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- Written by: Peter J. Scalise
In order to maximize your accounting firm’s overall effectiveness in connection to researching and resolving a tax issue and determining the sustainability of the tax return filing position, the appropriate tax research processes must be meticulously executed. These five steps will guide you in establishing an all-inclusive tax research effort on behalf of your client base while properly ascertaining the likelihood of success should a tax position(s) taken on a tax return be challenged by the IRS upon examination.
Tax Research Methodology
Establish the Facts and Circumstances - The first step in the tax research process is to establish all of the facts and circumstances provided by your client in order to determine which tax laws(s) apply to your client’s fact pattern. At this initial stage, it is imperative not to overlook any of your client’s facts and circumstances whether appearing material or immaterial. Always be guided by the axiom that facts and circumstances appearing to be immaterial individually may, in fact, be material in the aggregate.
Determine All the Issues - The second step in the tax research process entails determining all of the tax issues affecting your client’s specific circumstances and any mitigating factors. Normally, complex tax issues evolve through several stages of development. For instance, an experienced tax professional based upon his or her prior knowledge of the tax laws, can normally determine most of the initial pertinent issues in terms of general tax laws. However, after performing an initial search of the authorities to answer the initial issues, a tax professional often discovers additional specific technical questions of interpretations must be resolved before the initial issues can be fully addressed. Consequently, at this stage, a tax professional may need to obtain additional facts from the client. Accordingly, the tax research process may have to move back from step two to step one. In addition, you may learn that facts initially not considered to be important may prove critical to the resolution of your client’s tax issues.
Identify Statutory, Administrative, and Judicial Authority - The third step in the tax research process entails identifying the specific authorities to support all of your client’s tax issues while appropriately weighing authorities that may be contrary to your supporting position. Generally, this process begins with consulting statutory authority (e.g., the Internal Revenue Code) and quickly expands to encompass administrative authority (e.g., Proposed Treasury Regulations, Temporary Treasury Regulations, Final Treasury Regulations, Revenue Rulings, Revenue Procedures, Private Letter Rulings, Technical Advice Memorandum, General Counsel Memorandum, Circular 230, Internal Revenue Manual, Internal Revenue Bulletins, IRS Field Service Advice Memorandum, IRS Determination Letters, and IRS Notices) and judicial authority (e.g., decisions by the U.S. Tax Court, U.S. District Court, U.S. Court of Federal Claims, U.S. Circuit Court of Appeals, U.S. Court of Appeals for the Federal Circuit, and the U.S. Supreme Court). In addition, at times, you the tax professional may have to consult the legislative history (e.g., the Public Laws and Congressional Committee Reports from the House of Representatives and the Senate) of a particular Internal Revenue Code section to fully address what Congress’s intent was in passing a particular bill. Lastly, you may also want to consult the voluminous range of editorial interpretations (e.g., Tax Treatises, Tax Journals, etc.) available to assist in the interpretation a particular tax issue. However, it must be duly noted that editorial interpretations are generally impressible sources of authority before the IRS and the judicial system. For clarification purposes, the subsequent synopsis will elaborate upon the aforementioned statutory, administrative, and judicial interpretations:
Statutory Authority
The Internal Revenue Code - All federal level tax statutes passed by Congress into law are compiled and published in Title 26 of The United States Code. As it should be recalled, Title 26 of The United States Code contains the specific statutes that authorize the IRS to collect taxes for the federal government. Generally, the tax research process begins with consulting the Internal Revenue Code and quickly expands to encompass administrative and judicial authorities based upon the complexity of the tax issue under analysis.
Administrative Authority
The Treasury Regulations - The Treasury Regulations provide the official interpretations of the Internal Revenue Code by the Treasury Department and have the force and effect of law. The most common forms of Treasury Regulations include:
• Proposed Treasury Regulations (e.g., binding only on the IRS and not the taxpayers);
• Temporary and Final Treasury Regulations (e.g., binding on both the IRS and the taxpayers); and
• Preambles (e.g., treated just like legislative histories to demonstrate congressional intent and may underlie either type of the aforementioned treasury regulations regardless of status as Proposed, Temporary, or Final).
