How can the CPG industry benefit from IC-DISC?

The IC-DISC (Interest Charge Domestic International Sales Corporation) is a tax incentive tool provided by Congress, intended to benefit companies engaged in exporting U.S. manufactured goods or architectural and engineering services from the United States. 

Consumer Packaged Goods (“CPG”) companies, which often deal with significant international sales, should use the IC-DISC structure to lower their tax burden on export profits.

Here’s how the CPG industry can benefit from the IC-DISC:

Tax Savings on Export Income: The primary benefit of an IC-DISC is the ability to convert ordinary income from exports into qualified dividend income, which is taxed at a lower capital gains rate (capped at 20%).

Export profits—which can include profits from the sale of CPG (like food, beverages, personal care products, or household items) to foreign buyers—can be routed through an IC-DISC. By doing so, companies can reduce the overall tax burden on the profits from those sales.

Increased Cash Flow: By reducing the effective tax rate on export income, a CPG company can increase its after-tax cash flow. The saved funds can be reinvested into business operations, marketing, research and development, or other growth initiatives. This is especially valuable for small to mid-sized CPG businesses looking to expand their international footprint without sacrificing capital.

Export Incentive for U.S. Manufacturers: The IC-DISC helps encourage U.S.-based manufacturers to focus on exporting by providing a tax incentive. This is particularly beneficial for CPG companies that produce goods domestically but sell them internationally. It can help increase competitiveness in international markets where price sensitivity and cost efficiency are crucial.

Eligibility and Flexibility: Eligible CPG products qualifying for  IC-DISC can be quite broad, including food & beverages, household items (e.g., cleaning supplies, personal care products, etc.), and health & wellness products. The IC-DISC can also benefit CPG companies in a variety of ways, whether the company is selling directly to international consumers or indirectly through distributors.

Here’s a real-world scenario of how a CPG company can utilize an IC-DISC:

Scenario: A Gourmet Food Company (S Corporation)

Company Profile:

  • Type of Business: A closely held S corporation producing premium sauces and condiments.
  • Ownership: Owned by two founders (a married couple), each holding 50% of the company’s shares.
  • Operations:
    • Products are manufactured in the U.S. and exported to Canada, the EU, and Japan.
    • Exports represent $5 million of the company’s $20 million annual revenue.
  • Export Channels: Products are sold through international distributors and specialty online retailers.

How the IC-DISC is Utilized:

  • Setting Up the IC-DISC:
    • The IC-DISC is established as a wholly-owned subsidiary of the CPG companIt is a separate legal entity but functions solely as a tax-saving vehicle with minimal operational involvement.
  • Paying a Commission:
    • CPG company pays a commission to the IC-DISC based on export sales.
    • For example, they calculate a commission of $300,000 (based on 50% of export net income). This amount is deductible from the S corporation’s taxable income.
  • Pass-Through Tax Benefits:
    • As an S corporation, a CPG company doesn’t pay corporate income tax. Instead, its net income is passed through to the two shareholders, who pay taxes on it at their individual rates.
    • By deducting the $300,000 IC-DISC commission, the S corporation reduces its pass-through income, lowering the shareholders’ tax liability.
  • IC-DISC Dividend Distribution:
    • The $300,000 commission is retained by the IC-DISC and later distributed as qualified dividends to the CPG company, which passes through to the shareholders as an S corporation.
    • These dividends are taxed at the lower qualified dividend tax rate (20%) instead of the higher ordinary income tax rates (up to 37%).
  • Tax Savings Example:
    • Reduction in taxable pass-through income saves the owners $111,000 in taxes (assuming a 37% tax rate: $300,000 × 37%).
    • Tax on the IC-DISC dividend is $60,000 ($300,000 × 20%).
    • Net tax savings: $51,000 ($111,000 saved – $60,000 dividend tax).
  • Reinvesting the Tax Savings:
    • The owners reinvest the $51,000 in tax savings into marketing campaigns, expanding their product lines, or upgrading production equipment to support international growth.

Key Considerations:

  • Regulatory Compliance:
    • The IC-DISC must adhere to strict IRS regulations, including maintaining separate books and records, meeting capitalization requirements, and filing annual tax returns. Export-related sales must meet the IRS criteria to qualify for IC-DISC benefits.
  • Initial and Ongoing Costs:
    • Setting up and maintaining an IC-DISC involves upfront expenses and recurring annual costs. Companies should carefully evaluate these costs in relation to the potential tax savings to ensure it is a worthwhile investment.
  • Expert Guidance:
    • Leveraging an IC-DISC effectively requires partnering with tax professionals who have in-depth technical knowledge of IC-DISCs. Their expertise helps ensure compliance with IRS requirements and allows businesses to fully optimize the available tax benefits.

For consumer-packaged goods companies with a strong international presence, an IC-DISC can provide significant tax benefits. The resulting tax savings can be reinvested into global expansion efforts, innovation in product lines, or strengthening domestic operations—ultimately driving growth and profitability in competitive markets.

For more information on how IC-DISC or other export-related tax services could benefit your business, please feel free to contact us at mmiller@tglobaltax.com

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