The “Fiscal Cliff”.  “Tax-aggedon”.  Two colorful terms that are being bandied around in the business and popular press to express the unknown future of many tax breaks on which people and businesses have come to rely.   There is one long-standing tax tool wrapped up in “tax-aggedon” that specifically impacts manufacturers, DISCs, or Domestic International Sales Corporation, which currently are tax-exempt entities.

On January 1, 2013, the official expiration mark of Bush tax cuts, the use of DISCs may no longer be a tax-effective structure for manufacturers who are exporting.  The financial implications of DISCs no longer being around are significant.  For example, let’s say a manufacturer has $10 million in annual revenue and exports to countries like China, the Philippines and Poland.  By setting up a DISC, the business saves tens of thousands of dollars that it can use for other working capital needs, but if Congress doesn’t renew the viability of DISCs, the opportunity for those savings goes away. 

No Disc Disc
Export Profits $10,000 Export Profits $10,000
Tax $3,500 Disc Commission $5,000
    Taxable Income $5,000
    Disc Commission (15%) $750
    Supplier's Income (35%) $1,750
    Total Tax $2,500
    Disc Benefit 10%