Transferable film tax credits (also known as film tax incentives) are a form of government incentive provided to encourage film production within a specific jurisdiction (such as a state, province, or country). These credits can be monetized even when the production owes no tax in the jurisdiction.
Basic Concepts
Tax Credit: This is a financial incentive that reduces the taxes a production company owes to the government. It's essentially a "rebate" or "refund" that filmmakers can use to reduce costs.
Transferable: A production company is often not local to the jurisdiction in which they are filming, and may not owe tax. The term transferable means the tax credit can be sold or transferred to another company or individual that owes taxes in the jurisdiction offering the credit.
Eligibility: To qualify for these credits, a film production must typically meet certain criteria, such as spending a minimum amount in the jurisdiction (on wages, equipment, services, etc.) and meeting specific local hiring or production requirements.
Cap: Many programs have a cap, or limit, on the total amount of credits they will issue each year. Once this cap is reached, the incentive program may close for that year.
Steps Involved in Accessing Transferable Film Tax Credits
Identify the Tax Credit Available: Different jurisdictions have different kinds of film incentives, and it is important for filmmakers to know which type would govern their planned production. A refundable tax credit is different from a transferable tax credit. This article refers to transferable tax credits only.
Application for Credits: Once a location is chosen, the production company applies for the tax credit program. This may involve submitting a proposal or application that includes a breakdown of the budget, intended expenditures, and the expected production timeline. Application deadlines are critical, so make sure to know when you must apply or you maty jeopardize your eligibility for the credit.
Qualified Spending: The production company needs to make qualified expenditures in the region (e.g., hiring local crew, renting local facilities, using local vendors, etc.). These expenses will then be eligible for the credit.
Documentation & Audits: The production company will typically need to track and document all expenditures that contribute to the credit. This can include invoices, payroll records, and other supporting documents. The governing body may require an audit or verification of these expenditures. It is essential that filmmakers not assume their production accountants will be aware of the sometimes complex rules governing tax credits. Talk to your production accountant in detail about your tax credit requirements before production begins!
Claim & Certification: After production, the film will submit a claim for the tax credit, often accompanied by an audit or certification of eligible expenditures. If everything checks out, the government or agency overseeing the tax credit will issue the credits.
Selling or Transferring the Credit: If the production company doesn’t have tax liability in the jurisdiction, they can sell or transfer the credit to another party (e.g., another business, investor, or individual). The buyer of the credit can then apply it to their own tax obligations in the jurisdiction offering the incentive. Filmmakers may sell directly or through a broker, but the credit will always be at a discount, typically only receiving 85-90% of the total value of the tax credit.
Simple Real-World Example
Let’s assume a film production has a budget of $1 million and is eligible for a 30% transferable film tax credit in a certain state or country.
Production Spending:
The production spends a total of $800,000 within the jurisdiction, making these expenditures elegible to be included in the tax credit calculation. This may include local labor, equipment rental, location fees, along with other qualifying expenses.
Credit Calculation:
The tax credit is calculated as a percentage of the eligible spending. In this case, the credit would be:
$800,000 (qualified spending) × 30% (tax credit rate) = $240,000 in tax credits.
Using the Credit:
If the production company does not owe taxes in that jurisdiction (for example, they are based elsewhere), they cannot directly use the credit against their own taxes. Instead, they can sell or transfer the credit.
Transfer or Sale:
The production company sells the $240,000 worth of credits to a local business or investor for a discounted price (say 90% of the value, or $216,000).
The buyer of the credit can now use the full $240,000 to offset their own tax liability in the jurisdiction.
Final Benefit:
The production company effectively gains $216,000 in cash by selling the credits.
The jurisdiction gains economic activity (spending, employment, etc.) from the film production, while the buyer benefits from a tax saving.
Conclusion
Transferable film tax credits provide filmmakers with a significant financial incentive, enabling them to reduce production costs and generate additional revenue by selling or transferring credits. This process benefits both the filmmakers and the local economy, but can be complex and daunting, particularly around deadlines, eligibility and qualifying expenditures. This overview hopefully gives the uninitiated filmmaker an idea of how transferable film tax credits work and the questions to ask if considering using them. Happy Filmmaking!
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Spiller Law is a San Francisco business, entertainment, and estate planning law firm. We serve clients in the San Francisco Bay Area, Silicon Valley, Los Angeles, and California. Feel free to arrange a free consultation using the Schedule Appointment link on our website. For other questions, call our offices at 415-991-7298.
The information provided in this article is for general informational purposes only and should not be construed as legal advice or opinion. Readers are advised to consult with their legal counsel for specific advice.
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