How GreenFlow Irrigation Boosted Growth and Cut Taxes with IC-DISC”

As a mid-sized company focused on high-quality irrigation systems, GreenFlow Irrigation Supplies was seeking new ways to grow its international presence while minimizing its tax burden. With $30 million in total revenue, including $12 million in international sales, GreenFlow recognized the opportunity to leverage the Interest Charge Domestic International Sales Corporation (IC-DISC) structure to reduce its tax liability and reinvest the savings into expanding its export operations. Here’s how they did it and why other businesses in similar positions might consider the IC-DISC strategy.

The Challenge: Minimizing Tax Liability on Export Income

GreenFlow’s core business involves selling irrigation systems to both domestic and international markets. With $12 million in international sales and a net income of $3 million on those sales, GreenFlow wanted to reduce the taxes they owed on export income and use the savings to reinvest in their business. This is where the IC-DISC structure comes in.

The IC-DISC program is a tax incentive designed to encourage U.S. companies to export goods by offering significant tax benefits on export-related income. The goal is to lower the effective tax rate on international sales, freeing up more capital for reinvestment into growth.

Step 1: Setting Up AquaExport Inc. as an IC-DISC Entity

To take advantage of the IC-DISC tax benefits, GreenFlow created a separate entity, AquaExport Inc., which was organized as a C Corporation and elected to be treated as an IC-DISC by filing Form 4876-A with the IRS.

By electing IC-DISC status, AquaExport Inc. is treated as a tax-exempt entity, but it can earn commissions on GreenFlow’s export sales. This allows GreenFlow to reduce its taxable income while AquaExport Inc. passes the tax benefits back to GreenFlow as a dividend, taxed at a lower rate.

Step 2: Entering into a Commission Agreement

GreenFlow entered into a commission agreement with AquaExport Inc. that outlined the commission AquaExport would receive for helping facilitate GreenFlow’s export sales. The commission is based on the greater of:

  • 4% of Gross Export Sales, or
  • 50% of Net Export Income.

In GreenFlow’s case, with $12 million in gross export sales and $3 million in net export income, the commission would be calculated as follows:

  • 4% of Gross Export Sales = $480,000
  • 50% of Net Export Income = $1.5 million

The commission is calculated at $1.5 million (since it’s the greater amount), which AquaExport Inc. earns as its commission on GreenFlow’s export sales.

Step 3: Tax Deduction and Reinvestment

For GreenFlow, the commission paid to AquaExport Inc. is deductible as a business expense, which reduces its taxable income. The deduction lowers GreenFlow’s overall tax liability, freeing up more cash flow for reinvestment.

AquaExport Inc. then distributes the $1.5 million commission back to GreenFlow as a qualified dividend. This dividend is taxed at a lower rate than ordinary income, providing additional tax savings.

In total, by utilizing the IC-DISC structure, GreenFlow was able to save approximately $198,000 in taxes (assuming shareholders are taxed at the maximum rate). These tax savings were reinvested directly into GreenFlow’s export operations, allowing the company to:

  • Increase its export sales,
  • Expand market penetration, and
  • Enhance its product offerings.

The Bottom Line: Leveraging IC-DISC for Business Growth

GreenFlow’s use of the IC-DISC structure is a textbook example of how a mid-sized company can utilize this tax incentive to enhance profitability and growth. By reducing taxes on export income, GreenFlow freed up capital that could be reinvested to expand its business and increase its international market presence.

For companies like GreenFlow, especially those with a substantial portion of revenue coming from international sales, the IC-DISC program offers a powerful way to minimize tax liability, maximize savings, and reinvest those savings into business development.

If your business is involved in export activities, an IC-DISC structure might be the strategic move you need to improve your bottom line and fuel growth. Reach out to a tax professional to see if this strategy could work for you!

This could easily be your story. Don’t leave money on the table—act now to explore IC-DISC opportunities with the help of Transglobal’s tax experts (https://tglobaltax.com/contact/). 

For further insights on IC-DISC or other export-related tax services, please feel free to contact us at mmiller@tglobaltax.com

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