Film Tax Incentives
A recent panel on State Tax Incentives sponsored by Media Services and Film Incentives Group, LLC., was centered on tax credits for Massachusetts and Rhode Island, but much of the advice is applicable to other state programs. It’s important to note that while many states offer some form of tax incentive for filmmakers, there are several important differences between the various programs: whether it’s a rebate or a credit, transferable, has a cap [the state has a total limit per years for all credits], the minimum production budget requirements, and several other details.
Also covered was: different ways to use the credit in your budgeting, accounting issues, and the importance of using a location that’s “right” for your production.
On the panel were:
Vinca Jarrett of FilmPro Finance, an entertainment lawyer focused on television and theater; Mike McCann, principal of Film Incentives Group, a company that handles the selling of transferable tax credits; Lisa Strout, Director of the Massachusetts Film Office; Jonathan Hyde of the Massachusetts Film Office and the “first explainer” of tax credits; Steve Feinberg, Executive Director, Rhode Island Office of Film & TV; and Irene Wachsler, Toblosky & Wachsler, CPA. The panel was moderated by Joe Maiella, VP of Media Services.
The following are notes from the event:
Jarrett: How do you fix the tax credit into your finance plan? There’s three ways I’ve come up with […] the first one is production funding; this is available only to bonded productions. The second way is [to] apply it to your marketing and distribution. Last is to return capital to investors […] There are accounting issues if you take income from the tax credit, so be aware of that […] but it’s a great way to say to your investor that no matter what happens, you’re going to get 15 to 20% back at the end.
A 25% tax credit is not across the board, and you never monetize it at a straight 25%, that’s just not how it is done. You’ve lucky to see 75-80% [of that].
If you haven’t produced a feature length movie before that is bondable, then you’re not a bonded producer and you need to get someone on your team that [has produced a bonded production.]
McCann: You can get your money in essentially two ways; on the front end you can get it through some of the finance vehicles […] or if you’re in a good enough position to wait until the end then the second way is produce and finish it, then get your tax credit and monetize [it…] If you had a million dollar credit that could be worth 925,000 back to you. If you financed it on the front end it might only be worth 700,000.
Strout: We see a lot of people who’re thinking “oh you have a great tax credit,” but if you’re trying to shoot your movie which is supposed to be in Hawaii, here in Massachusetts, how much CGI are you going to have to do, is it really worth it? You still have to make your movie; you still want to make a good movie.
Feinberg: One of the things we’ve found in the last eight years or so is that our crew base is really getting stronger in the New England area. A lot of folks that were living in Los Angeles or New York have now moved back here because there’s a livelihood here. And in Rhode Island, if you’re going to use a state property, they are relatively inexpensive.
Jarrett: It’s really important when you pick a location for your movie to also look at the film office and how active and established they are […] Look at the commitment of that state, of the governors office, of the commissioner of the film office, see how many tax credits have been processed. Talk to other filmmakers who have worked in the state.
McCann: The difference in the states include the percentage that you receive back for your expenditures, you can get up to 44% in Alaska, versus you get 25% in Pennsylvania. […] If it’s an uncapped state that means you know that if you have an eligible project, as long as you meet the minimum spend requirements there’s going to be funds there, versus states where it’s going to be capped.
Feinberg: In our state we average about 12 million dollars of tax credits per year. We have never gone over the cap, we have never had to shut somebody down and say ‘no we can’t do this.’ We found that anyone who has applied for our tax credit has been able to access the program.
Jarrett: You have to look at the process, not just the amount they can make available. For instance I worked with Puerto Rico […] one of the problems there is that you must post 1% of your budget just to activate your tax credit, and nothing you’ve done before that is retroactive. 1% is a lot if you’re making a $5 million movie.
Wachsler. Another thing to keep in mind [if you’re looking to sell your credits] and I’ll give an example with Iowa […] commercial companies are buying these credits, but in Iowa the whole issue is there’s not enough industry to buy all the credits that they promote.
McCann: Massachusetts is a great state because any taxpayer can utilize it, it can be carried forward for up to five years, vs. Pennsylvania which is much more restrictive.
Strout: If you shoot less than 50% you’re only going to get the payroll tax credit, not the production tax credit.
The incentive program is really run by the Department of Revenue, not the Film Office. We’re there to help filmmakers, we use it as a marketing tool and we try to keep the really basic questions answered so the DOR isn’t inundated; but at the end of the day they are the folks who make the decisions.
Jarrett: [I recommend that you] not ask questions of the DOR before filing, you will get [misleading] answers and you’ll be fighting with them for years. Better to make your filing, take your crapshoot. Don’t let any accountants or lawyers talk you in to making an inquiry prior to doing it.
Strout: I couldn’t disagree more. They are the state entity that runs this program. If you ask anyone here, myself included, to give you the definitive answer, we cannot do that, only DOR can do hat.
Wachsler: I’ll give an example, the word “fee,” – location fee – if you have the word fee, they question it. So we say location expense. There are certain hot points. The issue is a general one, not just for the tax credits. The Mass DOR has it’s rules, so if you have an audit, regardless of film tax credit or what not, you have to be nice and play nice. That’s why we talk to them on a weekly basis.
Feinberg: This probably isn’t my place, but our division of taxation is fun!
Hyde: What I notice is that a lot of people approach the Massachusetts program with experience in other states and it takes them a while to get through the whole issue that we don’t distinguish between above the line, below the line, resident, non-resident, it takes people a while to get though that.
Feinberg: If you plan to have a million dollar budget, maybe give yourself a little wiggle room in case you go over, your request should be 1.2 mil just in case. That is one of the problems of having a cap.
51% of principal photography must be shot on the ground in Rhode Island. For documentaries, if you spend 51% of your budget in Rhode Island you’re allowed to access the program.
You must form a Rhode Island LLC or Rhode Island corporation.
Please, please fill out an initial application before you start your production if you plan to use the tax incentive program. Don’t do it post. Do it before.
Wachsler: No matter where you are going, hire a local CPA firm that is familiar with that states tax credits.
A lot of people say ‘oh we don’t want to do payroll service’. Hire a company. Just do it. Because they are going to help you avoid those costly federal and state fines.
If you can’t do bookkeeping or you don’t know what a credit or debit is, or assets equals liabilities plus net equity, then hire a bookkeeper. Don’t try and do it yourself. Use a real accounting system. Use QuickBooks, do not use Quicken.
Jarrett: If you don’t have a production accountant and a competent bookkeeper during production, you are going to mess up and you are not going to end up getting the benefit of these tax credits where your books have to be meticulous.
Wachsler: If you establish an S-Corp or an LLC, make sure you file your federal tax returns.
For everybody who is an employee, or provides services, you have got to withhold the Massachusetts state income tax, or else it doesn’t count.
All vendor expenses, when you submit your application to DOR, you have to have a description of the expense, [as well as] the vendor name and the address. You can’t just say coffee. DOR wants to know five cups of coffee at Dunkin Donuts and make sure the zip code is correct.
Loan-outs. They should complete page one of the Loan-Out affidavit form. Have a Loan-out person complete and sign it before you pay them, because after you pay them they’ll say ‘oh no, I don’t want to register I don’t want to pay taxes’ then you’re out your credit for their salary.
CORRECTION: An earlier version of this report incorrectly stated that the event was sponsored by the Massachusetts Production Coalition.