Revenue Rulings - A Revenue Ruling is an official interpretation by the IRS of the tax laws. Initially, Revenue Rulings are published in the weekly Internal Revenue Bulletin. The same rulings later appear in the permanently bound Cumulative Bulletin, a semi-annual publication of the Government Printing Office. Revenue Rulings hold less weight than the Treasury Regulations because they are intended to cover only specific fact patterns. Regardless, Revenue Rulings can provide valid precedent if your client’s facts and circumstances are substantially identical.
Revenue Procedures - A Revenue Procedure is a statement of procedure that affects the rights or duties of taxpayers or other members of the public under the Code. Similar to Revenue Rulings, Revenue Procedures are less authoritative than Treasury Regulations. However, Revenue Procedures should be binding on the IRS and may be relied upon by taxpayers.
Private Letter Rulings - Private Letter Rulings (PLR) are issued directly to taxpayers who formally request and pay for advice about the tax consequences applicable to a specific business transaction. Such PLR requests have been employed frequently by either taxpayers themselves or the taxpayer’s representatives (e.g., a taxpayers’ representation through a CPA firm or law firm) to assure themselves of a preplanned tax result before they consummate a transaction and as a subsequent aid in the preparation of the tax return’s filing position. When the IRS issues a PLR it is understood that the PLR is limited in scope and application to the taxpayer making the request.
Technical Advice Memorandum - A Technical Advice Memorandum (TAM) is a special after-the-fact ruling that may be requested from the taxpayer or the technical staff of the IRS. For instance, if a disagreement arises in the course of an audit between the taxpayer or the taxpayer’s representative and the revenue agent, either side may request formal technical advice on the issues(s) through the District Director. Under certain circumstances, TAM’s can be used as a basis for the issuance of a Revenue Ruling and can also be subsequently published as a PLR.
General Counsel Memorandum - General Counsel Memorandum (GCM) are legal memorandum prepared by the IRS Chief Counsel’s Office. GCM’s analyze proposed Revenue Rulings, Private letter Rulings, and Technical Advice Memorandum. GCM’s issued after 1981 constitute substantial authority for purposes of the penalty assessed for the substantial understatement of income tax.
Circular 230
Circular 230 is an IRS publication that sets forth the requirements and responsibilities of professionals (e.g., Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries) admitted to practice before the IRS. It should be duly noted that Circular 230 was most recently revised on June 12, 2014 and all tax professionals admitted to practice before the IRS must adhere to this latest version which can be downloaded and referenced at: http://www.irs.gov/pub/irs-pdf/pcir230.pdf
Internal Revenue Manual - The Internal Revenue Manual (IRM) is an official compilation of policies, procedures, instructions, and guidelines for the organization, function, operation and administration of the IRS. It is not legally binding and the policies are not mandatory. The IRM guidelines do not confer any rights on taxpayers.
IRS Field Service Advice - IRS Field Service Advice (FSA) are taxpayer specific rulings furnished by the IRS National Office in response to requests made by the taxpayers or IRS Officials.
IRS Determination Letters - A Determination Letter is issued by the IRS at the taxpayer’s request to outline the IRS’ position on a particular transaction that has already been completed. Generally, Determination Letters are issued only when a determination can be made on the basis of clearly established rules in the statute or regulations.
IRS Notices - When prompt guidance concerning an item of the tax law is needed, the IRS publishes notice in the Internal Revenue Bulletin. These notices are intended to be relied upon by the taxpayers to the same extent as a Revenue Ruling or Revenue Procedure.
Judicial Authority
U.S. Tax Court - The U.S. Tax Court is an independent 19 judge federal administrative agency that functions as a court to hear appeals by taxpayers from adverse administrative decisions by the IRS.
