Video Game Developers: Unlock the Potential of Lucrative Tax Credits in Georgia

At a glance

• The main takeaway: Despite Georgia lawmakers not passing the film and entertainment tax credit reform, opportunities to secure valuable tax credits are still available for video game developers. 
• Assess the impact: Video game developers must establish roots and create jobs in Georgia before they can unlock the door to favorable tax credit benefits.  
• Take the next step: Aprio’s State and Local (SALT) and Research and Development (R&D) Tax Credit teams can help game developers identify and secure lucrative tax credits and incentives.     

Schedule a free consultation today to learn more!

The full story:

Taxpayers with ties to Georgia’s film and entertainment industry have closely monitored the tax credit reform bill, HB 1180, which proposed several significant changes to the state’s film tax credit. While HB 1180 (and a subsequent attempt via SB 349) did not pass during Georgia’s 2024 legislative session, one aspect of HB 1180 that did not garner as much attention applied to the state’s tax credit for interactive entertainment (e.g., development of virtual reality games, PC games, mobile games, and console games).

HB 1180 proposed to separate the interactive entertainment and film tax credits into individual statutes, which would have insulated the interactive entertainment tax credit from the proposed changes to the film tax credit while otherwise leaving the credit intact as it currently exists.

Video game studios boosted Georgia’s economy

Based on a state-ordered audit, Georgia Southern University’s Center for Business Analytics and Economic Research released a report at the end of 2022 detailing the success and impacts of the interactive entertainment tax credit.[1] The report highlighted how video game studios that claimed the credit generated close to $90 million in economic output and supported close to 400 jobs in 2021 alone. Aside from the economic impact and support of Georgia’s economy, the report notes that the interactive entertainment tax credit retains businesses and jobs in the state, leading to successful companies creating new technologies that are strengthening Georgia’s industries.

Each year, qualifying game developers may be eligible for the state’s interactive entertainment tax credit, which can equal up to 30% of a business’s qualified expenditures. There is an annual aggregate statewide cap of $12.5 million, and no single developer can claim more than $1.5 million of the credit annually. While the tax credit can be used to offset the game developer’s Georgia income tax liability, many developers may be reporting tax losses in early years, which may otherwise make the tax credit useless. One of the most attractive aspects of the interactive entertainment tax credit is the ability for developers to sell and transfer the tax credit to other Georgia taxpayers. Additionally, developers have the option to elect to use the tax credit against the company’s Georgia payroll withholding taxes. As a result, game developers are able to monetize these credits even when accumulating tax losses.

Leveraging lucrative R&D tax credits for video game development

Similarly, game developers may also be eligible for research & development (R&D) tax credits both at the federal and state levels related to game development in Georgia. R&D tax credits are available to companies performing R&D activities, as defined by the IRS’s four-part test, and game development tends to satisfy each of the four parts: 

1. The activity is technological in nature, such as game development with principles of computer science.
2. The purpose is to invent something new or to improve a product’s function, performance, reliability, or quality.
3. The work involves technical uncertainty. For example, uncertainty about a company’s capability to improve a game’s technological performance.
4. The work requires navigating the technical uncertainty by conducting a process of experimentation in which the team evaluates and experiments with alternative methodologies and approaches, such as alternative tech stacks, parallelization, and alternative algorithmic approaches. Note: the purpose of the experimentation must be technical and related to game function as opposed to visual appearance.

Further, companies operating at a loss can still qualify for the R&D tax credit. Regardless of the company size, it can qualify and claim its Georgia-based development spend and pair it with a federal incentive, based on U.S. R&D spend, to claim both credits on an annual basis. Companies may also use the federal and Georgia R&D tax credits against the company’s income tax liability. Alternatively, certain companies may use the federal tax credit to offset the employer’s portion of the social security tax, but any company may elect to use the Georgia credit to offset the company’s Georgia withholding taxes. Just as with the interactive entertainment tax credit, Georgia incentivizes technical job growth by supporting the gaming industry through the R&D credit’s ability to be elected to offset the company’s Georgia payroll withholding. This is advantageous if you are in a taxable loss position or if you have a credit amount exceeding your tax bill. 

The bottom line

In total, Georgia is the ideal location for video game developers to establish roots and create jobs to benefit from this triple dip tax credit. In the right circumstances, video game developers in losses can monetize the federal R&D tax credit, the Georgia R&D tax credit, and the Georgia interactive entertainment tax credit on an annual basis. In coordination with the impact to Georgia’s economy detailed in the aforementioned report, as well as the tax credit benefits to the game developers themselves, the gaming industry in Georgia is a win-win for all stakeholders.

Aprio’s SALT and R&D Tax Credit teams have extensive experience working with video game developers to identify and secure these tax credits and incentives. Reach out today to learn how your business can thrive with these lucrative tax benefits and start planning for the future.

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[1] Tax Incentive Evaluation: Interactive Entertainment Tax Credit; December 20, 2022.