Question

X corporation, an S corporation, has $6,000,000 of domestic sales and $2,000,000 of foreign sales (export sales). Taxable income before any DISC commission is $600,000 from the domestic sales and $120,000 from the foreign sales.

a) What is the federal tax savings with or without a DISC? Assume that the individual income tax rate is 37% and the tax rates on dividends is 20%.

b) Assume the same facts except that the X corporation is a C corporation and does not use an IC-DISC. X has no depreciable assets or cash.

Answer 1

For S Corporatin, Several methods are used to calculate the amount of commission the IC-DISC may be

Four percent of its qualified export receipts  

Fifty percent of its combined taxable income that is its export profits

For C Coropration, the allowable portion of your company’s gross receipts is passed to the IC-DISC corporate entity, which is owned by your company’s shareholders. Commission payments are then taxed at the dividend income rate of 20 percent, rather than at the federal corporate income tax level, which can be as high as 37 percent.