U.S. District Court - The U.S. District Court hears civil actions against the United States for the recovery of any tax alleged to have been erroneously or illegally assessed or collected by the IRS. Trial by jury is available at the preference of either the petitioner or defendant.
U.S. Court of Federal Claims - The U.S. Court of Federal Claims is a Washington D.C. based appellate-level court in which a taxpayer may sue the government for a refund of overpaid taxes.
U.S. Circuit Court of Appeals - The U.S. Court of Appeals is one of thirteen courts including the District of Columbia and the Federal Circuit Courts, to which appeals from a trial court, such as the U.S. Tax Court, are directed.
U.S. Court of Appeals for the Federal Circuit - The U.S. Court of Appeals for the Federal Circuit hears appeals from the U.S. Court of Federal Claims.
U.S. Supreme Court - The U.S. Supreme Court is the highest appellate court in the federal court system and in most states. The U.S. Supreme Court, under its certiorari procedure authority, reviews the constitutionality of a tax law and a small number of tax decisions by the Court of Appeals.
The subsequent chart illustrates the geographic boundaries of The United States Courts of Appeals and the United States District Courts:
Resolve the Issues - The fourth step in the tax research process entails the resolution of your client’s tax issues after identifying, analyzing, and interpreting all of the applicable authorities. It cannot be overstated that you should have provided, as needed, reasonable statutory, administrative, and judicial support to demonstrate your position could be upheld if challenged by the IRS upon examination and you exercised due diligence and acted in good faith. Furthermore, at times, positions taken on tax returns may need to be disclosed on Form 8275 entitled “Disclosure Statement” or Form 8275-R entitled “Regulation Disclosure Statement” depending upon the complexity and controversial nature of the tax issue. Noting, by disclosing positions on your client’s tax returns you may be able to avoid paid preparer penalties should your position be disallowed and avoid the application of the six year statutory period for assessment under I.R.C. § 6501(e).
From a risk management perspective, in order to mitigate or avoid income tax return paid preparer penalties pursuant to I.R.C. § 6694 (e.g., penalties are assessed on both paid tax return preparers and tax advisers that are deemed paid tax return preparers due to their consulting on matters that constitute a substantial portion of their client’s tax returns even if they were not engaged to prepare nor review the tax return), a “More-Likely-Than-Not” standard should be satisfied. The subsequent standards of the applicable levels of opinions should be scrupulously analyzed when assessing your tax return filing position:
• “Will” Standard: Generally, a 95% or greater probability of success if challenged by the IRS. A “Will” opinion generally represents the highest level of assurance that can be provided by an opinion;
• “Should” Standard: Generally, a 70% or greater probability of success if challenged by the IRS. A “Should” opinion provides a lower level of assurance than is provided by a “Will” opinion, but a higher level of assurance than is provided by a “More-Likely-Than- Not” opinion;
• “More-Likely-Than-Not” Standard: A greater than 50% probability of success if challenged by the IRS. The “More-Likely-Than-Not” standard is the highest level of accuracy required for purposes of avoiding the accuracy-related penalties under I.R.C. 6662A;
• “Substantial Authority” Standard: Typically, greater than a “Realistic Possibility of Success” standard and lower than “More-Likely-Than-Not” standard (i.e., 40% probability of success);
• “Realistic Possibility of Success” Standard: Approximately a one-in-three or greater possibility of success if challenged by the IRS;
• “Reasonable Basis” Standard: Significantly higher than the “Not Frivolous” standard (i.e., that is, not deliberately improper) and lower than the “Realistic Possibility of Success” standard. The position must be reasonable based on at least one tax authority that can be cited as valid legal authority;
• “Non-Frivolous” Standard: Approximately a 10% chance of being upheld upon examination by the IRS and accordingly under no circumstance should a tax professional ever render services with this level of comfort; and
• “Frivolous” Standard: Approximately a percentage less than a 10% chance of being upheld upon examination by the IRS and accordingly under no circumstances should a tax professional ever render services with this level of comfort.
