Final U.S. tax bill preserves future IC-DISC tax benefits for taxpayers utilizing an IC-DISC
Under the final U.S. tax bill, the preferential 23.8% capital gains tax rate is retained on IC-DISC distributions. As explained below, this preserves the potential, through future use of an IC-DISC, for either:
- a 13.2% tax rate benefit (only slightly reduced from the current 15.8%) on export income otherwise taxable at the new 37% individual tax rate (i.e., in case of pass-through entities); or
- a 21% tax rate benefit on export income otherwise taxable at the new 21% C corporation tax rate.
Timing of new tax rules related to IC-DISCs
The future tax rate benefits described above apply for tax years beginning on or after January 1, 2018.
For current tax years that began prior to January 1, 2018, the current tax rate benefits of 15.8% for pass-throughs or 35% for C corporations still apply.
Future IC-DISC Benefits for Partnerships, S Corporations and Sole Proprietorships
Under the final tax bill, there are strict limitations on the new tax benefits for pass-through income of partnerships, S corporations and sole proprietorships. In many cases, most pass-through income will remain taxable at a 37% individual tax rate.
As a result, a 13.2% tax rate benefit is possible through future use of an IC-DISC, which can achieve a preferential 23.8% capital gains tax rate on export income otherwise taxable at the 37% rate. The future 13.2% IC-DISC benefit is only slightly lower than the 15.8% benefit achievable under the current 39.6% individual tax rate.
Future IC-DISC Benefits for C Corporations
Under the final tax bill, the maximum C Corporation tax rate is reduced to 21% from 35%.
As a result, a 21% tax rate benefit is possible through future use of an IC-DISC to reduce export income otherwise taxable at the 21% C corporation tax rate. In cases where C corporation income is reduced through compensation to individual shareholder/employees, a 13.2% tax rate benefit can be possible through future use of an IC-DISC to achieve a preferential 23.8% capital gains rate on some portion of compensation income otherwise taxable at a 37% individual tax rate (or higher due to payroll taxes).
BPM is Here to Assist You
If you do not currently have an IC-DISC, we can reliably determine your potential IC-DISC tax benefits and then provide full turn-key IC-DISC implementation services, together with cost-effective annual IC-DISC management and tax compliance services. Contact one of our BPM IC-DISC professionals to learn how we can help.
