Incentives are a big deal in the film industry, and every so often, you can fund your movie based on incentives. The media hypes it by reporting a government incentive for film production in a country or state.

With all this valid hype, a filmmaker needs to know everything and anything about incentives. If he doesn’t have the time or skill to learn about the subject, the filmmaker needs to find someone who can learn about it or has taken the time to understand incentive programs. Let’s examine the incentives and see what makes these offers so appealing.

Film Industry Tax Incentives

First, an incentive is a payment, reduction, or discount that stimulates greater production or investment. Types of incentives relating to the film industry include, but are not limited to, state and international governments, bankers, incentive specialists, CPAs, attorneys, film commissions, consultants, payroll companies, studio and network producers, and executives. Each role discusses incentives with questions like: “How much will the bank loan me on the expected rebate or tax credit?” “How much money can I save by shooting in that city or state?”

Trade publications devote endless coverage to which states and countries offer incentives, and a filmmaker will read something like: “Incentive: 20%, plus 10% for below-the-line local labor. Minimally spend $200,000, “Incentive: 20% (25% for indie films), plus 5% for itemized expenditures. Spend: $1 million,” and “Incentive: 25% (30% for local cast and crew), plus 5% for United States veterans. Spend $50,000.” What does this all mean?

The above specialists are sharp and know how to analyze complex legislation regarding incentives in the film industry. It takes a CPA’s education to understand complex tax issues.

The lobbyist works with legislators to negotiate with state officials and draft legislation for the film industry. They develop financial circumstances that are important to studios, networks, and producers for filming in a specific location. All these experts are invaluable in determining, calculating, and presenting the breadth of incentive programs, enabling filmmakers to decide where to shoot their projects.

Filmmakers consider a multitude of factors when choosing the perfect location for filming, making it a crucial decision. Sometimes the filmmaker wants to stay close to home. Perhaps he is looking for a specific style, location, or city. It is often about the basic physical and organizational structures and facilities needed for production to go smoothly. The availability of many incentive programs in the U.S. and internationally is a significant factor in determining a location.

Incentive Programs and Runaway Productions

When film incentives were new to the industry, the formulation of runaway productions started in the 1990s. Productions left, particularly those in Los Angeles, and headed to other countries, mainly Canada, so producers intelligently secured favorable exchange rates, reducing production costs by as much as 25%. As a result, the U.S. lost a significant number of film jobs and suffered economic harm.

Finally, the regulators created a solution known as the American Jobs Creation Act of 2004, specifically Sections 181 and 199 of the Internal Revenue Code. Immediate 100% write-off for specific entertainment works.

Investors or production companies can claim a loss of $15 to $20 million when spending funds, regardless of the budget or distribution deal. There are some qualifications to the 2004 Act, but the incentives are very generous, with guidelines and tax forms to be filled out. Section 199 permits investors to subtract 9% of their taxable income from their taxes. That means an investor profits $1,000 and must only pay taxes based on $910.

Do Your Homework

Although this sounds like a great incentive, some are not so quick to agree. Each filmmaker, investor, or executive producer should consult with experts or conduct thorough research. Together, they determine if earning these enticements is worth all the time and paperwork. There have been many changes in the U.S. since 2004, with the September 9th attacks, stronger LGBT and minority rights. Producers and studios are increasingly inclined to shoot their projects in the U.S., with the added benefit that roughly 40 states now offer worthwhile incentive packages. A filmmaker has no reason to leave the U.S. Add to that the intention to increase film production, stimulate local economies, create jobs, and promote tourism, and these incentive programs are promising.

What is a Runaway Production?

Now, the term “runaway productions” has a whole new meaning. It is not just about keeping film production in the U.S., but also about keeping it in one’s city, county, or state. For example, the Afghanistan-set war movie Lone Survivor saved $4.5 million on its approximately $40 million budget by shooting in New Mexico. The state offers tax credits of 25 to 30 percent, surpassing California’s complex incentive programs.