Each of the aforementioned standards above has a relevant meaning to both the taxpayers and tax professionals when evaluating a tax position and the related disclosure requirements. The percentages listed for “More-Likely-Than-Not” and “Realistic Possibility of Success” are specifically provided for and discussed in the treasury regulations. In contrast, the percentages for “Substantial Authority”, “Reasonable Basis”, “Non-Frivolous”, “Frivolous” have been developed based upon their relative importance in the hierarchy of standards of opinion as principally provided for in congressional committee reports. Moreover, while not mathematically calculable, the percentages are still practical in demonstrating the relative strength of one level as opposed to another level.
Communicate with Your Client - The fifth and final step in the tax research process entails communicating the conclusion to your client. Your client, of course, must ultimately make the final decision concerning what course of action to take, even though the client’s decision is guided by and often dependent upon the conclusions reached by you, the tax professional. It is strongly recommended this tax advice be rendered to your client in a written format, as opposed to verbal communication, and preferably in a formal tax advice memorandum format (e.g., Facts & Circumstances Section; Issue(s) Section; Analysis Section; and Conclusion Section) meticulously discussing the applicable statutory, administrative, and judicial authority to appropriately document your due diligence in assessing the tax issues(s) and resolving them satisfactorily to reach a strong tax return filing position (e.g., “More-Likely-Than-Not”, “Should”, “or “Will” filing positions). Finally, caveat language in the form of a disclaimer should be documented within the tax advice memorandum for any areas of the tax law that were not within the scope and application of your tax research services (e.g., the scope and application of this tax advice memorandum analyses the federal-level tax consequences only and does not provide any advice or analysis in connection to any multi-state tax consequences nor any international tax consequences).
Conclusion
By following the preceding all-inclusive steps in the tax research process you should be able to render your research services to your entire client base in a more efficient manner while adequately weighing risk management concerns in connection to tax return filing positions. As a final reminder, the guidance contained in this article should be applied with due professional care including seeking further professional advice from a subject matter expert should it be deemed warranted based upon both the complexity and contentious nature (e.g., taking a tax position contrary to a Treasury Regulation on Form 8275-R, etc.) of the tax matter under review.
Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for Prager Metis CPAs, LLC a member of The Prager Metis International Group. Peter is a BIG 4 Alumni Tax Practice Leader and has over twenty years of progressive CPA Firm experience developing, managing and leading multi-million dollar tax advisory practices on a regional, national, and global level. Peter serves on both the Board of Directors and Board of Editors for The American Society of Tax Professionals (“ASTP”) and is the Founding President and Chairman of The Northeastern Region Tax Roundtable, an operating division of ASTP.
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- Written by: Robert E. McKenzie, J.D.
Each year the IRS assesses over 40 million penalties against taxpayers. Of the total number of assessed penalties over 5 million of them are eventually abated by the Service. Generally the IRS only abates penalties when the taxpayer contests the penalty. Since most taxpayers don’t contest IRS penalties the number of abated penalties is artificially low. Most taxpayers and their representatives are unaware that if the taxpayer establishes a reasonable cause for failure to comply with tax laws, the applicable penalties may be abated. Therefore sophisticated taxpayers and their representatives have a much greater chance of reducing tax penalties than the approximately 12% abatement rate for all penalties. It is in a taxpayer’s best interest to contest IRS penalties if she has a reasonable cause for her noncompliance.
[This article is course content for the Tax Season 2016 CPE quiz, worth 3 CPE credits! Reach the quiz and additional content HERE.]
Chapter 20 of the Internal Revenue Manual provides guidance to IRS employees on the standards for reasonable cause. Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise be assessed. Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply with those obligations. Reasonable causes is defined by the Internal Revenue Manual in the following manner:
“Any reason that establishes a taxpayer exercised ordinary business care and prudence but nevertheless failed to comply with the tax law may be considered for penalty relief.” The most important part of that definition is the term ordinary business care and prudence. Ordinary business care and prudence is defined as follows in the Internal Revenue Manual:
“Ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing that they exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless were unable to comply with the law.”
