ATLANTA, Aug. 26, 2020 (GLOBE NEWSWIRE) -- By: Marman “Marco” Cordova, CPA, MBT
New Georgia tax credit law will maintain the state’s status as “Hollywood of the South.” To alleviate escalating concerns about the viability of the Georgia film tax credit, Governor Kemp, on August 4, 2020, signed into law HB 1037, which is intended to preserve and bolster the integrity of The Georgia Entertainment Industry Investment Act. Indeed, the new legislation provides for stricter rules and audit requirements, while increasing the time it takes for productions to monetize the tax credit benefits. These measures, and a few more discussed below, are intended to address critics and inconsistencies with the current tax credit quantification process in a manner that results in a win-win for all involved.
Background
The Georgia Entertainment Industry Investment Act provides the largest tax credit offered by Georgia, and it is the most generous film incentive program in the nation, with an estimated $915 million of tax credits generated during 20171 A production company that spends $500,000 or more on qualified productions are eligible for a tax credit of 20% of their qualified Georgia production expenditures. Production companies are also allowed a 10% bonus “uplift,” which increases their tax credit rate to 30%, by including a Georgia promotional “Peach Logo” within the end-title credits, or an approved alternative marketing opportunity such as a link to Georgia’s Department of Economic Development Office’s (Film Office) website on the project or studio’s web page.
As the Georgia film tax credit grew in popularity over the past several years, the increasing cost to Georgia resulted in increased scrutiny. The Georgia Department of Audits and Account (DOAA) released two critical reports earlier this year regarding the Georgia film incentive. More specifically, one report2 claimed the Georgia film tax credit’s economic impact on the state was overstated by the Film Office, and it provided suggestions to scale back the program through adding a program cap and reducing the incentives provided for non-resident labor costs, among other recommended changes. The other DOAA audit report also stated the “Statute does not require audits, and current audits do not identify and disallow all ineligible expenditures.”3
Key stakeholders expressed concerns earlier this year that the DOAA audit reports could significantly impact the incentive program through new legislation, but the final version of HB 1037 kept the film tax credit benefits primarily in one piece. The legislation is effective for production companies that submit an initial application to the Film Office on or after January 1, 2021 (the “Effective Date”). The film incentive program will still generate a maximum 30% tax credit of qualifying production expenditures for one or more qualifying production activities. However, Georgia is tightening its rules by providing new standards for certifying the tax credit through mandatory audits administered by the Georgia Department of Revenue (DOR). Furthermore, Georgia’s new legislation reflects a growing trend among key film incentives states to make it harder for production companies to monetize the benefits of the film tax credit program.
New Audit and Certification Requirements Introduced
Currently, the DOR allows production companies to apply for a voluntary film production costs review. Upon completion of such review, the DOR issues a film tax credit certificate (the “DOR Certificate”). This certificate provides the actual amount a production company can either claim against its Georgia income or withholding tax liabilities. However, in most cases, production companies sell the DOR certificate to other Georgia taxpayers (either corporate or individual) at a discounted price to reduce their own Georgia income tax liabilities. This effectively provides the production company with additional funding sources to guarantee completion of production. Once the DOR Certificate is issued, the production company does not have any further requirement to substantiate the tax credits granted pursuant to the initial film production costs review.
New DOR Tax Credit Application After State-Certified Production
HB 1037 will now require all production companies who submit an initial application with the Film Office on or after the effective date to submit a tax credit application to the DOR within one year of completing a state-certified production. This step is effectively a mandatory audit to validate the initial tax credits awarded in the DOR Certificate. We note that as of the date of this publication, the DOR has not yet formalized the tax credit application for this new process. However, we can glean from language in HB 1037 itself, which provides minimum information to be included in the new DOR tax credit application.
Once the tax credit application is submitted, the DOR will perform a mandatory audit and then issue a final certification of qualifying production expenditures included in the base investment for calculating the tax credit.
Who Benefits from the New DOR Tax Credit Application
Currently, the DOR has the power to alter, modify, or disallow the tax credit amount certified production companies claim on its income tax return through a “post audit” of qualifying production expenditures if the credit is not quantified through a DOR Certificate.4 Tax credit buyers or transferees of Georgia film tax credits will become the primary beneficiaries for the new mandatory audit because the DOR “shall not recapture a tax credit from the transferee if the tax credit was issued a valid final certification….” The added protection for all Georgia projects in the future to have a DOR Certificate though a new mandatory audit will create more integrity and consistency for the Georgia film tax credit program due to the current use and inconsistent application of CPA audits, reviews, and AUP reports and DOR voluntary production expenditures reviews.
Certified public accountants (CPA) currently involved in the DOR Certification process5 could also benefit from HB 1037 primarily because the legislation provides for DOR audit compliance relief through integrating the use of “Eligible Auditors” to help perform the new required audit procedures. While the DOR will be able to perform an audit by itself, it is likely that it will utilize an Eligible Auditor, who meet certain requirements, to help perform the audit procedures (which are still in the process of being formalized). Once an Eligible Auditor performs a tax credit audit, the DOR will conduct a final review of the audit records before finalizing and issuing a DOR Certificate. The use of Eligible Auditors to assist with the mandatory audits for Georgia production tax credits in the future will help the DOR with its expected increased backlog of audits.
