ACT II: THE SELLING PROCESS
The GEC principal partners are experienced at placing credits from major Hollywood studios to small independent producers. (References may be obtained upon request.)
Because transferrable tax credit prices and availability are always changing, it’s important to partner with a tax credit company that truly understands the local market.
Simply receiving a Certificate of Certification from the Georgia Department of Economic Development’s (GDEcD) Film, Music & Digital Entertainment Office (the Film Office) prior to production does not fully qualify your Georgia Entertainment Tax Credits for sale. Detailed guidelines have been provided by the Georgia Department of Revenue (GDOR) and should be carefully reviewed.
GDOR RULES & REGULATIONS LINK
3rd Party CPA’s
Once your production accounting books have closed out all qualified Georgia preproduction, production and post-production expenses, it is advised to hire an independent Georgia CPA familiar with GDOR guidelines to review your bookkeeping.
While this is not a legal requirement by Georgia statute or part of the GDOR Rules & Regulations, the local tax credit buyer community prefers an independent 3rd party “set of eyes” on your books.
To help expedite the movement of your credits into the open market, a 3rd party CPA may review your production accounting in parallel with your production, rather than at the end of production, using “agreed upon procedures.” This expense is the responsibility of the seller.
Letter of Comfort
At the end of the review process, the 3rd party CPA will render a Letter of Comfort, further reinforcing the legitimacy of the production accounting. This letter is for buyers, not the state. It is NOT required by law, but highly recommended.
The GDOR requires every qualifying production company to file a GA IT-FC Form along with its Georgia Income Tax Form. This becomes the first official GDOR reference for tracking Entertainment Tax Credits earned, whether your production company is Georgia-based or not.
GA IT-FC LINK
GA Income Tax Liability vs. Georgia Withholding Liability
Companies earning Georgia Entertainment Tax Credits must first use them against their Georgia income tax liability or withholding liability before selling and transferring any unused tax credits.
If your production company HAS a state tax liability, that portion of the earned tax credit that covers the liability should be used before any unused credits can be sold and transferred.
If your production company elects to use all or a portion of its earned tax credits for withholding liability, it must notify the GDOR a minimum of 30-days prior to use. Credits taken under this election BUT NOT USED may be lost.
If your production company does NOT have a Georgia state tax liability and/or your company does NOT use all or a portion its earned credits for withholding taxes, unused credits may be sold and transferred to an individual or corporation that has a Georgia income tax liability.
Currently, the sale and transfer of Georgia Entertainment Tax Credits does NOT include withholding tax use by the purchaser/transferee.
3-Year Recapture Provision
Currently, the GDOR reserves the right for a 3-year look back on Entertainment Tax Credit filings. A state audit initiated during the 3-year recapture window by the GDOR does not necessarily mean tax credits under review will be revoked in full or in part.
To date, no Georgia Entertainment Tax Credits have been recaptured. However, the possibility of recapture can affect tax credit pricing and has precipitated the emergence of guarantees and indemnifications by sellers.
Guarantees & Indemnification v. GDOR Audit
While NOT required by law, it is recommended that sellers of Georgia Entertainment Tax Credits guaranty and indemnify their credits to obtain optimum pricing. In affect, this provides an additional layer of protection for the purchaser in the event of a full or partial recapture by the GDOR.
The GDOR now offers an audit option for productions that wish to fully certify their bookkeeping, eliminate the 3-year recapture provision and maximize pricing prior to a credit sale. A GDOR audit will replace any independent 3rd party CPA review. Expenses for the audit are the responsibility of the seller. Audit costs and delivery timetables are subject to change at any time by the GDOR, but base retainer estimates are: $5,000 for productions with under $5M in qualified Georgia spend, $10,000 for productions with between $5M-$10M in qualified Georgia spend, and $15,000 for productions with over $10M in qualified Georgia spend. Auditor rates begin at $25/hour. Travel, lodging and special transportation costs are also debited against the retainer. If final audit expenses fall below the retainer, the GDOR will refund any difference. If fees exceed the retainer, these costs are born by the seller. Productions are handled on a first come, first serve basis.
Pricing is contingent upon several factors: gross volume of available credits in the marketplace (supply v. demand), timing of the sale, guarantees and indemnification, and the credit worthiness of the seller may also come into play, but only if the seller has NOT selected to have a GDOR audit performed.
Currently, Georgia Entertainment Tax Credits may be transferred only once.
Currently, Georgia Entertainment Tax Credits can be sold to a single or aggregated group of buyers. However, the buyer(s) may only buy credit issues in their entirety, multiples of $100K, or for the difference between the total issue and a $100K multiple.
i.e. Company A has $175K in earned credits to sell. It may only sell the credits to one or more buyers at a plateau of $100K, the full $175K, or the remaining $75K, if the first $100K has already been sold under separate transaction. Any aggregation of buyers, whether at the $75K, $100K or $175K plateau, must be closed simultaneously.
The GEC is experienced at handling closing details in-house and can assume all transactional costs at no expense to the seller or buyer. Otherwise, the seller is responsible for all transactional costs.
Entertainment tax credits are best sold at times of tax urgency.
March 15 and September 15 are ideal targets for corporations organized on a regular annual calendar.
April 15 and October 15 are ideal for individuals and partnerships, although partnerships filing under extension must now use the September 15 deadline.
April 15, June 15, September 15 and January 15 are ideal for purchasers using tax credits for estimated tax periods.
December 31 is ideal for individuals, partnerships and corporations, who wish to pay their state income tax liability prior to year’s end so as to be able to write down the payment on same year federal tax forms.
Of course, businesses organized on a fiscal basis will have their own special deadlines.
And, Georgia taxpayers may elect to amend previously filed tax forms at any time to claim refunds (plus interest) due to a tax credit purchase, as long as the tax credits purchased do not have a production origination date after the tax year to be amended.
i.e. Taxpayer A has previously filed 2009 taxes and wishes to amend that 2009 filing in 2010 due to an Entertainment Tax Credit purchase. Taxpayer A may buy available tax credits that originated in certified and verified production from the years 2009 or prior, but not from 2010 or beyond. (Georgia Entertainment Tax Credits can carry forward up to five years from the year of certification and verification, but may not be applied retroactively.)
On the surface, this process may look complex, but it was structured for the protection of sellers, buyers and the State of Georgia for the long term.
The Act is a wonderfully aggressive and competitive blueprint for Georgia Entertainment Tax Credit opportunities, and measures are continually being taken by the principal GEC partners and other key members of the Georgia film community to perfect The Act. Just remember, whenever changes or special rulings occur, you need look no further than the GEC for the most up-to-date information.
Don’t Leave Money on the Table!
Be sure to call us with your questions. We’ll be happy to guide you down the path to real production savings.
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