If I Export Products, Should I Set-up a DISC?

Yep.  If your company generates significant income from exporting products made in the US, or from engineering or architectural services related to foreign construction projects, you should set-up a domestic international sales corporation (DISC).  A DISC is relatively easy and inexpensive to set up and operate.  And setting up a DISC can reduce the federal income tax rate on your net export income by up to 20%.

To set-up a DISC, you need to incorporate in one of the 50 states or the District of Columbia, file an election with the IRS for the corporation to be treated as a DISC, maintain a minimum capitalization of $2,500, have only a single class of stock, and meet an annual qualified export receipts test and a qualified export assets test.  The DISC must have its own bank account, maintain separate accounting records, and file US tax returns. But there is no need for the DISC to have its own office, employees, or tangible assets. 

Under federal tax law, the DISC pays no federal income taxes.  And setting up the DISC reduces your overall federal tax liability significantly.   The DISC tax benefits flow from the commission payment made by your export company to the DISC. The commission payment is equal to the greater of 4% of your export receipts or 50% of your export income. The commission payment is fully deductible by your company and is not taxable to the DISC.  The commission payment is only taxable (at the 15% qualified dividend rate) when the monies are distributed to the DISC shareholders. 

For the most part, qualified export receipts are proceeds from the sale of tangible products.  To qualify, such tangible products must be: (1) manufactured, produced, grown, or extracted in the US; (2) held primarily for sale, lease, or rental for use, consumption, or disposition outside the US; and (3) have a maximum of 50% foreign content.  Export property does not need to be newly produced property.  Used equipment and scrap also qualify.  There is also an exception whereby payments for engineering and architectural services related to construction projects outside the US are considered qualified export receipts.

Give me a call or email if I can help you set-up an DISC.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.  Many businesses have been improperly classifying employees as independent contractors. The reason? Classifying workers as contractors rather than employees can save an employer 20-30% of its labor costs.  The IRS has voluntary worker classification program that will allow businesses to reclassify their workers as employees, and pay only a small amount to cover past payroll taxes.  However, the IRS also announced plans to aggressively audit and look for worker misclassification in the future.  Give me a call if you have any questions about whether your workers can or should be treated as employees or independent contractors.  Jsenney@pselaw.com or 937-223-1130.

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