Let’s assume you got into filmmaking because you wanted nothing to do with business school. Well, tough. Movies are the most expensive art form; even ones they call “no-budget” aren’t. You need to learn about business eventually, and in today’s world, even independent filmmakers need to understand terms like “transferable rebates,” “soft money” and “100 percent deductibility.” In fact, there’s one financing term both Hollywood and independent producers must know: “tax credits.” The studio world is continually on the lookout for states offering production rebates that will reduce the cost of their movies and TV shows, while independent producers scout these same states in search of funds that, along with private equity, grants, crowdfunding, and the occasional pre-sale, will allow their films to even be made at all. “I can’t imagine doing a movie without incentives. I don’t even know what that feels like,” says Film Science’s Anish Savjani, a Portland, Oregon–based producer whose credits include films by Kelly Reichardt (from Old Joy to Certain Women), Joe Swanberg (Alexander the Last) and Jeremy Saulnier (Blue Ruin, Green Room).

Despite the importance of tax incentives, most independent producers say they begin projects without thinking too much about them. “At the script level, we try to keep an open mind toward anything,” says Savjani about Film Science’s early-stage development. Once projects get closer to preproduction, however, “the conversation turns pretty quickly to how do we subsidize our budget, how do we get the most bang for our buck. And that conversation turns toward tax credits or a rebate.” For directors, such dialogues involve changing a script’s location or maybe doubling one location for another, perhaps with a few exterior days budgeted in one state while the bulk of the shooting takes place in another.

Kimberly Parker, who has produced features like Katie Says Goodbye and The Adderall Diaries, concurs, “I have the writer put on their writer’s hat and imagine what they want in an ideal world. When we get closer to the fundraising part, then they have to throw on their director’s hat. That’s when I ask them to sincerely and genuinely go through the script with me and be really open-minded about whatever changes need to be made. It becomes that matrix of the creative versus the practical — what you get on screen and what’s going to make the most sense to film.”

For independent films, tax credits are particularly important because they incentivize investors. Producer Alexandra Byer (Dark Night, Sollers Point) explains, “Soft money is always going to be attractive to investors because that means they’re recouping more — their investments are worth more.” For example, because soft money like tax rebates doesn’t need to be paid back, an equity investor fully financing a $1 million film might only need to actually commit, say, $800,000, with the rest being covered by the state.

Finding the right tax incentive program can be a simple, straightforward process or one plagued with a degree of uncertainty. Many films, independent and studio, shoot in New York, which offers a refundable credit of 30 percent of qualified production (most below-the-line crew and vendors) and postproduction costs, with an additional 10 percent added for productions shooting in certain upstate counties. “There’s a great infrastructure and the credit is solid,” says John Hadity, a longtime expert on production finance and now executive vice president at payroll firm Entertainment Partners, which also works to monetize credits for producers. Hadity notes that Governor Andrew Cuomo recently extended the sunset date for New York’s film tax credits until 2022. “That means television series that do their planning 18 to 24 months in advance have certainty that the program is going to be around for another few years.”

Flush as it is with cash, New York isn’t necessarily Hollywood’s only go-to location these days. Take Atlanta. Among producers, it wasn’t mentioned in the same sentence as New York or Los Angeles until 2008, when the state approved a tax credit program that can go as high as 30 percent. Ever since, Georgia has lured scores of major film and TV productions (plus job-hungry crew) down South, offering nearly a billion dollars in credits to film and television between 2009 and 2015. In addition to, obviously, the TV series Atlanta, prominent Georgia productions have included Black Panther, Guardians of the Galaxy 2 and Hidden Figures.

Currently, 32 U.S. states, plus the District of Columbia and territories of Puerto Rico and the U.S. Virgin Islands, offer incentives. These include production centers like New York, Georgia, California (20 to 25 percent of qualified below-the-line) and Louisiana (25 to 40 percent), but also such lesser-lensed spots as Virginia (15 to 40 percent), Illinois (30 – 45 percent) and West Virginia (27 to 31 percent).

