Most companies in the adult industry are not aware of the domestic U.S. tax benefits and incentives that are available to them, have existed for many years, and will be available for more years to come.Each year, billions of dollars are provided by the U.S. government in the form of tax benefits to companies that derive any portion of their income from overseas sources. These benefits are achieved through the application of either the Extraterritorial Income Exclusion (“ETI”) or Interest Charge-Domestic International Sales Corporation (“IC-DISC”) regimes.
The ETI and IC-DISC regimes are federal government-sponsored benefits backed by the IRS, Congress, and current administration. While originally put in place for mainstream manufacturing and media companies as a means to reduce the U.S. trade deficit, no exclusions were put in place for companies in adult and related industries, allowing these export benefits to be applied to them.
The ETI regime was put into place on November 16, 2000. This regime allowed U.S. exporters to exclude a substantial portion of their net income derived through qualified export sales from federal corporate income tax. Unfortunately, due to pressure from the European Union, in 2004 the ETI regime was repealed setting an eventual wind down in 2005 and 2006, and total elimination in 2007. However, even with this repeal, companies can make amendments to their open tax returns, allowing the ETI regime to be taken advantage of for tax years 2003 through 2005.
With the repeal of the ETI regime, the IC-DISC regime has become the only viable option for domestic U.S. taxpayers to obtain tax savings for their export activities. Additionally, since there are no adult industry limitations with the IC-DISC regime, it has become the only tax benefit option available for U.S. based companies in the adult industry.
The IC-DISC regime provides tax savings on a go forward basis, rather than the ETI regime that allows a company to go back to open tax years. Through an IC-DISC, taxpayers are able to take advantage of the reduction of the dividend tax rate to 15% that took place in 2003, creating an effective 20% tax saving on qualified foreign income.
Both the ETI and IC-DISC regimes apply to all types of U.S. taxpaying entities- S-Corps, C-Corps, LLCs, LPs. While there are certain requirements with each regime, these are easily met by most companies, due to the following reasons:
• It is not necessary to be the producer of the product or content being sold;
• It is not necessary to produce or have purchased the product or content produced in the United States; and
• It is not necessary to be the direct seller of the product or content to overseas customers.
Specific examples of qualifying activities for domestic U.S. taxpaying companies, as they relate to the adult industry, include but are not limited to the following:
• A company produces its own content or purchases content produced in the United States and sells it overseas directly, or to or through third parties that in turn sell it overseas, whether via CDs, video, internet subscriptions, VOD, raw or finished footage, etc.
• A company produces its own content or purchases content produced outside the United States, imports the content into the United States, and sells it overseas directly, or to or through third parties that in turn sell it overseas, whether via CDs, video, internet subscriptions, VOD, raw or finished footage, etc.
While some may think that tracking foreign sales is a burden, it is actually much easier than one would expect. Due to the nature of the adult industry and its use of the internet and computerized processing systems and companies, foreign sales are easily tracked, broken down, and detailed through up-to-date and historical reports according to volume of sales on a country-by-country basis. Additionally, for those companies that are not web-based, or do not receive all their payments via the web, accounting systems as well as simple tracking of invoices and bills of lading allow for an easy means of identifying foreign sales.
Based on the overall size of the U.S. adult industry market and the substantial percentage of revenues that are generated from foreign customers, hundreds of millions of excess dollars are being paid in taxes to the U.S. government. Through the ETI and IC-DISC regimes, U.S. companies and their owners can re-capture a portion of their previously paid taxes and reduce their tax burden going forward.
About FortisTCS:
FortisTCS is an independent professional service consulting firm specialized in assisting companies with the tax credit opportunities developed by the U.S. government and available under the IRS Code, as well as through various state programs.
FortisTCS’s group of professional consultants is composed of CPAs, lawyers, and business and technical professionals. Their proven methodologies have been developed to provide their clients with tax credit services in an effective and efficient manner. These methodologies have been customized to meet their clients’ specific needs as no two businesses are the same and the ever-changing tax code can affect each on differently.
