularly from the White House.
While IC-DISC sounds like a bootlegged software program or an invasive spinal surgical procedure, it's shorthand for what is actually a powerful export incentive for US companies that sell goods and services abroad. These are not the multinationals noted on Wall Street. They're small to midsized companies with annual gross revenues that range from $3 million to about $1 billion. They represent a broad range of industries—manufacturers, distributors, architecture and engineering firms, software developers, farmers, and so forth—the critical industries that both political parties agree merit support. These are companies such as U.S.Ordnance in Nevada and Open Range RV in Indiana. They feature the high-skilled jobs we should be fostering.
a big effective tax cut for exporters
Like many tax incentives, IC-DISC can be complex but it essentially does one thing—rewards innovation and sales of U.S. goods and services overseas. It does so by allowing U.S. companies to set up separate domestic entities that act as commission agents for the company's export sales. Once the IC-DISC is established, the U.S. company can pay commissions to it. These commissions are based on the income derived from qualified export transactions.
Companies that use this incentive cherish it for three reasons. First, the commission is fully deductible. Second, the IC-DISC pays no federal income tax. Third, the IC-DISC is at heart a Subchapter C Corp., meaning it distributes its income to its owners as a qualified dividend. The result is a permanent reduction in tax of 20¢ on every commission dollar (the difference between the top federal corporate tax rate and the individual qualified dividend rate).
Many companies may be exporters but don't even know it. Others dismiss IC-DISC as inapplicable to their business. Indeed, only about 6,000 businesses—a small percentage of those that qualify—are currently taking advantage of it. This is mostly due to a general lack of awareness among qualifying companies and their advisors. The tax benefits of the IC-DISC, however, are actually much broader than most realize because they cover the sale of products and some services for ultimate use outside the U.S. For example, truck tires manufactured in Michigan would qualify for IC-DISC benefits if they are installed on a truck that is then exported to Europe.
Another illustration of IC-DISC in action is an Ohio company with roughly 100 employees, about $50 million in total sales, and export sales equating to nearly 30 percent of total business. Its annual savings from IC-DISC? Approximately $330,000.
obscured amid expiring tax features
This is real money. A well-managed IC-DISC can typically provide tax savings of close to 30 percent on export-derived income, saving companies across the country from $20,000 to $10 million or more annually—dollars that can be invested in research, expansion, and yes, jobs. Better yet, IC-DISC meets the "deficit-friendly" test because its actual cost is approximately $1 billion over 10 years, as scored by the Joint Committee on Taxation. Big bang for little bucks.
Why then are businesses that benefit from the IC-DISC getting nervous? Because the benefit is essentially tied to the differential between dividend rates and ordinary income tax rates, which were changed in the 2003 tax package that is set to expire on December 31. If Congress and the President don't act, IC-DISC benefits will expire, too. This would be a disaster for thousands of small and midsized US exporters, and for those they employ, at a time when working Americans are struggling to make ends meet.
Congress and the Administration need to send a clear signal to these businesses that Washington is not going to sit idly while this vital tax benefit for exports expires. Business owners are making decisions now about hiring and investments. They need Washington to provide certainty.
The IC-DISC is essential to meeting the President's goal of doubling exports in five years. It's even more essential to our economic recovery and job preservation in the U.S. right now.