As states rise in popularity and attract more productions, infrastructure (rental houses, stages, crew) in those states builds; yet, for producers of lower-budgeted independent films, chasing a credit can actually be a gamble. A blockbuster can come to town and scoop up all the crew, forcing producers to fly in crew members who then, because they’re from out of state, aren’t eligible to have their salaries rebated. Or, in a particular state, there may not be enough of a nonunion or IATSE Tier One crew base at all to make the state feasible for a very low-budgeted film. “Sometimes it’s questionable if it’s really worth it,” says producer Neil Kopp, who works in partnership with Savjani, about the process of chasing the latest incentive by traveling away from a producer’s home base.

And then there are politics. Changing legislative priorities can make the national landscape for tax credits an unstable one. States can promote a high credit only to have the legislature underfund it, with caps restricting the number of productions that can actually come to town. “We’ve seen some states emerge with credits, and we’ve seen some states disappear with respect to credits,” says Hadity. “We’ve seen states lift caps, we’ve seen people raise caps. The programs evolve, just as the industry evolves. A program drives production. If you get rid of the program, you’ll lose production. And we’ve seen that. We’ve seen programs that have absolutely dried up.”

Hadity cites the sad story of New Jersey. In 2009, then-Governor Chris Christie decided he didn’t like how one of the state’s biggest shows, Jersey Shore, depicted the Garden State. He denied the MTV show its expected tax credits, causing shockwaves throughout the industry. “There was a credit in New Jersey, but no one was taking advantage of it because why would you go there if you think you’ll get left at the altar?” Hadity says. “Even if you’re precertified, you’ve spent millions of dollars, and you’re working under the assumption that as long as you do what you say you’re going to do, you’re going to qualify for incentives. Then the state says, ‘Sorry, you’re not going to get your incentives because we don’t like the way you make the state look.’ Isn’t that a First Amendment issue?”

Christie wound up suspending the New Jersey program entirely in 2010 and vetoed a new bill reauthorizing it in 2016. With a revamped edition of Jersey Shore headed to the state and Christie departed, there’s speculation that a new version of the program could be in the works.

Other fallen film locales include Michigan, which, from 2007 to 2015, had one of the highest incentives in the country — up to 42 percent, with state funds scooped up by high-profile pictures like the Transformers movies — but whose program was shuttered by Governor Rick Snyder in 2015. Some states, though, are thriving. Oklahoma, Pennsylvania, Kentucky and Alabama are all attracting independent productions. Savjani and his colleague Neil Kopp speak highly of Oregon, where they’ve shot most of Reichardt’s films. Oregon does have a very low cap on its rebate expenditures — for fiscal year 2018, just $14 million — but Film Science has seen its films, including Green Room and Macon Blair’s Sundance Grand Prize winner, I Don’t Feel at Home in This World Anymore, receive funds. Significantly, both had low budgets that were still high enough to qualify for credits in the first place. (Oregon’s credits are restricted to films budgeted above $1 million).

Ohio is one of the newer kids on the scene, says Hadity. After Todd Haynes shot 2015’s Carol in Cincinnati, where he was able to recreate 1950s New York on the relative cheap, others quickly chased his lead. “Now the cat’s out of the bag. People say, ‘Oh my god, I’m doing a movie in the ’50s in New York, I can go to Ohio and get a great tax credit,” Hadity says. (That credit is 30 percent of qualified above- and below-the-line expenditures, and the minimum spend is only $300,000.) But with popularity comes potential risk. Although at $40 million Ohio’s cap is bigger than Oregon’s, Hadity says, “The program’s administered on a first-come-first-serve basis, so they’re probably going to run out of available funds every year. Everyone talks; everyone shares information. It only takes one person to say, ‘We were going to go to Ohio, but they ran out of money.’ So if they don’t want to lose productions, in the next couple years they’ll have the raise the annual cap.”

Having to scramble when a tax incentive deal suddenly falls apart is what happened to Parker while producing the 2016 indie Katie Says Goodbye. She made Nevada her production’s home after finding a hero location there — a roadside diner — as well as a 15 percent tax credit. The production began crewing up, and then the state abruptly passed a tax abatement law, which wound up yanking away most of the money earmarked for their program and redistributing it elsewhere. (Parker later learned Tesla reaped most of the rewards.) Weeks away from production start, she and director Wayne Roberts were in a car, cruising all over the American Southwest. “It sounds like it was fun, but it was actually quite stressful,” she recalls. “We were doing all the ‘touristy’ Route 66 roads, very American. It would’ve been great had we not been under such pressure.”