Georgia and Louisiana offer tax breaks for local film production, attracting major Hollywood productions from California. The Hunger Games: Catching Fire, Django Unchained, and Flight capitalized on the incentives. The examples of incentives are endless, and the only way a filmmaker can take advantage of these incentives is to hire a consultant or do their homework.

Example of a Tax Incentive Program

As mentioned, incentive programs vary in size, quality, and atmosphere. They include, but are not limited to, tax credits, upfront and back-end production funding, and cash rebates. Exemptions and waivers are incentives that include hotel occupancy taxes (based on a limited time), Goods & Services Tax, Value-Added Tax, and Use Tax. It becomes overwhelming when the location fee is waived for filming on state lands. There is even on-the-job training or filming in low-income areas or non-tourist times of the year, like winter. A filmmaker might even find basic physical and organizational structures and facilities credits, allowing the state to bring jobs to their area.

Regardless of how a filmmaker views these incentives, they vary from country to country, state to state, and local level to local level. They are very unclear, with intricate details. If a filmmaker works through a major studio, there will be an individual who understands the details of the various incentive programs. Film industry payroll companies may not ease the need to understand incentive programs and the associated legislation.

Something to consider when taking on an incentive package is that financial institutions, such as banks, may loan a percentage of the money the filmmaker plans to receive from the package. Tax credits or rebates can offset the loan. For independent filmmakers, the bank offers loans against incentive packages if the project is bonded.

Now, you are sold on checking out your options for closing an incentive package.

Here are some ideal contacts or resources to consider:

First and foremost, contact the Film Commission. The federal and state film commission offices are resourceful. Each website has incentive programs, application qualifications, and available resources. Just looking through a couple of quality websites will help filmmakers better understand the effort required to apply for incentives. Call the office and speak with a representative, as they want your production company to visit their area and will take the time to answer all your questions. Contact the local visitor or tourism bureau if you are looking for support at a more local level, such as the city or county, and there is no film commission office. Usually, each bureau has a representative for film production or can direct you in the right direction.

To stay informed about the latest statutes, guidelines, and regulations, contact your local legislative representative. Each representative has staff at the regional offices to handle any inquiries from their constituents. They are there to help you.

Contact the Film Commission office to determine who to contact at the State’s Department of Revenue or Department of Economic Development regarding film production incentive programs.

You can even network within your community of filmmakers who have filmed there by asking them for contacts or information regarding incentive packages.

However, realize that this field of expertise has its own system and terminology. You must do your homework even if you are passionate about your movie. If you are uninformed, they will easily recognize you as a novice and might not be willing to help.

So, doing your homework means you know what you are asking and can have coherent conversations with these professionals. That way, they know you are serious and a professional.

Questions to Ask the Film Commission Office

• Would my production company need a central office in a specific jurisdiction?
• Do I need to register the production company in a particular jurisdiction to conduct business?
• What local taxes would affect the production, cast, or crew?
• What are the costs for filing fees and audits?
• Does the state have a gross receipts tax?
• Which expenditures meet the requirements for tax credits or rebates? Prompt the question with expenses such as rentals, general purchases, shipping, airfare, fringe benefits, and box rentals, among others.
• Does the production company have to purchase from local or state vendors? If they are not available, what is the alternative? Can I approach third parties to act as brokers and bill for equipment or materials furnished by out-of-town vendors, provided the local area or state uses the equipment and materials?
• Do the extras and crew have to be paid by a local payroll company to qualify for a tax credit or rebate?
• What are the tax credits and labor rebates for local and nonresident labor? What about our talent who work through their loan-out corporations? Are there guidelines for loan-outs? Will their corporations be required to pay withholding taxes to the state? Should they register with the state?
• Does a certain percentage of filming need to be done in the jurisdiction?
• What are the responsibilities of our payroll company?
• How long was the incentive program voted in for, and when will it be up for legislative review? Proper terminology is “When is its sunset date?” In other words, when are the benefits no longer available? Would my project meet the eligibility criteria before the incentive program expires?
• What percentage of filming has to be done in the jurisdiction?
• Would I have to hire a CPA from that state to perform an audit?
• Does the state have unlimited funds for tax credits and rebates, or is there a finite fund from which the state draws when releasing incentives?
• What is the maximum limit on how much my production can claim on the project, any one employee, in any year?
• How long will it take for me to get my tax credit or rebate?
• Does your state offer a transferable tax credit that I might sell? What is the going rate for tax credits in your state? Are the companies willing to buy or broker my tax credits?
• Once my production company receives a transferable tax credit, can we sell it immediately, or is there a grace period?
• Does the state work on a calendar year? The idea behind this question is that you need to know: Would the incentives still be valid if your production ran over into the next year?
• If your production company had reshoots after you already filed, would your company still be eligible for the incentives when we return to the state?
• What is the requirement for the number of local crew members we must hire?
• Is there a cultural test to pass? This is common in other countries, such as the British Film Certification.
• Would my production be required to provide this county or state with a screen credit or display their logo in our end crawl?

