An IC-DISC company, short for Interest Charge Domestic International Sales Corporation, is a separate U.S. corporation that lets an exporter shift part of its export profit from ordinary income into qualified dividends taxed at a lower rate. The IC-DISC itself pays no federal income tax.1Office of the Law Revision Counsel. 26 USC 991 – Taxation of a Domestic International Sales Corporation The operating company pays it a commission on export sales, deducts that commission as an ordinary business expense, and the IC-DISC then pays the money out to its shareholders as qualified dividends. The rate spread is where the savings live.2Internal Revenue Service. IC-DISC Metadata
How the Tax Savings Work
Without an IC-DISC, export profits from a pass-through business flow to owners as ordinary income taxed at rates up to 37%. Profits inside a C corporation get hit at 21% and again when distributed. Route the same profits through an IC-DISC and the commission portion reaches shareholders as qualified dividends capped at 20%, plus the 3.8% net investment income tax for shareholders over the applicable income threshold.3Internal Revenue Service. Topic No. 559, Net Investment Income Tax
The mechanics are straightforward. The operating company earns export income, calculates a commission owed to the IC-DISC, and pays it. The commission is a deduction on the operating side. The IC-DISC receives the money tax-free and distributes it. Shareholders pay dividend rates instead of ordinary rates on that slice. For owners of S corporations, partnerships, LLCs, and sole proprietorships that ship U.S.-made goods overseas, that rate arbitrage is the whole point.
How Big the Commission Can Be
The commission isn’t a number the parties choose freely. Federal law caps the IC-DISC’s taxable income from any given sale at the greatest of three amounts:4Office of the Law Revision Counsel. 26 USC 994 – Inter-Company Pricing Rules
- 4% of qualified export receipts from the sale, plus 10% of the IC-DISC’s export promotion expenses tied to those receipts.
- 50% of the combined taxable income the IC-DISC and the operating company earn on the export sale, plus 10% of related export promotion expenses.
- The actual arm’s-length transfer price under standard transfer pricing rules.
Most IC-DISCs use the first method. It’s simpler and, in common scenarios, produces the largest commission. One constraint matters more than the others: the no-loss rule. Commissions can’t be calculated on transactions where combined taxable income is zero or negative. Unprofitable export sales get excluded from the calculation entirely rather than netted against profitable ones.
Who Can Set One Up
The entity requirements are light. The IC-DISC must be a domestic corporation formed under the laws of any U.S. state or the District of Columbia, with only one class of stock and a par value of at least $2,500 on every day of the tax year.5Office of the Law Revision Counsel. 26 USC 992 – Requirements of a Domestic International Sales Corporation Shares can be held by individuals, C corporations, S corporations, partnerships, and LLCs.
Two ongoing 95% tests decide whether the corporation keeps its status year to year. At least 95% of gross receipts must be qualified export receipts, and at year-end at least 95% of the adjusted basis of assets must be qualified export assets. Fail either test and the IC-DISC loses its favorable treatment for that year.
Whether the goods qualify is the other threshold question. Export property must be manufactured, produced, grown, or extracted in the United States by someone other than the IC-DISC, held for sale or lease for use outside the United States, and contain no more than 50% imported content by fair market value.6Office of the Law Revision Counsel. 26 USC 993 – Definitions and Special Rules Some goods are excluded outright: patents, copyrights (other than commercial films and recordings), trademarks, trade names, formulas, and franchise rights; unprocessed softwood timber; oil, gas, coal, and uranium products unless substantial processing adds value; and any product whose export is prohibited or restricted under export control laws. The goods also have to actually leave the country and stay outside it. Products ultimately used in the United States don’t count, even if they were sold to a foreign buyer first.
Making the Election
A corporation elects IC-DISC status by filing IRS Form 4876-A.7Internal Revenue Service. About Form 4876-A, Election To Be Treated as an Interest Charge DISC Timing depends on whether the corporation is new:
- For a brand-new corporation, file within 90 days after the beginning of its first tax year.
- For any later tax year, file during the 90-day window immediately before the first day of that tax year.8Internal Revenue Service. Form 4876-A – Election To Be Treated as an Interest Charge DISC
An existing corporation that wants IC-DISC status for 2026, in other words, had to file during September through December of 2025. Miss it and you wait a year. The form requires the EIN, incorporation date, and every shareholder’s name, address, and taxpayer ID, plus a signed consent from each shareholder acknowledging the election.
Once elected, the IC-DISC files Form 1120-IC-DISC every year as an information return reporting its income, distributions, and deemed distributions.9Internal Revenue Service. About Form 1120-IC-DISC, Interest Charge Domestic International Sales Corporation Return It should keep its own bank account and its own books, separate from the operating company. Commission payments have their own timing rule: a reasonable estimate, generally at least 50% of the final commission, is due within 60 days of the tax year’s end, with any balance due within 90 days of finalizing the calculation. A commission receivable that sits unpaid past the 60-day mark can stop counting as a qualified export asset and put the 95% asset test at risk.
The Two Costs You Trade For the Savings
The structure is aimed at smaller exporters, and Congress built in a ceiling. When an IC-DISC’s qualified export receipts exceed $10 million in a tax year, the taxable income tied to receipts above that line is treated as deemed distributed to shareholders and taxed in the current year, whether or not any cash actually moves.10Office of the Law Revision Counsel. 26 USC 995 – Taxation of DISC Income to Shareholders A controlled group with multiple IC-DISCs shares one $10 million limit.11Internal Revenue Service. Instructions for Form 1120-IC-DISC Larger exporters still benefit on the first $10 million of receipts and can steer their most profitable transactions below the line to maximize the deferred commission.
The “IC” is the second cost. Shareholders who defer tax on accumulated DISC income owe an annual interest charge on the deferred liability, calculated by multiplying it by a base-period T-bill rate factor the IRS publishes each year. For tax year 2025, that factor was 0.041641381 for a full 365-day year.12Internal Revenue Service. Form 8404 – Interest Charge on DISC-Related Deferred Tax Liability Shareholders report it on Form 8404, filed separately from their income tax return. Individual shareholders owe by April 15; corporate shareholders owe by March 15. C corporations (other than S corporations) can deduct the interest charge as an interest expense; individuals and other filers cannot. As long as the interest charge stays small relative to the rate savings from converting ordinary income to qualified dividends, the structure keeps paying. Let the deferred amounts grow large enough and the annual charge starts to eat the benefit.