The Internal Revenue Manual sets forth a series of circumstances that would allow a taxpayer to establish reasonable cause and secure abatement of tax penalties. The following is a partial list of excuses that might establish reasonable cause:
• Death, Serious Illness, or Unavoidable Absence
• Fire, Casualty, Natural Disaster, or Other Disturbance
• Unable to Obtain Records
• Mistake was Made
• Erroneous Advice or Reliance
• Ignorance of the Law
• Forgetfulness
• Statutory Exceptions or Waivers
• Undue Hardship
• Written Advice From IRS
• Oral Advice From IRS
• Advice from A Tax Advisor
• Official Disaster Area
• Service Error
Practitioners may be surprised to learn that the IRS uses a computer program to review abatement request. The program is known as Reasonable Cause Assistant (RCA). Therefore it is in the best interest of the taxpayer for his representative to submit a letter specifically requesting abatement of penalties which quotes the Internal Revenue Manual with respect to reasonable cause and cites to specific reasons set forth in the manual. The greater the specificity of the reasonable cause letter, the greater the chance that the IRS may abate that penalty.
The RCA provides that taxpayers who have not been penalized by the IRS in the past may have their penalties reduced. The IRS Manual sets forth a First Time Abatement Rule. That rule generally allows IRS employees to abate penalties asserted against formerly compliant taxpayers. The manual provides as follows:
“RCA provides an option for penalty relief for the Failure To File, Fade To Pay, and/or Failure To Deposit Penalties if the taxpayer has not previously been required to file a return or if no prior penalties (except the Estimated Tax Penalty, on the same taxpayer…in the prior 3 years.”
Robert E. McKenzie of the law firm of Arnstein & Lehr LLP of Chicago, Illinois, concentrates his practice in representation before the Internal Revenue Service and state tax agencies. He previously served as a member of the IRS Advisory Council (IRSAC) which is a group appointed by the IRS Commissioner from 2009 to 2011.
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- Written by: Joshua Fluegel
Not-for-profit organizations have a very particular set of accounting and tax needs making a CPA an invaluable resource. The market for not-for-profit organizations is worth exploring for CPAs. The National Center for Charitable Statistics reports there are over 1.5 million registered not-for-profit organizations in the U.S. The benefits of this market could be even better realized when effective not-for-profit (NFP) software is implemented.
Not-for-profit software has come a long way and continues to fill unexpected gaps in CPAs’ practices. NFP software vendors are looking forward to anticipate issues that may need to be remedied in the coming years.
“Despite limited media attention on the very real problem of embezzlement-related fraud within the business community, the industry is gaining appreciation for the risk,” said Chuck Gossett, CEO of Cougar Mountain Software. “Based on their board fiduciary responsibilities, our not-for-profit prospects and customers are sharing a greater appreciation for higher levels of security and accountability. If inappropriate adjustments can be made in the financials without the oversight capabilities of a true audit trail, what excuse - in light of damage control - is worthy to the board and the donors? As the not-for-profit industry tolerates less and less risk, the software industry must continue to adopt stricter standards and controls. This will guide the industry into the future.”
Not only is it likely that software will be securing CPAs’ future with not-for-profit clients, but the software’s presence could become lighter and more accessible for CPAs.
“Certainly we expect to see more online and hosted integrations, but in the near term, it will be interesting to see how the FASB reporting changes coalesce,” said Pete Koblinski, marketing manager at CYMA Systems.
However, only time and the CPAs who vocalize their needs to software vendors will decide the true future of not-for-profit software.
