PA Film Production Tax Credit Alert
The Pennsylvania Department of Community and Economic Development (PA DCED) has provided EisnerAmper with guidance on fringe benefits and their qualification for the film production tax credit.
Additionally, EisnerAmper received a definitive response on how to treat employees covered under a reciprocal personal income tax agreement between the Commonwealth of Pennsylvania and other participating states.
The PA DCED has concluded that fringe benefits (including employer contributions to pension, health and welfare plans) will be considered "costs of operations" and may be treated as "qualified film production expenses" subject to the limitations of Act 55 (the current film tax credit statute). Fringe benefits will only qualify to the extent that the associated service was performed in Pennsylvania.
Fringe benefits for each employee or loan-out should be prorated and coded as qualified production expenses in the bible based on the associated service days in Pennsylvania over total service days. From an auditor’s perspective, we suggest fringe benefits be coded in the bible as accounts payable and not payroll.
For budgeting and accounting purposes, film production companies commonly treat the following as fringe benefits. These will be considered as operations expenses (accounts payable) and therefore, qualify for the film production tax credit program:
- Employer share of payroll taxes
- Workers’ compensation insurance (does not require a Pennsylvania-based broker)
- Payroll processing fee
- Taxable portion of per diem
- Vacation and holiday (paid with wages)
- Employer pension contributions for employees (not taxable to the employee)
- Health & Welfare (a term for health benefits) (not taxable to the employee)
Are wages for employees, who file a certificate of non-residence with the film production company under the reciprocal personal income tax agreement with the Commonwealth of Pennsylvania and another participating state, "qualified film production expenses"?
Each employee residing in a reciprocal state has the legal right to elect out of Pennsylvania Personal Income Tax (PA PIT) withholding. However, if the employee does not file the certificate of non-residence, then the employer should withhold and pay PA PIT and the production company would include these wages for services performed in Pennsylvania as "qualified production expenses." The term Pennsylvania Production Expense includes “Compensation paid to an individual on which the tax imposed by Article III (PA PIT) will be paid or accrued.”The employee "must" provide to the employer Form REV-420 to obtain treaty protection and not to be subject to PA PIT withholding under the reciprocal agreements with Indiana, Maryland, Ohio, New Jersey, Virginia and West Virginia.
Each employee should consult their personal tax adviser with regard to electing treaty protection from withholding of PA PIT. If the employee "does nothing", they will not be provided treaty protection from withholding of PA PIT (otherwise, withholding tax on his or her wages for services performed on the production in Pennsylvania is required to be paid to PA by the employer). We do not suggest production companies or employers give personal tax advice to employees. However, we do suggest the production company or employer advise each employee to consult their personal tax adviser when completing federal and state withholding tax forms.
The written advice was not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice).