L A Times article, Hollywood’s new financiers make deals with state tax credits, discusses the growing trend of film and TV production moving out of California because of the increased tax credits. The article displays aspects of the credits that Entertainment CPAs have known for years, such as the mechanics of declaring a tax credit against the state taxes.
In company taxation, the article brushes on the thought processes of producers when selecting a location to shoot, whether within California, or outside California. The bottom line in the article is that the decision sometimes comes down to “the bottom line” since a scene can be shot almost anywhere these days.
Individual investor considerations are also mentioned when making a decision of where to shoot or just invest in an entertainment project. But what this piece ignores is what an entertainment CPA analyzes when considering a decision for a client to invest in a film in another state. One of the important question is what state does the individual investor reside in? More specifically, where is this investor’s tax residency?
Now to a person not versed in taxation, it may not seem important, but to an entertainment CPA, it is vital. For example, if an individual resides in Nevada where there is no state taxation, then a film tax credit in another state would make sense on its face because it may offset taxes in that state derived from production income.
However, let’s say the investor is a California resident. In California, a tax resident is taxed on all of their income. But does that mean this resident will be double taxed?
Not necessarily. If a California investor recognizes income in another state WITHOUT a tax credit thus paying other state income taxes, then the California resident may be able to use the out of state tax (partially or totally) as a credit against their California tax liability.
On the other hand, if the California investor reports out of state income WITH a tax credit, then they may still wind up paying California taxes on that income even though the credit wiped out taxes in the other state.
The real bottom line is that a holistic approach should be taken to determine the total taxes paid everywhere in order to determine the net cash and tax effect. CPAs should do tax projections that span different states. The existence of another state’s credit may not matter to the bottom line.
I have discussed only the tax aspects. What about the financial aspects of these entertainment ventures? A proper rate of return on investment calculation should be performed on an after-tax basis. In fact, a broker that pushes these type of entertainment vehicles would include a state tax credit which would show a larger return on capital. The problem with such an analysis is that it may ignore the fact that the California investor may end up paying taxes somewhere, even with a state credit abroad. This may have a substantial impact on the return on investment, and the decision of whether to invest.
Before making any investment in another state, determine the return in investment looking at the whole tax picture, not just the tax situation of the state providing the credit.
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