Georgia’s popular Film Tax Credit will undergo significant changes as of January 1, 2021. House Bill 1037 (H.B. 1037) was drafted in response to a report released earlier this year by the Georgia Department of Audits and Accounts (DOAA). The report revealed the use of inadequate procedures by the Georgia Department of Revenue (DOR) to verify expenditures that qualify for the credit, resulting in the improper granting of credits. H.B. 1037 was signed into law on August 4, 2020 and was designed to prevent similar situations from occurring in the future.
By CHARLI TRAYLOR is a tax principal and the leader of the National Entertainment Practice for Frazier & Deeter. Courtesy Georgia Society of CPAs, Current Accounts.
The Georgia Entertainment Industry Investment Act was signed into law by Former Governor Sonny Purdue in 2005. Since then, Georgia has become one of the top filming destinations in the United States, surpassing California in 2016 for the number of feature films shot in the state and generating $9.5 billion of economic activity in FY17. The base credit is 20 percent of qualified expenditures, with an additional 10 percent uplift credit granted to productions that commit to placing the Georgia logo in their credits.
One of the most desirable features of Georgia’s credit is that it is transferrable, meaning it can be sold from one Georgia taxpayer to another. The credits are sold at a discount ranging from 8-14 percent, creating instant tax savings for the buyers. There are very few limitations on the sale’s timing, which means production companies can quickly generate funds by borrowing against the credit’s estimated value or simply selling the credit mid-production.
Although a formal audit was not previously required, a production company seeking to sell their credits would almost always have to provide their broker with third-party verification in the form of a “comfort letter” or Agreed Upon Procedures Report. Alternatively, the seller could engage the DOR to perform an audit, which could be quite costly and could take as long as 12-15 months to complete. The benefit of a DOR audit is that once the credit’s value was determined, the DOR couldn’t disallow any portion of it after-the- fact, which is known as a recapture. The reduced risk associated with DOR audited credits allowed them to be sold at a higher price. A third-party verified credit carried the risk of recapture and sold at a price that was often 3-5 cents lower, with the tradeoff that they could be monetized more quickly. This was often the deciding factor for smaller independent productions that relied on credit sales to fund the production as projects were being produced.
The most significant change resulting from H.B. 1037 is that each project that receives a credit must undergo an audit of their expenditures. Audits may be performed by the DOR or an independent third party certified by the DOR. Once completed, the audits will be reviewed by the DOR, and if the audit was performed effectively, the final certification of the credit will be issued. Upon final certification, the credit can be sold or otherwise utilized, and the risk of recapture is eliminated. It is yet to be determined whether the new process will delay the ability to monetize credits compared to the prior process.
It is important to note that the final certification date will determine the tax year to which the credit is assigned. Previously, a tax credit was assigned to the year in which the expenditures were incurred. This provided some certainty around when the credits would be most likely to sell due to increased demand around tax deadlines. With the timing of final certification left up to the DOR, it is unclear whether final certification will be granted in the same year as production occurred or in a subsequent year, limiting the ability to predict the sale’s timing.
The audit requirement will be implemented in phases, as follows:
- For any project certified by the Georgia Department of Economic Development (GDEcD) on or after January 1, 2021, pursuing a credit of $2.5 million or more
- For any project certified by the GDEcD on or after January 1, 2022, pursuing a credit of $1.25 million or more
For any project certified by the GDEcD on or after January 1, 2023
Another change is the requirement that multi-market distribution must occur before final certification of the 10 percent uplift. Previously, the uplift was granted upfront in good faith to productions that applied for it. It was subsequently verified by reviewing a DVD submitted to the GDEcD after the project was complete. The DOAA report found that many projects granted
the uplift were never commercially distributed, reducing the logo’s promotional value. To remedy this, the 10 percent uplift will not be available to productions that have not been commercially distributed in multiple markets within five years of certification by GDEcD. This requirement means final certification of the additional 10 percent will not happen until distribution has been verified and certified by the GDEcD.
This requirement creates another obstacle to predicting the marketability of the tax credit. It is unknown whether the uplift will be granted, and the determination could be made in any of the five succeeding tax years. Additionally, it is unclear whether the tax year to which the tax credit is assigned will be the year of final certification of the base credit or the year in which the uplift receives final certification. The credit could potentially be split into two different, nonsequential tax years.
OTHER NOTEWORTHY CHANGES
The carryforward period has been reduced from five years to three years. This change may have been motivated by the $1.1 billion liability on the state’s balance sheet for outstanding credits generated through 2016 that remain unclaimed as of March 2019. Reducing the carryforward period could lead to pressure to sell credits before they expire, which could impact price.
Costs incurred through conduit vendors have been disqualified. The DOAA report found instances of goods being purchased through a vendor’s Georgia location with the shipping costs indicating that the purchases originated from out-of-state locations. This change could positively impact Georgia vendors as business is directed away from out-of-state vendors and back to Georgia.
CLARIFICATIONS WILL FOLLOW
It is unclear exactly how the changes brought about by H.B. 1037 will impact the market for tax credits; however, consistency in procedures and interpretation of the rules will bring long-term benefits that far outweigh the short-term challenges. As of this writing, the Regulations and Procedures are still being drafted, and CPAs seek clarity regarding unanswered questions.