By Andrew L. Moore, CPA
Over the past several years Georgia has grown to become one of the top states in the country for film production, largely as a result of the Georgia Film, Television, and Digital Entertainment Tax Credit. Currently extended to January 1, 2019, Georgia allows for a 20 percent tax credit for companies that spend $500,000 or more on production or post production in Georgia, either in a single production or on multiple projects. The state grants an additional 10 percent credit if the finished product includes a promotional logo provided by the state. Companies producing feature films, television series, music videos, commercials, interactive games, and animated films can take advantage of the credit.
Why should all of this matter to the average Georgia taxpayer whose only film activity involves watching his or her favorite TV shows or catching a movie at the theater? The Georgia Legislature, realizing that many production companies would lack sufficient Georgia tax liabilities to fully utilize the credit against state income or withholding tax, provided the credit be transferrable, one time, to other Georgia taxpayers either in whole or in parts. The credit may only be sold or transferred once; however, the sale or transfer may involve multiple Georgia transferees or buyers.
A number of tax credit brokers work with production companies that have unused film credits and assist with brokering all or some of company’s unused credits. Film credit brokers typically make 2 – 3 cents per dollar of credit sold. So, when credits sell to an end user for 92 cents on the dollar, the broker likely negotiated a commission with the production company based on 89 to 90 cents on the dollar, profiting 2 -3 cents per dollar for putting buyer and seller together. Although rare, some credits are exchanged directly from production companies to the end purchaser of credits without a broker, usually providing for a larger discount to the buyer.
Generally, $1 of Georgia film tax credit can be purchased for around 88 to 93 cents, allowing Georgia taxpayers to settle their Georgia tax liability at a discount because the film tax credits are exchanged dollar for dollar to pay Georgia income tax. Taxpayers can purchase film credits for the current tax year, and three proceeding tax years –with the price generally lowering for prior year credits. For the buyer, the credit is treated much like withholding and is included as a tax payment before the calculation of interest and penalties. This helps taxpayers who are filing late, fail to make estimated tax payments, or have been audited with tax assessments for prior years.
According to Garrett Fox, Tax Senior Associate in charge of facilitating Georgia film tax credits at Atlanta based CPA Firm Frazier & Deeter, the price of tax credits has steadily increased over the past 3-4 years due to the increased popularity of purchasing film credits as a tax savings and planning tool. Brokers and studios are placing minimums on order size which effects pricing and availability. For example, in today’s market, a taxpayer purchasing $100,000 or more in film credits may have access to credits not available to buyers who might only need $35,000. Or, sometimes you will see an increase in price for orders below a particular threshold. In addition, Fox explains that some CPA firms, including Frazier & Deeter, have developed relationships with brokers where, depending on the circumstances, arrangements can be made to reduce minimum order requirements given the sheer volume of business done with the brokers.
As described above, this is an easy way to reduce Georgia tax liability for those taxpayers with higher income tax liabilities. For example, a client who is married and files taxes jointly, already with a high annual income, sells his or her business resulting in 2016 Georgia taxable income of $1,671,000 (the amount of Georgia taxable income that results in Georgia income tax of roughly $100,000 when filing jointly). In this example, your client would purchase $100,000 of Georgia film tax credits for around $92,000 (92 cents on the dollar), saving $8,000 simply by settling Georgia taxes with film credits.
In the above scenario, the benefit is magnified when considering your client could wait until the extended due date of his or her 2016 Georgia tax return, October 15, 2017, to actually make the purchase without being penalized for late payment of tax or underpayment of estimated tax (credits may be harder to find later in the year so careful planning should be done to locate credits as early in the year as possible).
Contrast this to settling taxes via direct cash payment to the Georgia Department of Revenue, where your client would be required to remit $100,000 on April 15, 2017, and likely be penalized for failure to make quarterly estimated tax payments if the balance due was not remitted until the April 15, 2017 due date.
As you can see, by paying via film credits you can not only settle Georgia taxes at a discount but keep cash in your client’s pocket longer!
In addition to the above, your client is eligible for an itemized deduction for state income tax in the amount of $100,000 in the year the credit is purchased. The above benefits are slightly reduced due to the taxable capital gain of $8,000 ($100,000 – $92,000) associated with purchasing the credit and using it in satisfaction of Georgia tax.
Credits left unused can be carried forward for up to five years. The expiration of the carry-forward period is based on the end of the tax year in which the production company claimed the tax credit and not the date the credit was transferred to the buyer. For example, if a production company claimed a credit on its December 31, 2010 tax return, that credit will expire five years later on December 31, 2015, even if the credit was transferred on December 31, 2014.
Sounds Great, But What Are The Risks?
Georgia film tax credits are generally considered by tax advisors to be a fairly low risk investment. However, as with all investments, there are risks to consider –including audit risk with film credits. The risks involved can be mitigated by considering the following:
- Securing a guarantee from a reputable production company (like NBC, Universal, Sony, or The Weather Channel, to name a few);
- Purchasing credits from quality brokers and production companies;
- Ensure the Georgia Department of Economic Development has certified the project;
- Purchasing credits which have already been audited by the state; or
- Purchasing credits where a reputable CPA Firm has provided a “comfort letter” for the credits.
How Can Frazier & Help?
Involve Frazier & Deeter early in the purchase. We have contacts throughout the industry, including brokers and production companies, to find the right credits. As CPAs, we are simply facilitators and advisors and are not influenced by any sort of commission.
If you have questions regarding film credits or any other tax planning strategies or tools feel free to give me a call at 404.573.4336 or email me at Andrew.Moore@FrazierDeeter.com.Read More