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Calculating The AllowableIC-DISC CommissionThe allowable IC-DISC reportable commission incomeis the greater of: a transfer price computed underthe rules of IRC §482 (provided there is a contemporaneousdocumentation study), 4 percent of the IC-DISC's qualified export receipts on reselling the property,or 50 percent of the combined taxable incomefrom export sales of the exporter and the IC-DISC– plus 10 percent of export promotion expenses. 19Let's take a look at a hypothetical company to seehow this plays out. We'll limit our calculation toa comparison of the second and third methodsmentioned above. The first method requires that atransfer pricing study be conducted, which is beyondthe scope of this article.Illustration: S-corporation that domesticallymanufactures product for exportHypothetical company financials:Foreign trading gross receipts: USD5,000,000Cost of goods sold: ( USD4,000,000 )Gross margin: USD1,000,000Sales, general, and administration expenses:( USD700,000 ), includes USD300,000 of "exportpromotion expenses"Export sales net income: USD300,000In this case, we'd take the greater of either:4 percent of export gross receipts: USD5,000,000× 0.04 = USD200,00050 percent of export net income: USD300,000× 0.5 = USD150,000Because the export gross receipts figure is larger, ataxpayer would take USD200,000 (4 percent ofexports) and add USD30,000 (10 percent of theUSD300,000 export promotion expenses) to get anallowable IC-DISC commission of USD230,000.Although it has been stated previously that theIC-DISC incentive is limited to materially benefitflow-through entities, owners of C corporationshave implemented IC-DISCs by creatingor using 20 a related flow-through entity, whichwould directly own the IC-DISC. The flowthroughentity would need to be owned by individualswhom the exporting company wishesto benefit from the IC-DISC income taxationbreak. For example, the owners of a US C corporationcould set up a brother-sister corporationas an IC-DISC that's owned in the same proportionby a US LLC. 21The calculation of commission income in this scenariowould be the same as the one above, assumingthe companies have the same financial performance.In order for the taxpayer shareholders ofa C corporation to benefit from the intended taxsavings, the IC-DISC would need to be owned bya separate pass through entity and the additionalstructuring would likely be required.E NDNOTES12The original DISC law was codified in IRC §§ 501 -507,Revenue Act of 1971, Public Law No. 92-178, 85 Stat.535 (1971).The Jobs Act provision where under qualifieddividends are taxed at the capital gains rate was26