Today I’m going to explain the Georgia Entertainment Tax Credit. Full disclosure, I am a practicing attorney but do not take anything here as legal advice. The point of this article is to explain how the surprisingly complicated tax credit works and how it has created the modern Georgia movie industry.
In 2008 the governor signed in to law the Georgia Entertainment Industry Investment Act. This created an up to 30% tax credit incentive for production companies to invest in producing entertainment in our state. The total production expenditures in Georgia increased from roughly $250 million in 2008 to over $600 million in 2010. It’s estimated that this has added over $800 million to Georgia’s gross product and supports the equivalent of 11,000 jobs. As a result, the state created a $300 million tax credit market to buy and sell entertainment production tax credits. These credits can be claimed against corporate or individual tax liabilities in any given year.
How Credits Work
A qualifying production studio may claim up to $12.5 million in tax credits for spending at least $500,000 on qualified expenditures in our state. The studio then sells these credits to third parties (typically brokers) at a discount. So, the third party would pay $0.80 for a $1.00 tax credit. The studio wins because they receive money up front and the third party wins because you can offset your income tax by the difference between the credit’s FMV and the purchase price. Note: [You will have to declare capital gains tax on the spread between the FMV and the purchase price, so it’s smart to purchase these credits greater than 12 months before using them so that you can declare this as a long term capital gain.]
Unused credits may be carried forward for up to 5 years. So, if you purchase $100,000 of state tax credits and only have a $50,000 state tax liability this year, then you can use the rest next year.
There is the threat of recapture. Recapture occurs if the production studio no longer qualifies for the credits. Long story short, state recapture provisions generally take effect when the taxpayer that claimed the credit no longer complies with the statutory prerequisites for the credit. This happens rarely and can be viewed similar to the risks in purchasing debt. Purchasing AAA bonds carries the risk that the company will not pay the installments, but established companies rarely default on their obligations. Further, the sales agreements typically indemnify the buyer for any penalties that may arise from a mistake; they don’t want to be sued for their financial negligence.
How do you do it?
Unfortunately, there is no credit certificate from the State of Georgia confirming how many credits you purchased. first, the Form IT-TRANS is filled by the selling production company. Then, you purchase the credits from the company and report them on your Georgia income tax return.
What hath this wrought?
As we mentioned above, the Georgia entertainment industry is booming. This tax credit has catapulted our state from an unknown in the entertainment market to the Hollywood of the South. Several states have allowed their entertainment tax credits to lapse due to contradicting economic reports as to the efficacy of the credits on the local economy. However, Georgia is not most states. Our state has Atlanta, which is the undisputed economic hub of the South. Our city has easy access to mountains, lakes, seas, and a large infrastructure set to support these jobs. In contrast with other states, like Louisiana, our state has the capacity to incubate a thriving economic industry.
Georgia prides itself on fostering commerce. May this act continue to light the way for our entertainment industry.
Tax credits for video game development companies were slated to expire at the end of this year, but have been approved another three years.