They wound up in New Mexico, whose production community is resurgent thanks partly to Breaking Bad and now Better Call Saul. The state had a great tax credit — 25 percent refundable — and the head of the Albuquerque Film Office even picked up the producing team herself and drove them around possible locations, including their much-sought-after diner.

“There’s always the fear that [states] are not going to follow through on the credits,” says Savjani. “States maintain the right to pull out because of some fiscal disaster.” One horror story that haunts anyone who follows movie tax incentives is the tale of Louisiana. A few years ago, the state was in a financial crisis. Their solution was to put a one-year moratorium on their immensely popular tax incentive program. That meant no one could use the credits, and therefore get money from the state, for an entire year.

Big studios weren’t much affected, as they had the financial stability to wait. Indies were a different story. Small productions that were counting on promised cash they’d use during production or for post suddenly had to wait for their credit. If they had borrowed against these credits, they couldn’t pay back their loan, which would then acquire an additional 12 months’ interest. If they had finished shooting their movie and needed that money for postproduction, they had to sit on their footage for what seemed like an eternity.

“What’s scary about incentives across the country is they’re pretty precarious,” says producer Alexandra Byer (Memphis, Dark Night). “Even if you find a state that has one, and you take meetings, as we did, with the film commission, and you’re buttoned-up and have your application in, the money might not even be there.” Byer is referring to her recent production, Sollers Point, directed by Baltimore’s Matt Porterfield, who wrote his script specifically about the small Maryland neighborhood. She says she’s not surprised that her film received no credit from Maryland. “Their process is that you literally have to hand in your application in person, when their doors open. And it’s first-come-first-serve,” says Byer. “House of Cards had someone there early, to be the first person in line, and hand in their application. Because House of Cards is such a massive show, they took all the money. And Sollers Point, a low-budget film which would have only needed a tiny fraction of what House of Cards got, got nothing.” (Maryland specifically notes it prioritizes returning episodic television.) Ultimately, it didn’t matter, Byer says; they were still going to shoot there, no matter what.

Once a production identifies a state and goes through the process of qualifying for an incentive — in New York, that involves a preliminary application and, sometimes, a meeting with the film office — producers must tackle another step in the process: turning that incentive into funding. Credits turn into cash in various ways. Some states, like Oregon, Montana and Colorado, have rebates, where money is given directly by the governments to the production companies. Others, like New York, Florida and Pennsylvania, offer tax credits, which means that productions subtract these credits from the money their production entities and/or members owe the government. There are nonrefundable credits, which only refund as much as the tax liability, and refundable ones, like New York’s, which eliminate the tax liability with an excess balance returned by check.

A number of states have what’s known as transferable, or tradable, tax credits, which for many independent films are sold by the typically out-of-state production to a larger in-state entity or private company looking for a tax break. “They can use your tax credit to lessen their own burden as a bigger company,” explains Parker. “A lot of times they buy the tax credits for less than the dollar value. It’s a good deal for them. Then, for the production, you get your cash a lot sooner.” Note, however, that the discount offered to the buyer reduces the amount of funds a film will receive.

Some state film commissions will even handle the credit selling, including Louisiana. Oregon will actually auction the rebate to companies for you. Producers can get a check within 30 days, which can then be used for production cash flow.

In the private space, there are companies as well as private investors who will offer to partner with producers by cash-flowing their tax credits. It’s not entirely no-risk for them — after all, things can easily go wrong in the production of any film — but it’s not at the risk level of an equity investment. These companies will often demand credits, back-end and upfront fees and sometimes even “creative involvement.” Caveat emptor!

And then there’s the simplest way to handle tax credits: to promise this money to investors as a guaranteed return. Yes, this requires producers to raise the full production value of a project. But it will also incentivize investors, who will know that their downside risk is mitigated.

