IC-DISC and FDII – Export Tax Options for Businesses
IC-DISC and FDII are two export incentives for US-based companies with foreign presences to utilize around tax time. However, they have enough differences that you must know one versus another to select the most optimal tax incentive for your business. What are the differences between FDII and IC-DISC?
IC-DISC and FDII are different in areas of corporate structure and available benefits. For example, FDII does not require companies to create separate US companies like IC-DISC. Additionally, FDII does not apply to S-corporations, only C-corps, unlike IC-DISC tax benefits. FDII tax incentives might also decrease by 2025.
This guide to FDII and IC-DISC will explain both export incentives separately, then compare them and assess their differences. Your corporation will be ready to decide which incentive to apply for.
Overview of IC-DISC and FDII
Your business must understand FDII and IC-DISC before applying for these tax incentives. This overview will provide a definition of both, share some background, and review the eligibility criteria.
Introduction of IC-DISC
IC-DISC, or Interest Charge-Domestic International Sales Corporation, is a type of export tax credit for corporations operating in the United States. This tax incentive allows the registering corporation to defer its taxes until later to reap profits in the interim. Commission payments based on export gross receipts are another feature.
Introduction of FDII
FDII, or Foreign Derived Intangible Income, is a tax deduction for selling products attached to an intellectual property, including patents. When a US company with a US-based IP sells the IP or related products to a foreign customer, the company becomes eligible for a reduced sales tax rate.
We’ll continue explaining how IC-DISC and FDII diverge throughout this article, with plenty of examples and eligibility criteria to guide your decision.
Export Tax Management Inc.’s extensive services include IC-DISC incorporation and compliance. Contact our export tax experts to learn about your IC-DISC options.
Definition of IC-DISC
IC-DISC is a leading export tax incentive for US businesses, but is it right for your company? Let’s review with some information on how it works.
Definition and Background
IC-DISC is a federal tax incentive for US corporations exporting products. US Congress created the incentive in the 1970s as an impetus to expand exports. Corporations that apply for IC-DISC status can enjoy tax deferrals, lower tax liability, and tax-free income on qualifying foreign income.
Congress once limited DISC benefits in the 1980s, but a resurgence in the late 2000s saw IC-DISC tax incentives becoming a valuable means for companies to increase capital gain.
A registering IC-DISC is eligible for a commission payment based on the export gross receipt rate. The commission payments do not accrue federal taxes, and the IC-DISC corporation has less taxable income.
Transferring taxable income into qualified dividends is another trademark of IC-DISC tax rules.
IC-DISC is also largely beneficial. It increases a corporation’s access to capital and grants it more freedom to develop products or grow in other ways. Other perks include reduced reliance on loans and increased international competition.
Eligibility Criteria for IC-DISC
Here is an overview of IC-DISC eligibility requirements:
| IC-DISC Eligibility Requirement | Description |
| Not a Member of a Controlled Group | The company is not part of a controlled group of foreign sales companies. |
| Separate Records | Separate records are maintained specifically for the IC-DISC. |
| Tax Year Alignment | The principal shareholder conforms to the IC-DISC’s tax year period. |
| Export Asset Requirement | Up to 95% of the assets are in the inventory intended for export. |
| Domestic Production Requirement | Up to 95% of the gross receipts come from goods produced in the US. |
| Minimum Stock Value | The value of single-class stocks must be at least $2,500. |
Tax Benefits for Businesses
An IC-DISC corporation pays its shareholders dividends at a tax rate of 20 percent.
Definition of FDII
Businesses with intellectual property and a foreign presence should consider the FDII export tax incentive. This section will explore the ins and outs.
Definition and Background
Continuing our assessments of IC-DISC and FDII, here is some background on Foreign Derived Intangible Income.
FDII is intellectual property income exported from the US. The US followed a worldwide tax system until 2017 t when the Tax Cuts and Jobs Act introduced a territorial taxation system for corporations.
Under the territorial tax system, profits for multinational corporations in foreign countries do not contribute to the domestic tax base. These are sometimes referred to as participation exemptions.
FDII is calculated by taking the foreign-derived income and subtracting 10 percent from a Qualified Business Asset Investment, or QBAI. The QBAI is the tangible asset value when calculating foreign-derived income earnings.
Eligibility Criteria for FDII
Your corporation must qualify as a C-corporation to apply for FDII. C-corps are separate entities from shareholders and owners for tax purposes and receive corporate income taxes. Secondarily, your corporation must sell IP-related products and generate gross income from exports.
Tax Benefits for Businesses
FDII-eligible corporations can utilize a tax rate of 13.125 percent for every dollar of taxable income. Maximize your FDII benefits with Export Tax Management Inc.’s expert services.