Not-For-Profit Software
| Vendor | Product | Website | Phone | |
| Cougar Mountain Software | Denali Fund | https://nonprofit-accounting-software.cougarmtn.com/ | 800-388-3038 | |
| CYMA Systems | CYMA Not-For-Profit Edition | http://www.cyma.com/business-accounting-software/nfp.asp | 800-292-2962 |
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- Written by: Paul Dunham
As the end of 2015 draws closer, it is once again time to meet with clients and discuss year-end tax strategies. At the top of every year-end planning list is the status of the “extenders” – those some 50+ provisions that expired effective January 1, 2015. Speculation would provide that many of these provisions will likely be reinstated at the last minute as did indeed happen last year. The purpose of this article is to not address the status of the “extenders,” but rather discuss other year-end tax strategies that are generally effective without regard to the status of the extenders. A list of such strategies follows.
• Income tax rates for individuals are currently static and the highest marginal tax rate remains at 39.6%. Given the current environment that income tax rates will likely be the same for 2016, tried and true strategies of deferring income and/or accelerating deductions are still applicable.
• The maximum long-term capital gain rate remains at 20%. Consideration should be given to harvesting capital losses before year end to offset capital gains already realized during the year. When harvesting the losses before year end, be mindful of the “wash loss” rules.
• Consideration should be given (if applicable) to using the installment sales rules for the disposition of real property and certain business interests. The spreading of the principal payments (and corresponding gains) over time, may allow the use of a lower tax bracket for the capital gains as they are recognized over time. Further, there may be other future opportunities to make use of “future” capital losses against such gains that are recognized in the future. Lastly, by spreading out the principal payments (and related gains) over time, it may allow an individual to fall below the income thresholds for the 3.8% net investment income tax.
• Consideration should be given to using the “like-kind exchange” provisions under Section 1031 and/or the “involuntary conversion” deferral provisions under Section 1033. Both provisions effectively defer realized gains to be recognized at a later/future recognition event.
• Consideration should be given to maximizing HSA, IRA, 401(k), Solo 401(k), SEP, and other “retirement type” plan contributions. Some types of retirement plans do not require action before year end, and can be created and funded in 2016 and still be effective for the 2015 tax year. However, there are certain types of plans that do require action (i.e., the creation of the plan) before year end to be effective for the 2015 tax year.
• Consider making an election to treat certain long-term capital gains and qualified dividends at ordinary income rates to maximize the investment interest expense deduction.
• Consider using long-term capital gain property to make charitable contributions. The benefit of this strategy would be to get a fair market value deduction for the charitable contribution without having to recognize the inherent gain in the property. A word of caution to double check holding periods and charitable contribution AGI limitation percentages before advising of such plan.
• Consider the use of a donor advised fund whereby a charitable contribution can be taken in 2015, but the actual payments to charity are made over time at the direction of the donor.
• Be mindful of the itemized deduction phase out limits when advising on any types of itemized deductions. At times, it will make sense to “bunch” deductions in one tax year versus taking them over two years.
• For the 3.8% net investment income tax, consider shifting investments to tax-exempt, deferred annuities or insurance products. Also, consider grouping passive activities that comprise an appropriate economic unit to qualify them as nonpassive.
• From an estate and gift tax planning perspective, remember to use the $14,000 annual gift tax exclusion amount. Once a year has passed the $14,000 exclusion is not cumulative and is lost. Remember that certain educational and medical costs do not count towards the $14,000 annual gift tax exclusion amount.
• For estate tax purposes, consider using the life time exclusion amount of $5,430,000 if not already used. In using such exclusion amount, consider transferring property that would qualify for minority and/or marketability discounts. There are indications that such discounts are currently under attack and may not be available too much longer.
While waiting for legislative action regarding the extenders, there are still many tax planning ideas/strategies that should be discussed with clients before year end. Hopefully, the items noted above will help generate some ideas and thoughts for your clients.
Paul Dunham is a Managing Director in the Tax Group of CBIZ MHM in Tampa Bay. He has served both public and privately held companies on a wide range of tax issues, including implications of corporate acquisitions and divestitures, S corporation and partnership operations, income tax accounting methods, estate planning, real estate investment and related taxation.
