How They Work
At-A-Glance
Structured IC-DISCs

A) Structure:

  1. C-1 Delaware Corporation formed. Owned by Pass ThroughEntities /Individuals.
  2. C-1 Elects IC-DISC (Tax Exempt) Status w/90days of formation.

B) Transaction Flow:

Assume Pass Through Exporter;
$1 million exports w/10% Profit.

C-1 C-1
Exporter
 IC-DISC Shareholders
Total
1) Exporter Profit
100,000
$100,000
2) IC-DISC Commission:
Maximum Allowed 50%
-50,000
$50,000
3) Dividend to Shareholder
-50,000
$50,000
4) Taxable Income
50,000
0
50,000
100,000
5) U.S. Tax Due 35% & 15%
-17,500
0
-7,500
-25,000
After Tax Cash Income
32,500
0
42,500
$75,000

• C-1 is a tax exempt entity. Income is normally taxed to its shareholders, as a
dividend. The exception being IRAs, where the Dividends are taxed as UBI.
UBI means Unrelated Business Income, which is taxed as ordinary income at
graduated trust rates.

Please note! Another exception is created if an S Corporation owns 80% or more of the IC-DISC. The dividend to the S will retain its character as trade income, thus eliminating a tax rate benefit.

C) Comments:

In situations where a Roth IRA shareholder is involved and the annual distribution to the Roth IRA shareholder is not expected to exceed $175,000 it is usually advisable to form a C-2 as a Holding Company to own the Roth IRA portion of the C-1 shares. The Roth IRA would then own the C-2 shares. In this manner the dividend to C-2 would first be taxed at the graduated Corporate rate and the after tax dividend would flow to the Roth IRA tax free. The reason for the 2 step approach is that the IRA, as a direct owner of C-1, would be taxed as on the distribution as Unrelated Business Income rather than a tax free income Dividend. When distributions to any one IRA shareholder exceeds $175,000, the Corporate graduated rate would exceed the Trust graduated tax rate, ergo a C-1 structure would be the lower tax vehicle.

In most situations with Roth IRA shareholders, the 2 step(C-1 & C-2) would be advised.

 

The Export Subsidy Company 3/05
800-243-1372