No matter how simple a state’s incentive program might seem, producers must make sure to consult with an experienced entertainment attorney when factoring an incentive into a film’s financing. That attorney will advise on the most beneficial corporate structure for the film’s single-purpose entity — typically an LLC or C-Corp — and on any tax implications that would affect its members.

There are several companies in the film financing and payroll space who also offer help. Entertainment Partners is one; GreenSlate (formerly IndiePay) is another. Miguel Batista, who works at the latter, remarks, “We get involved very early on in a project.” Batista advises that when hunting for tax incentives, producers should keep an eye on things like pricing for credits in each state, how long it takes to receive funds and knowing their spends and caps. He states that it’s essential for producers to make contact with a state’s film office before beginning the incentive process. “Each film office wants to bring production to the market, and they’re incredibly helpful, from the initial application stage all the way through the final application process,” he explains. “If you see you’re going to spend more in your jurisdiction than was reflected on the initial application, they can make amendments to your credit letter and really boost it. Having a good ear within the film office is a key thing for your production to have with regards to putting together a project and seeing it through to the end.”

State film commissions can also make sure producers understand the fine print in a program’s requirements. States differ in terms of approved costs, method of payment, and program eligibility requirements. Sometimes, these requirements actually add, not reduce, production costs. For example, even an independent shot entirely on actual locations must build a small set and shoot for one day on an approved soundstage to qualify for the New York production credit. (Hence the number of scenes set in bathrooms or phone booths in New York indies.)

Some states, like Oregon, noted above, have minimum budget requirements. And two of the biggest states, New York and California, don’t allow their incentives to apply to documentaries. “There are probably more documentary filmmakers in New York State than anywhere else in the country. It’s a crime,” Hadity says. His theory about this snub is that the powers-that-be may see docs as too inexpensive; the average nonfiction budget runs around $600,000. Plus, the production can take years and use only a skeletal crew. “That’s not going to move the needle a lot in terms of inward investment and economic development and jobs creation. When the incentives were originally devised, the idea was to go after the much bigger fish. What’s going to change things in New York? Getting a $200 million studio film, not a $600,000 documentary.”

One state that grants tax rebates to documentaries is Colorado, where Kitty Green’s Casting JonBenet shot. Producer Scott Macaulay (also Filmmaker’s editor-in-chief) found the project a streamlined one. “We had been shooting interview footage in Colorado since mid-2015,” he says, “while we raised money for our film’s larger-scale production. We learned from our coproducer, Mitch Dickman, that there were funds left in the state’s allotment and applied for the rebate in January 2016. We received approval that month, went into full production in February, and we wrapped in March. In May, we received a check for the amount we requested, which was 20 percent of our estimated Colorado spend. It couldn’t have been easier.”

When bringing on a state as, effectively, a financing partner, Hadity advises producers to keep their business clean. “Don’t pay people under the table,” he says. “Use a payroll company. If you’re using a tax credit administrator, it might be a good idea to use one who’s tied to your payroll company, so they’re all already talking to each other. Then all the labor records are accurate and can be shared with your tax credit administrator.”

Screwing this up means screwing up your tax credit. “I’ve had people call me and say, ‘I shot a million dollar film, I paid a lot of people in cash. I’m applying to a tax credit program, and I’m being rejected. Can you fix this?’” Hadity says, going on to point out that what underwrites a state’s tax credit program are the payroll taxes collected while a production is filming. “If you’re not withholding and you’re not remitting the employers’ share of the taxes, then you’re not really contributing to the program,” he says. “And if you’re not contributing to the program, then you shouldn’t be entitled to any benefits.”

Still, even after you’ve learned everything you need to know about tax incentives but were too flummoxed to ask, it’s important to remember this: Tax credit cash shouldn’t rule everything around you.

“Though incentives are a huge factor for us, it’s only one of the factors. It’s not the deciding factor,” Kopp says. “The filmmakers we work with have never shot in Atlanta or New Orleans because, for the scripts we happen to choose and the filmmakers we work with, the environment is a big part of the film. It’s a character. You can’t not do incentives, but they can’t be the number one thing. Then you risk making films that aren’t as good as they could be.”