By: Heather Dean, partner Hughes Pittman & Gupton, LLP

On Thursday July 22, North Carolina Governor Beverly Perdue signed into law House Bill 1973 extending tax incentives and credits to stimulate economic growth. An important provision is a tax credit for developing interactive digital media, effective for tax years beginning on or after January 1, 2011.

The incentive provides a 15 to 20 percent tax credit for compensation paid to employees and expenses paid to participating community colleges and research universities to develop games and other computer-controlled virtual universe platforms. This is the culmination of active lobbying by organizations such as the Triangle Game Initiative .

The North Carolina legislature has looked for ways to grow sustainable new jobs and expand technology industries in the state. The interactive digital media industry is a good fit. According to the Entertainment Software Association, the $11 billion industry experienced a 10 percent increase in sales during the 2008-2009 economic downturn.

A formula for job growth

In addition, Alexander Macris, president of the Triangle Game Initiative, notes that North Carolina has one of the largest concentrations of game development companies in the United States. The Triangle area alone has more than 30 companies employing more than 1,200 people. Just as important is the type of jobs the industry offers.

Add to this a median wage for game developers at more than $75,000 per year—nearly 40 percent more that the median income for the Triangle area as a whole—and you end up with a formula for sustainable job growth. This is supported by The Bureau of Labor Statistics estimate that careers in software development will grow by 21 percent by 2018.

Like every tax credit designed to stimulate growth, there are some qualifications and limits.  The incentive has been written under already existing Article 3F of the North Carolina statutes which requires a qualifying taxpayer to satisfy requirements relating to wages standards, providing health insurance, environmental impact, safety and health programs and overdue tax debts.

Eligible taxpayers get 15 percent credit

In addition, the credit may not exceed 50 percent of the amount of tax against which it is claimed for the taxable year, either franchise tax or income taxes, reduced by the sum of all other credits allowed against that tax, except tax payments made by the taxpayer.  Any unused portion of the credit may be carried forward for 15 years, however.

Taxpayers eligible to claim the credit related to interactive digital media may take a 15 percent credit on all taxable wages and compensation paid to full-time North Carolina employees for the development of qualifying projects. Employee fringe contributions on compensation and wages, including health, pension and welfare contributions, would qualify as well.

A 20 percent credit is available for amounts paid to participating community colleges and research universities for services performed in the state. The credits apply to expenses that are more than $50,000 and the credit is capped at $7.5 million.

What is a qualifying interactive digital media project?

The project must be:

•           Developed in North Carolina

•           Produced for distribution on electronic media

•           Designed to include a computer-controlled virtual universe and a significant amount of three or more of the following: sound, text, 3D geometry, animated images and fixed images

The project can not be:

•           Developed for the taxpayer’s internal use

•           For use as an interpersonal communication service

•           An internet site that is primarily static and used to provide information about a person, business or organization

•           A gambling or casino game

•           Political advertising

•           Designed to contain material that is obscene or harmful to minors according to North Carolina Statutes G.S. 14-190.1 or G.S. 14-190.13.

Before a company decides to relocate to North Carolina, or make any other significant financial decision based on this incentive, a CPA or qualified tax adviser should be consulted. The statutes contain other restrictions that need to be considered, such as not allowing double benefits. For instance, a taxpayer cannot use expenses claimed for this credit for the NC R&D tax credit as well. A complete understanding of both North Carolina tax law and the interactive technology industry is needed to maximize the potential benefit of this tax credit.

Heather Dean has been a member of HPG since 2005, becoming partner in 2008. A 14-year veteran in the public accounting sector, she leads the firm’s corporate tax practice and is co-lead of HPG’s knowledge-based industries team. Dean regularly speaks on corporate tax, including international taxes, and was a featured speaker at the 2010 Triangle Game Conference. Dean is also an executive member of the Triangle Gaming Initiative. She may be reached at hdean@hpg.com.

HPG is the largest CPA firm headquartered and staffed in the Research Triangle Park region of North Carolina. www.HPG.com.

The views expressed do not necessarily represent Hughes Pittman & Gupton, LLP or Hughes Pittman & Gupton, LLP policy and cannot be relied upon as accounting or tax advice. The outcome of any specific matter depends upon the specific facts and circumstances in which the matter arises. Check with a qualified adviser before taking any action.

 

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Tags: Alexander Macris, Hughes Pittman & Guptan, NC, tax incentives for digital interactive media industry, Triangle Game Initiative