Production Incentives Pain Point #4
So scary to some, they lose sleep over it!
Our summer series has tackled some of the biggest pain points surrounding production incentives, while offering tips and tools to alleviate your suffering.
Today, we take on what for some is the most mysterious and even terrifying part of applying for incentives:
The audit. (insert SFX scream here)
But fear not! We’ve got your back, with advice to help you sail through the process.
Our expert this week: David Brauer.
A CPA who’s conducted audits for over twenty years, David pivoted to tax incentives more than a decade ago. As incentives programs have grown, so, too, has his firm, Brauer & Co. The company focuses exclusively on the media & entertainment industry, working in over ten US states, with a staff of over 20 and offices in California, Georgia, and New York.
“So what does an audit have to do with production incentives?” the uninitiated may ask (and trust us, we’re glad you’re asking now).
Here’s the deal: most incentives programs require that an independent party verify that your reported expenses actually qualify for their production incentive.
That’s where the auditor comes in.
Is an audit required for every production incentive?
No - it depends on the jurisdiction. Some don’t require an audit from an outside CPA firm. Some only require one if you reach a certain level of qualified spend, or for particular categories of content.
So who selects and hires this auditor?
Usually, the production company - but again, it depends. In some cases, the jurisdiction allows production companies to select an auditor from a list of those they’ve approved. Some might assign an auditor. In others, a government agency conducts the audit.
Occasionally - as with the states of Georgia or New York - the jurisdiction allows you to choose between hiring a CPA or going with a government agency audit. As David points out, hiring a CPA may be faster than working through a government agency. This could potentially speed up your payout and ultimately save you money (especially if you’ve borrowed funds to cash flow your project).
So what happens during the audit?
Just as every jurisdiction has its own very detailed list of rules about which expenses qualify for their incentive and which don’t, they also have specific rules and processes required of an auditor. Every jurisdiction is different, so there’s no standard answer here.
Some jurisdictions require that the auditor verify a random sampling of expenses; others require a line-by-line audit (which explains why audit costs can vary so much from one jurisdiction to the next).
As David explains, his team may begin their work by conducting an account code review, to ensure that all your identified account codes qualify for the incentive in the first place.
Then (again, depending on the jurisdiction), they may ask the production company for documentation for a specific sampling of expenses (usually via a shared cloud-based folder).
When reviewing these expenses, they generally want to confirm that they meet the jurisdiction's requirements. For example, they may need to verify whether an in-state vendor is licensed in that state. For productions filming in multiple jurisdictions, an auditor may need to verify that crew labor hours have been accurately allocated among those jurisdictions.
“Sounds complicated…and a little scary,” you might be thinking.
But if you’re keeping thorough and accurate records from the start, you shouldn’t have anything to fear. And if you have a great auditor like David & team, they’ll ensure they're basing their findings on the right data.
If the auditor finds missing documents or ambiguities in your records, a good one will ask questions. As David shares, there’s always the chance that something has been filed in a way that makes sense to the production company’s bookkeeper, but not to the auditor. He’ll ensure the production company has provided all documentation before disallowing an expense. Obviously, the more accurate and detailed your records, the faster you can respond to such inquiries.
At the end of the process, Brauer & Co. will share a draft report and a summary findings with the production company. They’ll answer any questions, have the production company conduct one final review, and respond to any potential issues.
Then, the auditor will finalize the report and share it with the production company and jurisdiction.
What an auditor does NOT do
Keep in mind that an auditor is an independent party.
They won’t tell you how to keep your books, recommend specific accounting services or software, or even go into your ledgers. They won’t counsel you on how to increase your incentive or calculate how much your transferable tax credit will yield if you sell it.
As David says, “We don’t do any advisory services. There are plenty of companies out there that do. We are focused on the independent audit.”
They can clarify which expenses qualify from the outset. This help you plan better, avoid mistakes, and ensure you’re maximizing your incentive from the outset.
For example, salaries for crew brought from outside the jurisdiction might qualify for an incentive—but ONLY if they’re registered locally and pay withholding tax. There may be a cap, or maximum salary amount, that qualifies. Engaging a CPA like David early in the process - especially one with years of experience with production incentives - can help you avoid mistakes by alerting you to such nuances early on.
So how much does this cost?
Some CPAs charge an hourly rate. We’re not crazy about that approach.
Others, like Brauer & Co., charge a flat rate based on estimated qualified spend and jurisdiction. As David says, “We don't want clients to not call us because we're charging by the hour. They may say, ‘I don't want to bother them because then I'm going to get another bill.’”
Engaging with the auditor early is critical for understanding some of the nuances of these programs - especially if you’re new to incentives or just new to a jurisdiction. David shares, “People sometimes get surprised…they think something's going to qualify, and then they get our results and realize otherwise.” David’s mantra? “Ask questions, ask questions.”
A flat rate means your production company can reach out whenever you have questions, without the risk of “sticker shock” when the bill comes.
How long does it take?
David & team try to complete their audits within 3 to 6 months, but obviously, it depends on the jurisdiction and size of the incentive. “It also depends on how clean the books and records are, and whether or not that information is readily available,” David adds. Once again, accurate production accounting makes EVERYONE’S life easier—and often yields a faster incentive payout.
Selecting an auditor
When it comes to hiring an auditor for your production incentive, experience counts. This isn’t the place to save money by going with Uncle Larry who claims he can “just figure it out” (and in many places, Uncle Larry may not be approved by the jurisdiction).
David offered the following helpful tips:
Confirm that the auditor can work in that location. As mentioned, the jurisdiction may provide a list of approved auditors. Some places require that the CPA be licensed locally, and/or have a brick-and-mortar location there. Just because you’ve had a great experience with an auditor in one jurisdiction doesn’t mean they’re able to work in another. Make no assumptions, and ask early!
David suggests interviewing potential auditors. Ask them about their experience with production incentives, years of experience with the jurisdiction, and how many audits they’ve conducted there.
Ask about how they structure their fees. Will they charge by the hour, or a flat rate?
Do they have the bandwidth to conduct your audit in a timely manner? A benefit of a firm like Brauer & Co that’s focused on incentives: they won’t disappear during tax season!
Again, don’t assume that the CPA who does your taxes will be authorized to conduct this audit. Most jurisdictions require that auditors go through their training and/or have experience with incentives. Even if it’s not a requirement, it’s in your best interest to find one who does.
Audit do’s and don’ts
DO contact your auditor early in the process (if the jurisdiction allows. This may not be possible if a government agency handles the audit). As David says, “We charge a flat fee, whether you hire us in the beginning or the end.” There are gray areas with every program and complexities with every production. A great auditor like David will walk you through the jurisdiction’s requirements, point out the nuances, and answer any questions. “If we don’t know the answer, we can find it for you,” David shares.
DO keep accurate records. Skimping on bookkeeping services will only cost you in the end. These days, there are plenty of online tools and even fractional bookkeeping services to make the process easier.
DO take the time to get to know the rules of the particular incentives program.
That wasn’t so scary, was it?
Many thanks to David Brauer at Brauer & Co. for answering all our questions and helping us demystify the production incentives audit process. If you’re in need of an auditor for your next project, you can reach out to him at David@brauerco.com.
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