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Fi33. What guidelines should an eligible production company follow when requesting a post-production certificate and an independent auditor follow when verifying and performing an audit of the expenditures for a film or digital media production ...
All expenditures incurred and paid by an eligible production company in connection with a state-certified qualified production must satisfy the statutory requirements set forth in MCL 208.1455, particularly the definitions of "direct production expenditure" and "qualified personnel expenditure" set forth in MCL 208.1455(12)(c) and (j), respectively. The Michigan Film Office ("Film Office") and the Michigan Department of Treasury ("Department") require an audit, not simply a review, in connection with every request for a post-production certificate, performed by an independent Michigan Certified Public Accountant ("independent auditor"). The eligible production company and the independent auditor should verify that the expenditures adhere to these requirements and to guidance issued by the Film Office and the Department with regard to MCL 208.1455 and the definitions and scope of direct production expenditures and qualified personnel expenditures under the statute. Guidance currently available – including Frequently Asked Questions, the Notice to Taxpayers Regarding Film Production Credit Qualified Vendors, the Auditing Standards Relating to MBT Film Credit Reports, and the Michigan Film Office Audit Instructions and Expenditure Certificate Guidelines ("Audit Instructions and Guidelines") – may be found on the Department's website at www.michigan.gov/taxes concerning the Michigan Business Tax. The Audit Instructions and Guidelines may also be found on the Film Office's website at www.michiganfilmoffice.org.
The Audit Instructions and Guidelines prescribes standards and procedures that the eligible production company and the independent auditor must follow when verifying expenditures for the film and digital media production tax credit. Generally, these Audit Instructions and Guidelines state how expenditures may qualify as direct production expenditures or qualified personnel expenditures eligible for certification. The Audit Instructions and Guidelines also address whether and how various types or categories of expenditures may qualify or how they should be treated for purposes of determining certification of qualified production costs. Such categories include:
- Loan or financing interest expense attributed to financing of the qualified production
- Refunds, insurance claim recoveries and purchase discounts and rebates arising out of the qualified production
- Proceeds from sale of equipment, props, production assets and other tangible personal property purchased for use in the qualified production
- Costs allocable to the qualified production of props, equipment, production assets and other tangible personal used in the qualified production and inventoried for use in future productions or activities
The Audit Instructions and Guidelines also discuss how the audited cost report submitted to the Film Office in connection the eligible production company's request for a post-production certificate must be formatted and what information the independent auditor must present in the report. The Audit Instructions and Guidelines further prescribe that the audit must be performed in accordance with U.S. generally accepted auditing standards and that the auditor must have sufficient knowledge of accounting principles and practices generally recognized in the film, television and digital media industry. It should be noted that the costs attributed to the audit for the request for the post-production certificate do not qualify for the tax credit.
The Audit Instructions and Guidelines set forth an acceptable methodology that may be used by the independent auditor to certify that expenditures satisfy the criteria to qualify as direct production expenditures or qualified personnel expenditures, as applicable, for the tax credit. However, the prescribed methodology may not be appropriate for all circumstances. In all cases, the independent auditor must determine and adhere to procedures required to comply with the tax statute and must exercise the auditor's professional judgment when certifying expenditures for the tax credit.