State Tax Planning with Georgia Entertainment Tax Credits

By Tim Clancy

Georgia has seen significant growth in film and television productions occurring throughout the state over the past several years.  Film and television productions alone spent $2.65 billion in Georgia in fiscal year 2017, according to records from the Georgia Department of Economic Development. The entertainment industry as a whole, which includes commercial and music video productions, spent $2.7 billion and had an economic impact of $9.5 billion on the state

A major reason for this surge in production is related to legislation enacted in 2005 allowing a Georgia entertainment tax credit for companies with qualified expenditures in film, television, music, video animation and game development.  In 2008, the tax incentive was further broadened to allow film and entertainment companies to sell or transfer their Georgia film tax credits to any taxpayers, including corporations, partnerships, LLCs, trusts or individuals.  The purchasers of the tax credits offset their Georgia income tax liabilities by claiming the purchased credits on their corporate, individual or trust returns.

What are the benefits to the purchaser?

Production companies sell their Georgia entertainment tax credits to purchasers at discounted rates.  On average, $1 of a Georgia entertainment tax credit may currently be purchased for between $0.89 to $0.925.  Consequently, a purchase of $10,000 of entertainment credits at $.0905 on the dollar costs the purchaser $9,050. Pricing of the credit depends on the current supply of overall credits, the production company’s desired asking price and the guarantees offered by the production company. Taxpayers may purchase these credits currently for application to any years that are still open under the statute of limitations and may use them to offset 100percent of the tax liability. If a taxpayer is not able to utilize all the credits purchased, they may be carried forward for up to five years.

A purchaser must report the discount (9.5 percent in this example) as a short- or long-term capital gain, depending on whether the taxpayer holds the film credits for one year before filing a return using the credits. As an example, if a taxpayer buys $1,000 of film credits for $.905 on the dollar and applies the credits to a tax return filed within one year of the credit purchase, the taxpayer reports $95 as a short-term capital gain. If the taxpayer is in the highest tax brackets of 37 percent for federal and 6 percent for Georgia, $41 of tax is due on the capital gain. The net benefit is $54 ($95 for the film credit less $41 of tax), which is a 5.4 percent rate of return. 

What are the risks to the purchaser?

Georgia entertainment tax credits are generally considered to be a fairly low-risk investment.  The risk of audit of the credits by the state of Georgia could be mitigated by ensuring one or more of the following:

  • The Georgia Department of Economic Development has certified the project;
  • The credits purchased have either already been audited by the state of Georgia or a “comfort letter” has been issued by a reputable CPA firm; or
  • The production company has provided a guarantee.

Taxpayers should carefully consider with their tax advisor whether the use of Georgia entertainment credits, or any other tax planning strategies, are suited for their needs.

For more information on Georgia tax credits or any other state and local tax matter, please contact Tim Clancy.

Tim Clancy
State and Local Tax Practice Leader
tclancy@windhambrannon.com
678-510-2804