Entertainment Tax Credits and Loan-Out Withholding

A rough ride

This article examines recent state legislation in Georgia that requires entertainment production companies and their payroll providers to withhold state income tax on payments made to loan-out companies as a prerequisite to claiming tax credits. Peter Stathopoulos examines the difficult transition involved with this legislation that may spawn similar proposals in other states that host a large amount of filming projects.

Entertainment Tax Credits

Effective for tax years beginning on or after January 1, 2013, Ga. H.B. 1027 requires entertainment production companies (or their payroll service providers) to withhold Georgia income tax on payments to “loan-out” companies for services performed in Georgia as a prerequisite to claiming tax credits on such payments. This legislative change was presumably intended to ensure that Georgia captures tax revenues from payments to highly compensated actors, producers, directors, and other crew members who are non- residents of Georgia and who might not be filing tax returns in the state. Regardless of intent, the new withholding provisions apply to payments to all loan-out companies, and not just non-resident loan-outs. Once a production company withholds on a payment to a loan-out, the production company’s credits are not contingent upon the loan-out or its employees subsequently filing Georgia income tax returns. Because of many of the uncertainties created by this new legislative requirement, implementation of this change has been anything but a smooth ride.

Definition of “Loan-Out Company”

The somewhat ambiguous definition of a “loan-out company” has led to much confusion. For example, what is the difference between a loan-out company and an employee-owned outside vendor/independent contractor?

The Georgia code does not define the term “loan-out company.” A loan-out company is defined by the Georgia Department of Revenue (GDOR) as “any personal services company contracted with and retained by the production company to provide individual personnel for the performance of services used directly in a qualified production activity.” (Ga. Comp. R. & Reg. 560-7-8-.45(3)[b]). Under Internal Revenue Code (IRC) § 269(A)(b), a “personal services company” is defined as a personal services corporation or similar business entity meeting the principal business activity and employee-owner requirements of that IRC section. (Ga. Comp. R. & Reg. 560-7-8-.45(3)[c]). Based on the examples listed in the GDOR regulations, the primary distinction between a loan-out versus an employee-owned outside vendor is that the loan-out is involved in providing core artistic production services versus more mundane, non-artistic services (e.g., security or pest control).

In the event that a production company fails to withhold on payments to a loan-out, there is nothing preventing the company from doing so after the fact to claim credits on the payments. However, later withholding payments may expose the production company to late filing penalties.

Applicability to Per Diems and Kit Rentals

There has been significant controversy over whether loan-out withholding applies to per diems and kit rentals. The GDOR has provided informal guidance that payments for per diems are not subject to withholding when the per diems are paid pursuant to a federal accountable type plan. This guidance seems to be aimed at distinguishing between what is a true expense reimbursement versus what is just another form of compensation for services performed. However, federal accountable type plans do not apply to payments to corporations or other business entities, so there has been confusion as to how this guidance should be applied. Presumably, the department means that if the payments were being made by the production company directly to an individual (versus to their loan-out), no withholding is required when the payments is made pursuant to accountable type plan.

A similar issue exists with regard to “kit rentals.” If such payments are truly leases or reimbursements of the service provider’s equipment expenses, then they are not “for services rendered in Georgia” and, therefore, not subject to withholding. However, if the true object of the transaction is to compensate the personnel for services rendered, then presumably such payments would be subject to loan-out withholding. Treating the kit rentals as true leases creates other problems, however. Purchases and rentals of tangible personal property are qualified production expenses only when incurred to “Georgia vendors.” A “Georgia vendor” is defined as a vendor that has a physical location in Georgia with at least one individual working at that location on a regular basis. (Ga. Comp. R. & Reg. 560-7-8-.45(6) (f)[4]). Accordingly, if a non-resident loan-out company insists that its kit rentals are truly leases and not compensation for services, then such payments may not even be qualified Georgia production expenditures to begin with. In contrast, if such payments are, in substance, for services rendered in Georgia, then they qualify as Georgia production expenditures, but are now also subject to loan-out withholding.

Mechanics of Making Withholding Payments

There has also been confusion over how loan withholding should be remitted to the department. It would seem to make more sense for a production company’s payroll services provider to directly remit loan- out withholding to the Department of Revenue as the provider is the one actually making payments to the loan-outs. However, there is currently no easy way for service providers to distinguish between an employer withholding on payments to employees versus loan-out withholding. Accordingly, some payroll service companies have been using the work-around of doing the actual withholding, but then requiring the production company to open their own Georgia withholding account and then depositing the withholding into such accounts for remittance by the production company. A better solution would be for Georgia to find a way to allow payroll service providers to distinguish between employer withholding and loan-out withholding on their payroll withholding reports.

Bennett Thrasher helped draft the GDOR regulations relating to loan-outs and consults with entertainment production companies regarding this and other incentives issues.

[author] [author_image timthumb=’on’]http://www.btcpa.net/Portals/0/PropertyAgent/499/Images/193.jpg[/author_image] [author_info]Peter G. Stathopoulos published this article on the website of Bennett Thrasher, an Atlanta-based, full-service certified public accounting and consulting firm. You can reach Peter at pstathopoulos@btcpa.net or( 770) 396-2200.[/author_info] [/author]