There's been pretty exciting news for New Yorkers in game development: the Empire State Digital Gaming Media Production Credit bill (A.10083/S.7485) has received unanimous support to provide tax credits to game developers the way that the Empire State Film Credit does to filmmakers. All it needs is Governor Cuomo's signature to become law.
As a licensed tax professional, I've written about how the federal R&D Credit works for indie developers and have been asked by my peers to give my input on whether or not this bill is going to help indie developers in New York who are usually non-employers. Prior to submitting any comments to IGDA who has shown strong support of the bill, I wanted to look it over so I could translate from Tax to English just how this bill is supposed to work.
In short, indie developers in New York may actually see some benefits.
Tax Terminology You Should Know
I explain the basics of tax language and how it affects game developers in my book designed just for that purpose, but the basic differences you should know for the purpose of this bill is that a deduction reduces your taxable income while a credit is a dollar-for-dollar reduction of your tax liability. Nonrefundable credits will only go against your tax bill to the extent that you have a tax liability, while refundable credits will go directly in your pocket regardless of whether you have a tax liability or not.
This credit is proposed to be refundable, so if you have a zero tax liability you just might benefit. This includes indie developers. For a frame of reference, you can see an overview of New York State's film credit from the tax department website, where the state will grant a refundable credit to the production company worth 30% of the expenditures in most cases.
Per the text of S7485B, game developers (including sole proprietors, which would largely encompass indie developers) who are eligible can claim a refundable credit for up to 25% of eligible production costs incurred within the New York City metropolitan area and 10% within New York State.
Who is Eligible?
A vast majority of game developers who operate in New York are eligible. You must be in the business of making games, so this means that if you're making your first game and aren't sure if it's a hobby or business, you're likely to be ineligible. Publishers and developers alike will qualify for the credit providing that development costs are being incurred in-state or in-city.
Most games projects will qualify for the credit, but if you're trying to gamify e-commerce that won't be eligible. Gambling apps and games are also ineligible as are games made for private and political advocacy purposes. The game must be intended to be available to the public, which is the case for most developers.
What Constitutes Qualified Production Costs for Games?
Qualified production costs are pretty cut and dry:
- Concept creation
- Integrating digital files
Use of property in making the game counts as well, so this would encompass devices used to make the game, art supplies, software and engines, and anything else used in the development process.
Your total in-city development costs must be $7,500 or greater. If the costs are incurred outside of New York City, the threshold is $3,750.
Administrative expenses and costs related to distribution, marketing, advertising, and so on are not eligible for the credit. If anyone owns a stake in the company such as an investor, payments made to them from the game's profits are also ineligible.
Interestingly, the law also specifically states that salaries or other payments made to people serving as CEO, CFO, President, Treasurer or other positions of ownership and leadership are not eligible. Given that a majority of indie CEOs are doing the actual heavy lifting when it comes to programming, art, narrative design, and other parts of the development process, this is troubling for indie developers who use a corporation and reached the point of being able to pay themselves.
However, the good news is that unlike the federal R&D Credit there does not seem to be a penalty for contract labor. While the bill assumes that the game developer is working solely with employees and not contractors, there is nothing in the actual bill that states contract labor is ineligible or is only eligible at a reduced rate like it is for the federal R&D Credit. So if you have contractor relationships within New York City and New York State and they're working on making the game in some capacity, then 100% of their pay should count towards the qualified production costs.
Do Location-Independent Indie Developers in New York Risk Ineligibility for the Credit?
The fact that game developers are frequently location-independent immediately raised a red flag to me. You can operate your studio in New York whether it's AAA office space or just working out of your apartment or various coffee shops, but have dev team members literally anywhere in the globe. But because you're the owner, the focal point, does this mean the dev costs were actually incurred within the city limits? Does my game dev hut in the Bronx technically count even though I'm paying an artist in Washington DC, just because I sent that electronic payment with a Bronx IP adress?
The law explicitly states that the services must be performed within New York State or City. However, anyone you hire locally as a contractor or employee will push you into the eligibility zone. Those $7,500 and $3,750 thresholds also come into play because so long as your development costs meet or exceed those amounts and your total in-state or in-city costs will be at least 75% of the total development costs that surpass that threshold, you can still use out-of-state contractors. But if 26% or more of your qualified development costs were paid out of state, then you lose eligiblity for the credit.
One Hidden Tax Administration Pitfall
When I was at GDC this year, Don Daglow gave a great presentation where he mentioned, "Video games are a huge business, but a tiny industry." And he couldn't be more right because video games don't even have a North American Industry Classification System (NAICS) code.
When you file your tax return, you have to select a NAICS code. This doesn't seem like a huge deal, but it's actually in the Internal Revenue Code and many state tax codes that only certain NAICS codes are eligible for various tax benefits. Most game developers wind up picking 511210 which is the universal code for software publishers. This means that in the current system, an individual who makes games out of their apartment has to use the same exact code as a Fortune 100 corporation that develops enterprise-level payroll software.
Why is this important? Because statistics on tax filings are tracked through those codes and it's about time that game developers had their own. By not having a NAICS code, it will also make administration of tax credits like this one more difficult. The last thing a game developer of any size needs is to suddenly get smacked with an examination and repayment notice a year after receiving a sizable credit just because the taxation department suspects you may not actually be a game developer at all. If game developer tax returns were properly tracked with their own NAICS code, it would show the states what common income and expense patterns both indie and AAA are likely to have and therefore reduce audit and repayment risks that always come with incentives like these.
To Support or Not to Support?
In a perfect world, the United States wouldn't have this ridiculously complex tax code that favors one industry over another, with states having their own rights to do the same. As an advocate to indie developers, an indie developer myself, and a tax professional, I publicly offer support of this bill with a few caveats.
It's long overdue that New York built up a larger AAA presence. There is an even larger pool of talent in the tristate area to draw from than there is in California and Washington where AAA has historically roosted. Tax policy alone is never a good reason to choose a specific industry and area over another, but a harsh truth is that it does factor in.
The tax incentives for film have been successful for the most part, but film has a much shorter cycle than game development for the most part. On a large scale, will the results of this bill's passage herald AAA developers to pop up all over Silicon Alley and Brooklyn, maybe even breathing life into the former industrial towns upstate, creating a golden age of well-paying jobs...or will they take the money and run, laying said employees off every six months?
New York City has a mammoth indie developer scene that is thriving and could stand to thrive even more from the passage of this bill, as indies are frequently not accounted for in legislative discussion. I can tell they weren't since executive pay is not eligible even though most indies must wear both executive and developer hats and it says so on their incorporation documents. Perhaps an income or capital structure guideline should be set to distinguish to two types of developers so as to not leave indies out of the benefits.
Also, it would help if my state's legislature and others trying to get both AAA and indie activity going could push for game developers to finally have their own NAICS code!
While indie developers are gaining more access to alternative funding like grants and facing other unprecedented opportunities despite the Indiepocalypse? Until we have a different solution such as more accessible grant funding to indie developers or basic income that would allow us to pursue game development on our own, I think we should support states willing to subsidize game development because it is helping lend more legitimacy to the medium. Even if you don't financially benefit from this tax credit for whatever reason: it will go a long way to not having people think you do nothing but play League of Legends all day when you tell them you're a game developer.
If you are an indie developer, do you support this bill? Why or why not?