Pennsylvania Film Production Tax Credit (FPTC)
Procuring And Monetizing The Pennsylvania Film Production Tax Credit (FPTC) --
An Industry/ Government Partnership At Work
The Pennsylvania FPTC is available to corporations, limited liability companies (LLCs), and partnerships for feature films, television series and television shows intended for a national audience. Upon approval, a taxpayer may sell or assign ("monetize"), in whole or in part, unused Film Production Tax Credits. Additional guidance may be forthcoming from the DCED and DOR.
The Problem: A tax return for the "applicable year" was required to monetize the credit and film production companies were not certain of what "year" was going to be required by the Department of Revenue.
The Production Company's Request: EisnerAmper was consulted to effect the potential sale of a tax credit to a transferee who could utilize the credit before year-end 2008. Otherwise the credit could not be used until year-end 2009. Very simply, because of the time value of money, this may have devalued the credit transfer by upwards of $2 million.
The Resolution: EisnerAmper contacted the DOR and the DCED and did a comparison of their July and September guidelines. A disconnect was apparent which would have had the inadvertent impact of "freezing" the credit sale until 2009. EisnerAmper pointed the DOR and DCED towards a reasonable interpretation of the laws, rules and guidelines, with a suggestion that would not only make all provisions consistent with one another, but would also effectuate the Production Company's goal of selling the FPTC prior to year end 2008.
The mutually beneficial industry/government partnership was shown to be workable. EisnerAmper is thankful for the DCED's and DOR's prompt and professional responses to our input. The result is mutually beneficial, affording production companies clarity, enhancing the value of the FPTC, and affording the Commonwealth a viable set of rules and regulations that attracts film production.
Issuance and Use of Credits: Once all obligations have been met and all required reports submitted, a tax credit certificate will be issued within forty-five days. Tax Credits may be applied against the following tax liabilities: Personal Income Tax, Corporate Net Income Tax and Capital Stock / Franchise Tax. Tax credits must first be used by the original applicant for the tax year in which the credit is approved, and cannot be applied to such liabilities until the return is filed for the applicable year.
Sale, Assignment and Transfer of Unused Credits: If an applicant cannot use all available credits on its first applicable return, the applicant can sell, assign or transfer the remaining credits in whole or in part. The seller must file all tax reports due and remit all taxes due for all periods up to and including the date of application for sale/assignment and subsequent compliance check.
Applicants must apply to the DCED if they wish to sell or assign unused credits. Purchasers and assignees must immediately claim the credits in the taxable year in which the purchase or assignment is made, or such credits will be lost. The taxable year in which the purchase or assignment is made is the application date to DCED to sell the credit, the date the return is filed by the seller for the tax year in which the credit was approved, or the date a non-compliant taxpayer becomes compliant, whichever is later. Further, such credits may only be used to offset up to 50% of the purchaser's tax liability.
Pass-through entities (LLCs, partnerships and S Corporations) may elect to transfer unused credits to their shareholders, members or partners who must immediately use the credits in the taxable year in which the transfer is made or lose them (such transferees are not subject to the 50% limitation that applies to buyers or assignees).
Example: Film Corp, a calendar year taxpayer, applies for FPTC's on 6/15/08, and such application is approved for $2 million. All contracts are executed by 7/31/08, and filming in Pennsylvania is completed by 11/30/08. The final auditor's report and all other information are submitted by January 1, 2009. A tax credit certificate is sent to Film Corp on February 28, 2009. Film Corp must use as much of the $2 million in credits as possible against its 12/31/08 tax liabilities (the "applicable year" is 2008 not 2009). Assuming Film Corp uses $500,000 FPTC's to offset its 12/31/08 liabilities on a report filed 9/1/09, there will be $1.5 million in excess credits available for sale. Film Corp must wait until the 12/31/2008 return is actually filed before it can apply for such sale. The seller must ensure that all tax reports (corp, employer withholding, sales/use) are filed up to the date the application for sale is made to DCED and the subsequent compliance check is completed. If the seller is found to be delinquent the earliest effective date for the sale of the $1.5 million in excess credit would be the date the seller becomes compliant.
Since the FPTC transfer is linked to the tax return filing for the year of production, EisnerAmper suggests that production companies consult with their tax departments to accelerate the tax return filing and thereby the transferability of the FPTC.
EisnerAmper has significant experience in the procurement, use and sale of Film Production Tax Credits; and, in working in a climate of film industry/government partnership.
Specific situations vary widely. EisnerAmper strongly recommends consultation with your tax advisors.