As the end of the year approaches, CPAs generally experience a spike in IC-DISC incorporations. This seasonal activity is understandable as clients want to have everything set-up and ready to go in order to maximize the IC-DISC’s prospective tax benefits for the upcoming year. Concurrent with these new incorporations comes the question of how to best structure the shareholder ownership of the IC-DISC. In its most basic form, there are two ownership structures that are utilized based on the exporting company’s entity type.
The simplest ownership configuration for an IC-DISC comes when the exporting company is organized as a flow-through entity, an S corporation or an LLC. In this case, the IC-DISC is directly owned by the exporting S corporation or LLC as a subsidiary and the required movement of cash can flow in a complete circle back to the exporter. Under this scenario, at the end of the year the S corporation or LLC pays a commission to its IC-DISC subsidiary, and as soon as 24 hours later the IC-DISC subsidiary can pay those funds right back to the exporting parent in the form of a qualified dividend:
The other ownership structure utilized is where the exporting entity is a C corporation. This type of ownership structure is a classic brother/sister arrangement. Unlike the ownership structure of an S corporation or LLC, several Tax Code restrictions make direct C corporation ownership of an IC-DISC undesirable. But, both the C corporation and the IC-DISC could be owned by the same shareholders. In this type of structure, the C corporation will pay the deductible commission to the IC-DISC, thereby reducing its ordinary income, and the IC-DISC in turn pays that out to its shareholders in the form of a qualified dividend. Unlike the flow-through example discussed above, the money distributed to the shareholders as a qualified dividend permanently leaves the C corporation under this arrangement. However, the exporter has still effectively created a deductible dividend to the C corporation shareholder:
Whether the exporting company is structured as an LLC, S corporation or C corporation, the LBMC and McGuire Sponsel team is involved at the onset of the incorporation process to assist with realizing the optimal IC-DISC ownership configuration needed to maximize the IC-DISC tax benefit.
Call us if you need insight or assistance in discussing the establishment of an IC-DISC and the pros/cons of a respective ownership structure, or if you have an IC-DISC currently established and would like to discuss optimization.
Guest blog from the professionals of McGuire Sponsel, an LBMC strategic partner delivering specialized tax and advisory solutions. They approach their work as trusted resources to CPAs, enhancing those important annuity relationships through innovative tax strategies.