Delayed Ability to Utilize Georgia Film Tax Credits
Currently, Georgia film tax credits awarded through the DOR Certificate6, can be claimed against tax liabilities during the year when the qualifying production expenditures were incurred. Under HB 1037, the tax credit may not be claimed on the production company’s or other entity’s tax return in the same year that the expenses were incurred. Rather, the tax credit cannot be claimed until the tax year when the final certification is complete. The difference between utilizing a tax credit during the tax year when expenditures were first incurred versus the year when final certification is received could defer the state’s payout or lost revenues from the tax credits by an estimated one to three years, which could vary based on the size of the production and length of time for a production to complete a new mandatory audit. This mechanism is ingenious at best because it helps Georgia hold on to its tax revenues longer by delaying the payout of the tax credits.7
Furthermore, HB 1037 reduced the tax credits carryforward period from five years to three years, which effectively reduces the amount of time a production company or in most cases, a transferee can fully utilize a Georgia film tax credit. Both the deferral in being able to use the credits and a more limited carryforward of those same credits will increase the pressure on production companies to seek out tax credit brokers to monetize their credits quickly.
A Few More Noteworthy Changes
There are several other changes worth noting regarding the new Georgia film tax credit legislation:
- Production companies are no longer eligible for the 10% bonus “uplift” tax credit if the project is not commercially distributed in multiple markets. This new rule primarily affects television pilots or other qualified productions that were neither “picked up” nor distributed theatrically or through television network, cable, or streaming service. Under the current rules, television pilots or other qualified productions, regardless if they have the “Peach Logo” that do not have public distribution may apply for and receive pre-approval from the Film Office for an alternative marketing opportunity in order to receive the 10% bonus tax credit uplift. The new statutory language implies that certain productions such as television pilots that do not have wide commercial distribution will not be eligible for the 10% bonus.
- Narrower definition of “Production expenditures.” The new legislation reinforces the disallowance of any costs for goods and services incurred outside Georgia and removes all story rights from the definition of production expenditures. Furthermore, any transaction subject to either Georgia sales and use taxes or business and occupation taxes is excluded from the definition of production expenditures to extent such taxes have not been demonstrably paid.
- Transition Timeline: There will be a gradual phase-in for smaller Georgia film tax credit projects to meet the new final certification issuance rules as described below.
- A final tax credit certification is not required for any project that is certified by the Film Office on or after January 1, 2021, and before January 1, 2022, if it seeks $2.5 million or less in tax credits through its DOR tax credit application.
- A final tax credit certification is not required for any project that is certified by the Film Office on or after January 1, 2022, and before January 1, 2023, if it seeks $1.25 million or less in tax credits through its DOR tax credit application.
- All projects certified by the Film Office on or after January 1, 2023, must receive a valid final tax credit certification for the production company to claim, assign, sell, transfer, or utilize the tax credit.
Parting Thoughts
HB 1037 will provide more integrity and security for the Georgia Film Tax Credit Program while helping detract critics opposed to the tax credit. There was a time earlier this year when production companies and all concerned parties, including studios, producers, Georgia based vendors and service providers, production crew and actors, and taxpayers that benefit from the tax credit’s transferability, were on high alert due to the DOAA reports and talks within the state capital8 about potentially capping or greatly reducing the program’s tax credit benefits, thereby discouraging both feature film and television/streaming productions from “green-lighting” new projects in Georgia. Rather than reducing the face value or primary benefits of the Georgia film tax credit, the Georgia legislature and Governor Kemp reinforced the film incentive program through the new mandatory audit requirements and incorporating the support of Eligible Auditors. HB 1037 also indirectly helps limit the immediate fiscal impact for Georgia by changing the utilization rules while keeping the incentive generous enough for productions to keep the “Hollywood of the South” active next year and beyond.
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1 See Georgia Department of Audits and Accounts Performance Audit Report No. 18-03A
2 See Georgia Department of Audits and Accounts Performance Audit Report No. 18-03B
3 See supra note 2 (Georgia Department of Audits and Accounts Performance Audit Report No. 18-03A)
4 Currently, production companies not utilizing the DOR Voluntary Production Costs Review are relying on CPA reviews, audits, or agreed-upon-procedures (AUP) reports to quantify the tax credit. The current use of CPAs to help quantify a Georgia film tax credit could expedite a production company’s monetization or sale of its film tax credit, but the DOR has authority to conduct a “post-audit” of the qualifying production expenditures and alter the amount of the credit claimed on a taxpayer’s income tax return.
5 The use of CPAs to help state Department of Revenue agencies perform film tax credit certifications is also common in other film production states, including California, Connecticut Illinois, New York, and Louisiana.
6 Currently production companies may quantify Georgia film tax credits through a CPA report in lieu of the Georgia DOR voluntary production costs review.
7 For example, a production that has a certification letter from the Film Office in 2019 for qualifying production expenses incurred during 2019 applies for and completes a DOR voluntary production costs review and receives its certificate during 2021. Upon receipt of the DOR Certificate, the production company or tax credit buyer can claim the Georgia film tax credits immediately by filing an amended 2019 income tax return or file along with its 2020 tax return, which is due with extensions, on October 15, 2021. Therefore, under the current rules, production companies could monetize the benefits of the Georgia film tax credit immediately upon certificate issuance.
Under the new rules, a qualifying project that seeks $2.6M in tax credits and receives a pre-certification letter from the Film Office during 2021 for qualifying production expenditures receives its final tax credit certificate during 2023. The new HB 1037 rules provide the production company or transferee must claim the credit first for tax year 2023 instead of tax year 2021 when the production expenditures were first incurred. In such a case, the production company or transferee must wait until 2024 until they can file and utilize the credit against its 2023 tax liabilities. The timing difference could be longer for productions that currently use CPA reviews, audits, or AUP reports to quantifying its Georgia film tax credits because the turnaround for such reports could be as short as three to five months from the date production completes its Georgia spend.
8 See Atlanta Journal Constitution Article, Analysis: Georgia’s film and TV incentives could be part of a 2020 budget battle. https://www.ajc.com/blog/politics/analysis-georgia-film-and-incentives-could-become-part-2020-budget-battle/WChRc5e9JFmxjkMv3nJi4N/