For more information and details on different incentive programs, read The Essential Guide to U.S. & International Production Incentives, a helpful book edited by Joseph Chianese and Barbara Rosenfeld. The book explains the following incentives.

1. Film Production Rebate

A cash rebate is the funds paid to the production company based on the number of allowable expenditures or jobs created by the project in the state or country. The production company does not need to file a tax return for rebates and is not subject to the management of local tax authorities. The local film office, which falls under the Department of Trade and Industry, Commerce, or Economic Development, governs them. The government agency that oversees the incentives sets aside the rebates. When production completes shooting in a state and files all qualifying documentation that specifies eligibility for a refund, the tax authorities should process the rebate within 30 to 60 days (some states may process it faster). The production bond allows the use of the rebates as collateral for a loan.

2. Film Refundable Tax Credits

Tax credits differ from rebates in that the local tax authority administers them. There are refundable and nonrefundable tax credits. A refundable tax credit works like a rebate. Yet, the production company must file a tax return, usually by the sanction of the Department of Revenue, to claim it and receive a credit for taxes owed when the production files its income tax return. It is recommended that the filmmaker request a letter from the state’s Department of Revenue certifying that the funds will be available upon the production’s completion. Tax credits can serve as collateral to secure a loan, enabling the production company to obtain an advance from its bank.

3. Film Transferable Tax Credits

These tax credits are nonrefundable, but a production company can sell (transfer) them or assign them to a local taxpayer. Some states present transferable tax credits, which permit production companies to sell or receive a refund for tax credits they cannot use. Often, brokers manage these transactions and charge a commission. In the bargain, the production will need to offer a discount for the face value of the credit. The usual rates are 85-90 cents on the dollar. Each state or country varies in how it standardizes transfers. Some allow one credit to be divided and sold to multiple buyers. Some allow various transfers so the buyer can sell all or part of the credit.

4. Film Nonrefundable, Non-Transferable Tax Credits

Use this tax credit to offset a production company’s existing tax liability, which is primarily carried forward for a set period. If the production company has no existing tax liability, you can use it to lower taxes in the ensuing years. Still, the production company cannot transfer the tax credit to third parties.

5. Film Up-Front or Back-End Funding

Local investors or taxpayers provide the funds for tax advantages from local tax authorities, and are only granted to eligible productions. The filmmaker, investors, and taxpayers should consult with their CPA or attorney to determine if they qualify for the advantages.

The Bottom Line

Remember that incentive packages or programs are not just complicated but endlessly changing. For that reason, a filmmaker needs to be diligent and ask for advice from someone who thoroughly understands these programs. Georgia, Kentucky, and Massachusetts have the best incentives. Louisiana, Pennsylvania, and Puerto Rico also offer excellent incentives.

State websites provide filmmakers with details about incentive programs and contact information. Procuring incentives is hard work, but it will be worth the effort to be a successful filmmaker.