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Looking Beyond the Big Screen


2/18/14

Traditionally offered for film production, state incentives may include digital media of all stripes

Unless you’re making a movie, you may think the financial incentives offered by many state film commissions are irrelevant.

Think again. Over the last decade, many states have launched programs designed to lure film and entertainment companies as a way to create jobs and boost tourism. Today, 45 states and Puerto Rico offer tax credits, rebates and/or exemptions, according to the National Conference of State Legislatures.1 Many of these incentives are broad enough to cover a variety of digital media, including games, websites, TV commercials, and even mobile applications. And these incentives can amount to hundreds of thousands of dollars.

However, most companies either don’t know they exist, or don’t think they are worth investigating. “The single biggest mistake people make is assuming that they won’t qualify for these incentives,” says John Lanza, CPA, a partner in CohnReznick’s Entertainment Industry Practice and leader of its specialty in digital media and motion picture company tax incentive initiatives. States are looking to attract technology jobs, such as programmers, who build digital applications, video games and websites. “In fact, most of our work is in these areas, rather than traditional film production,” says Lanza. “Digital media is considered a green industry. States want these professional, high-paying jobs that don’t have a negative environmental impact.”

Each state’s incentives are different, in terms of the types of incentives, the strength of the incentive, and what activities they cover. According to Matthew Nick, a senior manager in CohnReznick’s State and Local Tax Practice, Virginia offers a base credit of 15% of qualifying expenses with bonus of 5% if the production is filmed in an economically distressed area of the Commonwealth. Connecticut established a program for eligible film companies to receive a tax credit of up to 30% of qualified digital media and motion picture production, pre-production and post-production expenses incurred in the state while Massachusetts offers a 25% payroll credit, a 25% production expense credit, and a sales and use tax exemption for qualifying projects. And New York offers production companies 30% of qualified production costs incurred in New York State.2

However, it takes an experienced consultant to know all the permutations and how they might apply to your company. There is more than meets the cursory eye in many of these programs. For example, an entrepreneur might think the higher the percentage, the better the deal. But that’s not necessarily the case, says Lanza. It takes careful analysis to figure out whether a particular activity qualifies in a particular state and exactly how much it qualifies for. One state program may have a very high reimbursement credit rate, but the expenditures that qualify are very narrowly defined. Another program may offer just a 10% credit, but covers more types of expenditures, which could end up netting a company more money in tax credits, Lanza says.

Case in Point

Track180, a technology startup in New Haven, Connecticut that has developed a mobile application, is a good example of a company that discovered the incentives and now stands to benefit from hundreds of thousands of dollars worth of them. Drue Hontz, founder and CEO, says he stumbled upon the existence of the state tax credits when someone mentioned them at a networking event. He asked a CohnReznick representative for insight, and Lanza determined that Track180 would qualify for incentives offered by Connecticut’s Office of Film, Television and Digital Media. He helped Hontz apply and even went with him to the state office to present a demonstration of the company’s iPad application.

The first implementation of Track180’s technology is an iPad app that allows users to explore information on global social issues, viewing them in context from multiple perspectives and across history. Someone interested in a U.S. law that reduces emissions from cement factories, for example, could use the app to quickly find out how and why the bill was proposed, how the law was implemented, and its impacts at the local, regional and worldwide levels.

Track180 stands to receive as much as $300,000 in tax credits, according to Hontz. Connecticut offers a tax credit of 15 percent up to $1 million in investment and 30% for more than $1 million. “That’s very significant capital for us,” he says. His only complaint is that he didn’t know about the credit two years ago, before Track180 had already spent $1.5 million. “For us, the biggest barrier to getting the credit was finding out that it existed,” Hontz says. Track180 recently received a patent for its technology. The company plans to use the capital to broaden its business plan, developing specialized applications for business-to-business markets, says Hontz.

CohnReznick consulted with Hontz through the application process and continues to advise him on what types of expenditures meet the criteria. Most states require using specific vendors located within the state. Exactly what activities qualify for the credits, and the conditions of the procurement, can vary greatly from one state to the next, says Lanza.  And there are plenty of other wrinkles. For example, in some states, the buyer gets the incentive; in other states, it’s the entity performing the work. “I could not imagine going through this process without an experienced consultant,” says Hontz.

Lanza reiterates that people should not dismiss these programs out of hand. If they are an LLC, for example, they may not think they need bother to apply because they don’t need the tax credit. The same may be assumed if a business isn’t yet profitable. Though in some states, the tax credits are transferrable or even refundable, says Lanza. “If you qualify but don’t use the credit, you can sell it at a discount to a company that can use it,” he notes. 

What Does CohnReznick Think?
Research the incentives your state offers through its economic development office; don’t assume you won’t qualify for these incentives. Many types of digital media work, including developing video games and mobile apps, may qualify. Since the rules can be tricky and vary from state to state, it may be best to seek expert guidance in working through the process.

Contact

For more information, please contact John Lanza, Partner, at 860-271-7915, or visit CohnReznick’s Technology Industry Practice webpage.


1 http://www.ncsl.org/research/fiscal-policy/state-film-production-incentives-and-programs.aspx
2 http://www.film.virginia.org/incentives/virginia-motion-picture-production-tax-credit-guidelines/
http://ct.gov/ecd/lib/ecd/3-5-10_DigitalMediaMotionPictureTaxCreditGuidelines.pdf
http://www.mafilm.org/production-tax-incentives/

http://esd.ny.gov/BusinessPrograms/filmCredit.html


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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