IC-DISC Case Study: U.S. Food Distributor Saves $99K in Taxes

For family-owned businesses, managing operational costs while maintaining growth can be a challenging balancing act. This was the case for a U.S.-based food distributor that exports $15 million in U.S.-made food products to Canada and Mexico. 

While the company’s sales were strong, high operating costs put pressure on its cash flow, necessitating a more effective tax strategy. In this case study, we explore how the company used an Interest Charge Domestic International Sales Corporation (IC-DISC) to reduce its federal tax liability and boost its cash flow.

Financial Snapshot

  • Annual Revenue: $15 million
  • Net Operating Profit: $1.5 million

With solid sales figures but squeezed margins, the company sought a solution to reduce its tax burden and improve its financial flexibility. The answer came in the form of an IC-DISC, a tax incentive available to U.S. exporters.

The Solution: Implementing an IC-DISC

The company took advantage of the IC-DISC structure, which allows U.S. exporters to reduce their effective tax rate on export-related income. Here’s how the process worked:

  1. Commission-Based Agreement: The company established a commission-based agreement for its export sales, allocating a portion of the income to the IC-DISC.
  2. Taxable Income Apportionment: By transferring a portion of its taxable income from the operating company to the IC-DISC, the company reduced its exposure to higher federal tax rates.
  3. Tax-Deductible Commissions: The company paid tax-deductible commissions to the IC-DISC, which helped lower its taxable income in the operating company.
  4. Qualified Dividends: The IC-DISC then distributed the income to the shareholders as qualified dividends, which are taxed at a much lower rate than ordinary income.

The Tax Savings Breakdown

Without an IC-DISC, the operating company’s shareholders would have faced a 37% federal tax rate on the $750,000 of taxable income derived from export commissions. Here’s a breakdown of the tax liability:

Without IC-DISC:

  • Taxable income: $750,000
  • Ordinary income tax rate: 37%
  • Tax liability: $750,000 x 37% = $277,500

With IC-DISC:

  • The $750,000 is now paid as a deductible commission to the IC-DISC, reducing the taxable income of the operating company.
  • The IC-DISC pays no federal tax on the income and instead distributes the amount to the shareholders as a qualified dividend.
  • Qualified dividend tax rate: 23.8% (including 3.8% NIIT)
  • Tax liability: $750,000 x 23.8% = $178,500

Total Tax Savings

By apportioning the export taxable income to the IC-DISC and paying out the commission as a qualified dividend, the company saved a total of $99,000 in federal taxes.

Tax Savings Calculation:
 $277,500 (tax without IC-DISC) – $178,500 (tax with IC-DISC) = $99,000 in savings.

The Results and Key Takeaways

The implementation of the IC-DISC provided the company with a number of key benefits:

  • $99,000 in federal tax savings: The company was able to lower its federal tax liability, freeing up more cash.
  • Increased cash flow for growth: With the savings, the company had more capital available to reinvest in the business, supporting its growth and expansion plans.
  • Improved profitability: The tax strategy allowed the company to increase profitability without the need for operational changes or major restructuring.

The Bottom Line: Could an IC-DISC Work for Your Business?

If your business exports U.S.-made products, an IC-DISC could be transformative in reducing your tax burden. This strategy allows exporters to transfer income from their operating company to a separate, tax-advantaged entity, significantly lowering their overall tax liability.

For food and beverage businesses in particular, the IC-DISC can deliver substantial savings, providing the financial flexibility needed to fuel growth and improve cash flow.

If you’re considering an IC-DISC for your business or want to learn more about how it could work for you, let’s discuss how this tax strategy can make a difference for your bottom line.

Contact us today to explore how an IC-DISC can optimize your tax strategy and boost your profitability.