As global trade policy evolves and tariff pressure grows, U.S. exporters are reevaluating their strategies for maintaining competitiveness. One often-overlooked tool in this process is the Interest Charge Domestic International Sales Corporation (IC-DISC). When paired with smart planning, the IC-DISC can help companies offset tariff burdens and improve after-tax profitability.

What is the IC-DISC?

The IC-DISC is a tax savings tool for U.S. businesses that make products or provide services used outside the U.S. It allows qualifying income to be taxed at lower dividend rates and, in some cases, deferred. With rising tariff costs, the tax rate differential and income deferral help free up cash for reinvestment, which would otherwise be spent paying taxes.

But the IC-DISC isn’t automatic. It must be intentionally established and properly maintained. Here’s what the setup process typically involves:

• Forming a New Entity: The IC-DISC is a separate legal entity that must be incorporated as a domestic C corporation under state law. It needs to follow specific IRS rules, including having only one class of stock and electing the IC-DISC status with Form 4876-A. While certain formalities must be observed during setup, the tax code is designed with the expectation that this new entity will function purely on paper, without engaging in actual business operations.
• Creating a Commission Agreement: The exporting business (original US entity) pays a commission to the IC-DISC based on qualifying export sales. This commission is deductible for the operating business and taxed at the qualified dividend rate when distributed to shareholders. The commission is generally calculated as the greater of 50% of the net income from qualified export sales or 4% of the related gross receipts.
• Maintaining Ongoing Compliance: The IC-DISC must file its own annual tax return (Form 1120-IC-DISC) and maintain detailed records of qualifying transactions, pricing calculations, board approvals, and export usage. Although collecting detailed sales information may seem tedious or overwhelming, we generally find that companies already track sales data well enough to support a transaction-by-transaction calculation.      

With the right structure in place, both C corporations and pass-through entities can benefit from meaningful tax savings.

Who Qualifies and What Types of Products are Eligible?

IC-DISC eligibility hinges not on whether goods are physically exported, but on whether they’re used outside the United States. This criterion presents more opportunities to industries not traditionally labeled as “exporters.” Eligible categories include:

• S.-manufactured goods shipped abroad
• Agricultural products
• Software and tech components
• Architectural and engineering services performed domestically for foreign projects.

What are the benefits of an IC-DISC?

The IC-DISC offers two primary tax advantages: deferral of export income and taxation at the lower qualified dividend rate. While both C corporations and pass-through entities (partnerships and S corporations) can benefit, the mechanics and savings vary.

• Passthroughs allow shareholders to receive IC-DISC dividends taxed at preferential rates. If an individual passthrough owner is taxed at the highest federal rate of 37%, their passthrough income may be effectively taxed at 29.6% after applying the 20% qualified business income (QBI) deduction. However, if this income is recharacterized through an IC-DISC, it can instead be taxed at the qualified dividend rate of 23.8% (comprised of the 20% long-term capital gains rate plus the 3.8% net investment income tax), resulting in a potential tax savings of 5.8%.
• C corporations benefit by shifting export profits to an IC-DISC and reducing their overall effective tax rate. These corporations have a reduced corporate tax rate of 21% and the ability to deduct 37.5% of Foreign-Derived Intangible Income (FDII), which can lower the effective tax rate to as little as 13.125%. However, unlike passthrough entities, several tax code restrictions may make it undesirable for a C corporation to directly own an IC-DISC. Additional planning opportunities exist for C corporations to incorporate a new passthrough entity into their structure, allowing them to access the IC-DISC benefits more efficiently through an indirect approach.
  
  

Understanding Tariffs and Trade Policy

With shifting global trade dynamics, U.S. exporters are facing greater direct and indirect cost pressure. Tariffs increase the cost of imported materials and components, squeeze margins, and create uncertainty in pricing strategies. Under the Trump administration, the implementation of a 10% reciprocal tariff policy reignited concerns about global competitiveness, particularly for manufacturers that are reliant on cross-border supply chains.

The Ripple Effects of Tariffs

As trade policies continue to evolve, understanding how tariffs interact with tax planning tools, such as the IC-DISC, becomes increasingly important.

• Customer Pricing Sensitivity: Tariffs can drive up costs, forcing price increases that may reduce customer demand.
• Vendor Renegotiations: Higher import costs often lead to renegotiated terms with suppliers to protect margins.
• Longer Lead Times: Sourcing shifts or customs delays tied to tariffs can extend production and delivery timelines.
• Profitability: Increased costs from tariffs can damage margins unless offset through pricing, sourcing, or tax planning tools like the IC-DISC.

Where do IC-DISC Strategies and Tariffs Intersect?

Pairing an IC-DISC strategy with trade policy analysis opens the door to meaningful tax and cash flow opportunities. Examples include:

• Restructuring sales flow to ensure qualifying export income flows through the IC-DISC.
• Modifying product classification to better align with export eligibility under the IC-DISC rules.
• Adjusting markup or transfer pricing strategies to absorb tariff costs while preserving margins and optimizing tax efficiency.

Example

To illustrate, let’s say a Nebraska-based manufacturer sells precision parts to an international distributor. Although the products are exported, the company has not leveraged the IC-DISC benefits. With annual export sales of $4 million, all income was taxed at ordinary rates through their S corporation structure.

After experiencing rising costs due to recent tariff changes on imported raw materials, the company sought a way to preserve margins. With guidance from an advisor, they implemented an IC-DISC structure. Under this strategy, a $1 million commission payment allowed the business owners to reclassify income that would have been taxed at ordinary rates into qualified dividends, which are taxed at preferential rates.

Assuming the owners are subject to the maximum 23.8% qualified dividend rate, they would owe $238,000 in federal tax on the $1 million distribution. Meanwhile, the S corporation deducts the full $1 million commission, resulting in federal tax savings of $296,000 (based on a 29.6% effective tax rate, factoring in the 37% top ordinary rate and the 20% QBI deduction). The net tax benefit is $58,000 (5.8% of the commission), which helps offset increased tariff costs and supports more stable cash flow. No changes to day-to-day business operations were required beyond setting up the IC-DISC.

Beyond the rate differential, the IC-DISC structure also offers timing flexibility. In most cases, the distribution of the commission payment to the business owners can be deferred by one year, delaying the $238,000 tax liability. This short-term deferral creates additional cash flow flexibility, which can be reinvested into equipment upgrades or capital.

Compliance & Risk Management of the IC-DISC

To fully benefit from an IC-DISC, businesses must stay organized and compliant. Strong internal controls and consistent documentation help minimize compliance risk and support long-term IC-DISC benefits. You should pay attention to:

• Documentation Requirements: Maintain clear records supporting export activity, pricing methodologies, shareholder reporting, and board authorizations.
• Common Red Flags: Watch for overstated export revenue, improper product classifications, or a lack of paperwork. These are frequent audit triggers.
• Export Qualification & Recordkeeping: Ensure goods or services meet the "ultimate use outside the U.S." requirement and retain dated, reliable documentation to prove eligibility.

Explore IC-DISC with Lutz

Implementation of an IC-DISC isn’t one-size-fits-all. At Lutz, our team offers expert Tax Advisory Services that help companies evaluate eligibility, model tax outcomes, and manage the compliance process from start to finish. Contact us to start the conversation.