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- Written by: Peter J. Scalise
Whether you’re a publicly held movie studio conglomerate producing and distributing substantial numbers of films annually commanding significant shares of box office revenues worldwide or an independent filmmaker, movie production tax incentives should certainly be considered and incorporated into the tax planning process to properly tax effect the cost of filmmaking.
Synopsis of Movie Production Tax Incentives
Movie Production Tax Incentives (MPIs) are tax benefits offered on a state-by-state basis throughout the United States to entice, as applicable, in-state qualified phases of filmmaking production such as the Qualified Pre-Production Phase, the Qualified Production Phase, and the Qualified Post-Production Phase. It should be duly noted that it is fairly common practice in the movie studio industry to shoot the aforementioned phases of qualified production throughout several locations (e.g., Qualified Production Phase in the City of Los Angeles in California, USA and the Qualified Post-Production Phase in the City of Vancouver in British Columbia, Canada) and consequently it is critical to be cognizant of incentives available, as applicable, not only state by state within the United States but also country by country worldwide.
While the applicable Qualifying Production Activities (QPAs) vary significantly from state-to-state, many common QPAs include, but are not limited to, feature films, episodic television series, relocated television series, television pilots, television movie, and mini-series. In contrast, as a caveat, many states generally consider the subsequent productions to be non-qualified production activities and consequently not eligible for MPIs such as documentaries, news programs, interview/talk programs, instructional videos, sports events, daytime soap operas; reality programs, commercials, and music videos. Additionally, while the applicable Qualifying Production Expenditures (QPEs) also vary significantly from state-to-state, many common QPEs include, but are not limited to, salaries, facilities, props, travel, wardrobe, and set construction. It is always critical to establish clear nexus between QPAs and corresponding QPEs.
The structure, type, and size of the incentives vary significantly from state to state. Many MPIs may include tax credits, tax rebates and/or exemptions (e.g., sales and use tax exemptions on movie production equipment, sales and use tax exemptions on lodging, etc.) while other state incentive packages may include cash grants, fee-free locations among many other diverse and advantageous incentives. The state-by-state legislative histories and policies driving MPIs are clearly aimed at increasing economic growth at the state and local levels through filmmaking and television production throughout the United States, while curtailing the departure of movie production to other countries.
Approximately forty states currently offer MPIs with most being either transferable (e.g., transferable credits allow production companies that generate tax credits greater than their tax liability to sell those credits to other taxpayers, who then use them to reduce or eliminate their own tax liability) or refundable (e.g., refundable credits are such that the state will pay the production company the balance in excess of the qualified expenses).
It is critical to design and implement a sustainable methodology that will incorporate all applicable MPIs to obtain the proper tax effect of the cost of filmmaking regardless of the size and structure of the movie studio or production conglomerate. Tax incentives matter whether your client is one of the “big six majors” (e.g., Paramount Motion Pictures Group (Viacom), Warner Bros. Entertainment (Time Warner), The Walt Disney Studios (The Walt Disney Company), NBC Universal (Comcast), Columbia TriStar Motion Pictures Group (Sony), and Fox Filmed Entertainment (21st Century Fox).) or a leading independent producer/distributor commonly referred to as the "mini-majors" (e.g., Lionsgate Films, The Weinstein Company, Open Road Films, CBS Films, DreamWorks Studios, and MGM Pictures) or a smaller production and/or distribution company known as independents or “indies.” As a direct result of these advantageous MPIs, filmmakers may be able to jubilantly end their productions saying, “Lights, Camera, Action and Tax Cut!”
Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for Prager Metis CPAs, LLC a member of The Prager Metis International Group. Peter is a BIG 4 Alumni Tax Practice Leader and has successfully represented entertainment industry clients over the past few decades for their specialty tax incentive needs including the “Big Six Majors”, the “Mini-Majors” as well as many independent production studios and film finance companies.