The Broadway tour of 'On Your Feet!' took advantage of the Empire State Theatre Production Tax Credit. Photo: Matthew Murphy

A New York state tax credit is bringing Broadway tours and economic activity upstate, but causing headaches for some producers.

The Empire State Theatre Production Tax Credit, which has been in effect for two years, gives a 25% tax credit to shows that tech their Broadway tours in upstate New York. However, because many shows structure their companies as limited liability companies and New York does not allow the sale of tax credits, the credit currently goes to the investors, not to the show itself.

Last year, a handful of shows took advantage of the credit, putting together sets and shows in theaters in cities such as Syracuse, Schenectady, Rochester, Buffalo and Utica. Six shows, including the Broadway tours of “On Your Feet!” and “The Color Purple” took advantage of the tax credit this fall.

Randy Buck, chief executive of Troika Entertainment, had four shows eligible for the tax credit this year, and says he did see positives from the program, including the proximity of the theaters to New York City, where most of his shows rehearse and are cast.

But he was dismayed to find that the credit, which he notes could amount to more than $1 million for a big musical, could only be received by the investors, rather than the production itself.

“Everyone thought that they were going to be able to realize this in a tangible transaction,” Buck said. “Needless to say it was a big disappointment.”

The hope was that cash going back to the production would help it recoup earlier, which would, in turn, help the investors.

On the other hand, the benefit to these upstate towns is clear, as the productions hire local stagehands, while also bringing in hundreds of cast and crews to stay in hotels and eat and drink in the area. In 2017, the program had an estimated $25 million impact on the state, said Al Nocciolino, president of NAC Entertainment and vice chairman of the road for The Broadway League.

“The intent was to generate jobs and create economic opportunity,” Nocciolino said of the tax credit.

Still, the League is aware of this issue for producers, and views this iteration of the tax credit as a “pilot program,” modeled after the credits offered to film and television productions in New York, said Tom Ferrugia, director of governmental affairs at the League.

“We saw this as a potential problem, and it became a bigger problem than we anticipated for the producers, but it’s something we’re going to try to figure out,” Ferrugia said.  

The reason this issue is occurring is due to New York tax law and the way companies for Broadway shows and tours are structured. Most productions are set up as limited liability companies, to protect the investors against greater losses and taxation. Any tax credit flows back to where the money came from, which, in this case, means the investors.

But unlike other states, tax credits in New York cannot be sold.

Instead, investors can use that state tax credit against their K-1, the tax document that the LLC uses to report income and losses.

Touring shows could capture the tax credit themselves if they were to reorganize each show as a corporation, but that would lead to double taxation, Buck said. Instead, Troika has hired legal counsel and tax attorneys to figure out a new model that he says will allow them to recoup “a significant amount” of capitalization.

Buck was not willing to give away the formula just yet, but he said the model joins an LLC with a corporation on paper, without actually restructuring the company.

“In theory, we have cracked the nut on how to do this,” he said.  

Rhode Island, Illinois, Kentucky and Louisiana also offer theater tax credits. However, in the case of Rhode Island, producers are able to realize the tax credit in cash. The production receives the credit, finds a broker who takes a cut from it and then sells it to a local firm — which Buck notes is typically for less than the full amount. In the end, the production receives a cash refund that is less than 100% of the tax credit.

The tax credit expires in 2018, and League plans to advocate for the credit again starting next year. The League will be following the progress of the Troika model to see if that is how other productions should proceed, Nocciolino said.

Otherwise, Ferrugia said the League would bring up the issue to state legislators.