Comparison: IC-DISC vs. FDII
Key Similarities and Differences
IC-DISC and FDII share a few common threads, including:
- Applies to US corporations
- Foreign income is eligible
- Reduces tax payments
However, FDII and IC-DISC are dissimilar in many more ways, such as:
| Aspect | IC-DISC | FDII |
| Corporate Structure | Requires the formation of a new corporation | Only C-corporations in the US are eligible |
| Organizational Requirements | A new corporation must be created | Newer tax benefit may be reduced by 2025 |
| Professional Fees | Often requires accountant and attorney fees | No specific fees related to corporate structure |
| Manufacturing Requirement | Must have 50% export property value from US-grown, produced, or manufactured goods | No manufacturing requirement |
| Tax Distribution | Works best with distribution to avoid interest charges | No distribution required |
| Longevity | Longer standing tax benefit with a stable future | Newer tax benefits may be reduced by 2025 |
What Influences the Choice for a Corporation – When to Choose IC-DISC over FDII and Vice-Versa
The biggest determining factor for whether a US-based corporation should select IC-DISC or FDII export tax benefits is eligibility.
Besides that, a corporation might rely on factors like tax benefit rates and the long-term status of the export incentive to influence their decision-making.
A manufacturer eager to reduce its tax rate might seek IC-DISC tax benefits. For example, if the average corporate tax rate is 35 percent per year, a qualified dividend income of 20 percent allows them to save on their taxes by 15 percent.
Here’s an example of FDII. If a company’s QBAI is $9,000 of exports, their FDII is $100, as you can subtract $1,000 of foreign income by a QBAI of 10 percent or $900. The company can take 37.5 of the FDII for taxable income.
Companies may sometimes be eligible for IC-DISC and FDII tax exemptions within the same tax year. Export Tax Management Inc. can help you determine your tax break eligibility.
Compliance and Reporting Requirements
Compliance Guidelines for IC-DISC
Compliance is critical, and IC-DISC corporations must pass QER and QEA tests. QER is short for qualified export receipts and requires a corporation to have a rate of 95 percent export receipts in an average tax year to qualify.
QEA stands for a qualified export asset. The corporation’s export assets must be within 95 percent of the sum of their adjusted asset basis within the tax year.
FDII Reporting and Documentation Obligations
You must document FDII tax incentives in IRC Section 250, Form 8993.
The form requires:
- Gross income
- Exclusions
- Financial services income
- CFC dividends
- Domestic gas and oil extraction income
- Foreign branch income
- Total exclusions
- Deductions
- deemed tangible income return or DTIR
- Gross receipts
- Cost of goods sold or COGS
- Interest deductions
- Experimental and research deductions
Common Mistakes and Pitfalls to Avoid During Tax Filings
Corporations seeking export incentives like IC-DISC commissions and FDII tax breaks should take special care to avoid these errors:
Always file your taxes, even if you’re not eligible to pay taxes for the calendar year.
Triple-check income to avoid underreporting or overreporting mistakes.
Improve recordkeeping to report all your income.
Confirm your math to ensure your calculations are done correctly.
Work with an expert team, like Export Tax Management, Inc.
FAQs about IC-DISC and FDII
- What assets are exempt from FDII?
Assets that are considered Qualified Business Asset Investment (QBAI) are exempt from FDII. QBAI includes depreciable assets such as property, plant, and equipment that are used in the production of foreign-derived income. Intangible assets, inventory, and financial assets do not qualify as QBAI.
- What qualifies as FDII income?
FDII income includes earnings derived from the sale, lease, or licensing of property to foreign entities or the provision of services to customers located outside the United States. The income must relate to products made domestically but consumed abroad to qualify for FDII tax benefits.
- How to calculate IC-DISC commission?
IC-DISC commissions are calculated using one of two methods: the 4% of qualified export receipts method or 50% of the combined taxable income of the related supplier and IC-DISC. Companies typically choose the method that provides the larger commission deduction. Specialized formulas help optimize this calculation.
- What is IC-DISC accounting?
IC-DISC accounting involves setting up a separate corporation to manage export-related transactions. This corporation tracks export income, commissions, and dividend distributions. The IC-DISC must follow strict IRS guidelines, maintain separate financial records, and file an annual tax return to ensure compliance with export tax incentive regulations.
Do You Have More Questions About IC-DISC and FDII?
If you still have questions or need assistance, Export Tax Management is here to help. Our experts can provide tailored guidance and support throughout the IC-DISC process. Contact us today to schedule a consultation and explore how an IC-DISC can optimize your export strategy.
Book a Consultation for IC-DISC and FDII Now
IC-DISC and FDII incentives on qualifying exports can reduce a corporation’s tax burden, increase available capital, and enable businesses to grow.
The differences between the tax incentives mean that a corporation might be eligible for FDII instead of IC-DISC or vice-versa. Select corporations are even eligible for both tax breaks.
Export Tax Management Inc. has saved over $250,000,000 for its clients and completed over 3,000 IC-DISCs. With 53 CPA firm partners and counting, you can rely on our services and expertise for your taxes.
Contact our tax experts today to discuss your IC-DISC and FDII eligibility.
