Late Fees: New York State’s Film Tax Credit Delays
Increasing delays in receiving the New York State film tax credit are affecting profitability and even dissuading some from shooting in the state, say a number of independent producers. What has long been one of the most robust and dependable of tax credits in the nation has become less appealing to producers and financiers due to timelines that can stretch out to five years from the start of principal photography.
These lengthening timelines, especially in the face of rising interest rates, affect independent films needing to borrow against the credit more than studio and streamer productions, which are often fully cash-flowed. Explains producer and Killer Films partner Pam Koffler, who has shot many films in New York, “From my personal experience, for a film that is truly independent, has no financial safety net, no entity that weathers the expense of a very long tax credit loan, the delay is a significant factor that has caused New York to be a problem for smaller independent films.”
When asked whether financiers and producers are shying away from New York due to the tax credit delays, John Hadity, Executive Vice President of the Incentives Group at Entertainment Partners, concurs: “Absolutely, especially the indies. And unless adjustments are made along the way, the longer a financing vehicle is out in play, the more the annualized rate of return gets diminished. Major studios, networks and streamers can wait for the refund to come back from the state, so they continue to come to New York. But indie productions can’t wait that long, especially if they are borrowing against the value of the credit, because they are accruing interest charges while they wait. Many lenders use variable interest rates, and many of these loans (against tax credits) can be outstanding for three to five years or longer.”
The recent Killer Films production A Good Person, directed by Garden State’s Zach Braff, shot in New Jersey. Says Koffler, “It was a negative pickup, [financed through] international sales and with the tax credit, and we were banking all of it. The fact that a [New York] tax credit could be out upwards of four or five years was a nonstarter. As a significant piece of our financing, the interest would have become prohibitive, not to mention the maintenance of the corporate structure, the constant tax filing, the administrative burden. That said, creatively, New Jersey was the right place for the movie, but their tax credit, which was brand new, was attractive. We’re about to get the New Jersey credit back, and it’s been less than a year and a half.”
To understand the delays, it’s helpful to review the process by which producers apply for and receive the credit. A producer submitting for New York’s production tax credit will wait until after DCP creation before filing paperwork. If used, an outside certified public accountant (CPA) will take about four months to audit a production before submitting materials to Empire State Development, the office handling the credit. “In 2013 it was taking six months for the final application to be processed and the certificate issued,” says Hadity. “Today it takes 20 months.”
Once received, the certificate is tied to what’s known as an allocation year. The state has currently allocated $420 million to the credit per year; after a year’s allotment has been claimed, the state draws from the following year’s allotment. Under current rules, credits are claimed by productions for the tax year of the film’s completion or the year after a project’s allocation year, whichever is later. And because the credit is received as a tax return refund, producers who need to keep their corporate entity open must wait until the end of the tax filing year to submit their return, stretching out timelines even further. (Additionally, films receiving a credit of more than $1 million see those credits split in half, with the second 50 percent being returned the following year. Credits over $5 million are broken into equal tranches over three years.)
The fact that the state is burning through its yearly allocation, with each $420 million yearly allotment being claimed roughly every seven months, is a significant factor in the delays. Currently, filmmakers are receiving certificates for the 2024 allocation year. If these trends continue, by the end of the summer the allocation year will be 2025, which means returns can’t be filed until 2026. But, shifting allocation years aside, the application review process has simply taken longer, too, as Hadity observes.
One New York-based producer who asked to speak anonymously placed their recent tax credit experience in historical context. “On two films shot in New York in 2018, we just recently received our tax credit certificate, which we then have to file with our NYS tax returns once our C-Corp’s tax year ends (so, more waiting!),” they say. “Between the start of principal photography and the time we expect to receive the tax credit check, it’ll be about five years. From the time we submitted our final application to the time we get the cash back, it’ll be three years. When I utilized this credit about 10 years ago, the wait was less than three years between start of principal and cash back, and less than two years between the final application and cash back.”
