Even during a downturn in the general economy, it is no secret that demand for video games remains strong. The fight for market share can be fierce, requiring constant innovation from game developers in order to remain competitive.
However, due to the increasing cost of sustaining their software development life cycle, many video game companies are finding it difficult to remain on the cutting edge. In states such as Massachusetts, however, the entertainment industry is about to catch a break.
For years, the talent and funding for video game development has been concentrated in high-profile areas such as Silicon Valley. Recently, Massachusetts has attempted to change that by introducing a bill to extend their highly praised film production tax credit to the video game industry.
The result is an incentive that encourages developers’ creativity, growth, and technological advancement while also boosting the state’s long-term economy, creating a win-win scenario no seasoned gamer can ignore.
In order to take advantage of the proposed credit, one must play by the rules, including meeting certain in-state cost thresholds. Fortunately, this should not be a challenge for most game companies; in fact, the credit extends not only to companies producing and selling games on any platform or medium such as consoles, mobile devices, or browser-based environments, but also to those developing interactive media for purposes other than pure entertainment such as education or research.
Even developing software to support a game’s infrastructure is likely to qualify, meaning companies producing middleware, e-commerce solutions, and VOIP systems are eligible even if they are not directly creating the games themselves.
The credit itself is two-fold. First, a labour-based component allows a credit equal to 35 percent of the in-state payroll for any employee participating in the design, development, or testing of qualified digital media projects.
Additionally, many employer-provided fringe benefits, such as parking or other transportation subsidies, may also be captured. Employees whose compensation is equal to or greater than $1,000,000 per year may not be included in this category of expenses; however, their wages may still be used in calculating the second, production-based component of the credit.
In addition to the wages paid to high-earning employees, the production-based credit includes most other non-payroll costs related to the production of video games in Massachusetts.
These items range from computer hardware and software used in development, to expenses incurred in acquiring music for a soundtrack.
Further, rent costs for development facilities may also be captured, easing the transition for companies who may choose to relocate to Massachusetts to take advantage of the new incentives. A 25 percent credit is allowed for these and other production expenses.
The proposed benefits don’t stop there. In addition to the production- and labour-based credits described above, a new workforce credit will also be available for meeting certain job creation benchmarks, allowing video game companies to grow their talent pool and providing valuable employment opportunities to Massachusetts-based developers and content producers.
Further, higher percentages of production expenses may be captured if a company is located in an Economic Development Zone or places a “Made in Massachusetts” logo on or within the game. Think of these additional incentives as “bonus points” for any enterprising gamer.
Other States in Play
Massachusetts is not the only state to recognize the value of attracting the video game industry, particularly in the last two years. In fact, many other state governments have enacted similar credits aimed at stimulating these highly valued companies. For instance, Louisiana’s Digital Interactive Media Credit provides a similar benefit, offering a 25 percent credit for production and 35 percent credit for eligible payroll. Michigan’s entertainment credit goes even further, allowing a refundable business tax credit of up to 42% of in-state production costs. Other video game-friendly states include:
No matter where your business is located, it is a safe bet to assume that the technology curve for game development will remain steep even as production costs continue to rise.
However, it is good to know that location options are no longer constrained to historically software-centric regions. Especially when combined with federal incentives such as the R&D Tax Credit, the credits enacted by individual states provide many safe havens for developers to cultivate their next digital masterpiece.
[Dean Zerbe is a national managing director for Alliantgroup, the nation’s premier provider of specialty tax services. Angelique Garcia is a senior associate and team director for Alliantgroup’s Software Industry Specialization Team].