As the world's economies become more and more integrated, an increasingly large portion of the agricultural products produced by California farmers are exported to other countries. In addition to the obvious advantage of expanding the product market, the export of products also creates an opportunity for the farmer to enjoy potentially significant tax savings through the use of an "IC-DISC."
The United States Congress passed legislation several years ago to further incentivize the export of United States goods and products to other countries by providing for the creation of Interest Charged Domestic International Sales Corporations, commonly referred to as IC-DISCs.
The IC-DISC itself is simply a corporation that is formed by the farmer and makes an election to be taxed as an IC-DISC. The IC-DISC serves as a broker to the exporter of the goods. As the broker, the IC-DISC enters into a commission agreement with the farmer and is paid commissions on the exported product pursuant to specific requirements set forth by the Internal Revenue Service. That commission income can then be distributed out of the IC-DISC to its shareholders by way of a dividend.
The tax advantages of this arrangement derive from two characteristics of federal tax law. First, pursuant to the enabling legislation for the IC-DISC, the commission income paid to the IC-DISC is not taxable to the IC-DISC. Second, the distribution to the shareholder (i.e., the farmer) is taxed at the preferential rate for dividends of 20% rather than the farmer's regular tax rate, which may be as high as 39.6% depending upon the farmer's income level.
The net result of the IC-DISC is that a portion of the farmer's income from its sale of exported goods will be taxed at a rate that may be nearly 20% lower than the farmer's normal tax rate. Depending upon the farmer's level of income, this may result in a significant tax savings.
While the IC-DISC is specifically sanctioned by federal law to encourage exports, it does require a legal advisor and tax advisor who are familiar with the legal and tax requirements of an IC-DISC. Therefore, if you, or any of your clients, are a farmer or any other producer of goods in the United States that exports a significant amount of those goods to other countries, we strongly encourage you to consult with your tax advisor about the potential advantages of an IC-DISC.
If you have questions about IC-DISCs or are interested in creating one, please contact our office for a personal consultation with an attorney.