Producer Lucas Joaquin shot Tayarisha Poe’s Selah and the Spades in Massachusetts and posted in New York, qualifying for the New York post credit. “We turned in our final New York tax credit application in March 2020 and have just received the certificate for the tax credit in January 2023, nearly three years later,” he says. “We’ve filed the certificate with an amended tax return and hope to receive the actual refund in the next few months. By contrast, we filed for the Massachusetts tax credit for Selah’s production in August 2019 and received the credit back in February 2020 (a six-month period).”
Some have speculated that understaffing may be a reason for the nearly two-year lag in receiving the certificate. Other states are speedier in issuing credit certificates, with Ohio taking only a month, Pennsylvania two months, New Mexico eight months and New Jersey nine months.
“Because New York is so busy (indeed, bursting at the seams), I’m hopeful that Empire State Development will expand its bandwidth by hiring more people to serve on the team that handles the processing of tax credit applications,” says Hadity. “By lessening the amount of time it takes Empire State Development to issue the final certificates, the quicker it will be for productions to file their tax returns and receive their refund checks.”
Asked about the delays, a representative of Empire State Development responded by email: “Empire State Development is actively working to expedite the processing of credit applications, in response to concerns from the industry. Some of the concerns we’ve heard include: the $420 million cap is too low; the statutory requirement to file for the tax credit one year after the allocation year is too onerous; and the incremental filing requirement for credits exceeding $5 million can be incredibly time-consuming.”
The spokesperson cited changes in the credit proposed by Governor Kathy Hochul in her fiscal year 2024 budget. These changes include, according to the spokesperson, “increasing the annual cap to $700 million to increase the number of applicants that can receive the tax credit each allocation year (meaning fewer will have to be rolled into future years) and eliminating the one-year waiting period before tax credits can be claimed, allowing companies to file in their allocation year, not the following year.”
One factor cited by several producers as affecting the speed of their credit is the use of a prequalified CPA firm—as opposed to, say, the film’s accountant or a nonqualified firm—to handle the application’s preparation. Producers generally report the lengthiest delays when not using a prequalified third-party CPA. “On projects where we’ve used a third-party CPA for the audit, it generally goes much faster, but [that process] can cost from $5,000 to $10,000 for post, and more for the production credit (which involves more transactions, so is more complex),” says Joaquin.
Says the Empire State representative, “Film producers applying for the film production [credit] can opt to have final applications reviewed by prequalified CPA firms and expedite approvals. This procedure enables productions that choose to participate to have their final applications reviewed by prequalified CPA firms according to agreed-upon procedures (AUPs) established and published by ESD. If more applicants opted in to CPA process, it would go a long way toward reducing the time it takes for all productions to receive their credits.”
Despite the problems with the current credit, its “tried-and-true” nature remains compelling to several producers we spoke to—assuming that they don’t need to commercially borrow against the credit. “I didn’t take out traditional loans against the credit,” says the anonymous producer about their New York-shot films. “We just treated the credit as gross receipts going back to equity investors through the recoupment waterfall.” On another of that producer’s films, friends and family loaned against the credit without adding additional interest.
Adds Joaquin, “The good thing about the New York credit is that, though it takes time, it has always ultimately been reliable. Other states may have caps on their overall credits, making the availability of the credit unpredictable, which in turn makes it tough to rely on the credits in order to plan a shoot. Some other states also have complicated application procedures to be approved, which can be arduous to navigate and make the shooting plan risky. Still others are subject to political processes within the state that make the existence of the credit programs uncertain from one year to the next. For that reason, I prefer the reliability of the New York credit despite the amount of time involved.”
Governor Hochul’s budget, which contains the funding increase as well as the change in the allocation year rule, is currently being debated in the New York legislature. State rules require a budget be ratified by April 1, and filmmakers are hoping that relief comes with its passage.
Note: As a producer, the author has produced and executive produced films that have received the New York State tax credit.