June 2013
taxalerts.plantemoran.com
DISCover This Tried-and-True Tax-Saving
Vehicle
Are you a domestic manufacturer who exports products internationally? If so, you may want to
consider forming a Domestic International Sales Corporation (DISC). This tried and true tax incentive
benefits domestic exporters and has seen renewed popularity this year as the uncertainty surrounding
tax rates has been settled.
Now that tax rates are known (at least for a year or two) and a beneficial qualified dividend rate is
available, the DISC stands as a tax-savings vehicle that should be considered by all domestic
exporters. DISCs also benefit engineering and architectural firms that work on foreign projects.
DISCs have been part of the Internal Revenue Code since 1971 and encourage U.S. companies to
export by lowering the effective tax rate on exports. DISCs are relatively inexpensive to set up and
operate, and they reduce federal income taxes on profits on exported goods or services by up to 15.8
percent. The savings result from a deduction that reduces ordinary income by tax rates up to 39.6
percent while the DISC’s dividend income is taxed at the lower qualified dividend rate of 23.8 percent.
Due to their low setup and maintenance costs, DISCs can result in significant tax benefits for
companies with exports as few as $1 million annually or if profits from exports exceed $100,000 (even if
sales are less than $1 million). For example, a typical company with $1 million in exports will save
$6,320 in taxes. The benefit is calculated by multiplying the statutory DISC commission of 4 percent of
sales ($40,000) by the tax rate difference between ordinary deductions (39.6 percent) and qualified
dividends (23.8 percent). The $40,000 commission times 15.8 percent results in savings of $6,320. The
actual computation is more complex and
will often result in greater tax savings.
.
If you have any questions, please contact your tax advisor or
Jerry Jonckheere
877.622.2257 ext. 34044
[email protected]
The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not
rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability
whatsoever in connection with its use.
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