Film ProductionWith the costs of film production continuing to rise, studios are always on the hunt for ways to reduce or offset their budgets.  State film commissions are responsible for attracting new productions, and will often contact a filmmaker during pre-production to offer shooting locations.  In the old days, most if not all films were shot in California where the major studios are located, but as other states realized that filmmakers desired more attractive incentives, they began offering tax credits to lure productions out of the Golden State.  Any studio or filmmaker who wants to explore the viability of tax credits to shoot a movie out of state first needs to understand the entire process, beginning with what these incentives entail.

Production Incentives Explained

“State production incentives” is just fancy way of stating that a state is willing to offer tax credits to a film production that shoots all or a majority of its footage within that state.  Tax credits are payments made to the film production by the state that help cover budgetary allocations related to out-of-state shoots.  States and cities offer these credits because they know that a new film production means new jobs for their citizens, and income from whatever products and services the production buys during the shoot.  These services include hospitality, food and recreation.  However, most states will require a film production to spend a specific percentage of its budget within the state in order to qualify for the tax credits.  To make their offer even more attractive, some states will add incentives such as a tax reduction on some sales and gross receipts, as well as rebates on specific expenses outlined in the contract.

Uses of Incentives

Studios and filmmakers who are granted tax incentives can use these credits in a number of ways.  The first and most obvious way is to pump the funds back into the production to alleviate budget constraints.  Credits are also valuable as collateral to borrow money needed to increase the budget.  Studios may also seek a buyer with a state tax bill who’s willing to buy the credits to pay off his obligation.  Other uses include the remuneration of equity investors, and the promotion and marketing of the film.

States that Offer Incentives

Given the possible economic windfall of attracting a film production, most states have established film commissions focused on luring feature films and television shows.  Many of these commissions provide services that can assist productions in hiring qualified crews, purchasing supplies and navigating the labyrinthine local laws that govern the issuance of permits and public land.  State commissions are the first place to start when seeking tax credits, as their staff members know all the requirements for a production to begin the application process.  Reference books such as the Hollywood Creative Directory have a list of all state film commissions.  State production incentives can also be found by accessing the Screen Actors Guild (SAG) website, which provides information on the type of credits a state is offering.  It’s important to understand that incentives change, and a prior year’s tax credits may not be available in the current year.

Eligibility

Not all productions are built the same.  Many states have specific definitions as to what constitutes a “production.”  In general, incentives are only available for what commissions define as “qualified productions,” and “qualified production expenses.”  In some states, for example, productions for the Internet and short films not guaranteed for movie theater exposure do not meet the “qualified production” standard.  The standard for “qualified expenses” includes rental of film equipment, salaries for cast and crew, accommodations, transportation, construction of sets and location fees.  Let’s look at an example.

A production decides to shoot in South Carolina, but purchases liability insurance in its home state of California.  The cost of paying the cast and crew while they’re working in South Carolina is a qualified expense, but the insurance purchased in California would not qualify for an incentive.  A production has to make sure that expenses in the state where the film is shooting meet the minimum percentage required by the state film commission.  If a state requires that 80 percent of total production expenses have to be spent in the state, and a film spends 75 percent, no tax credit will be given.

Incentive Considerations

Productions should be aware of a few things to make their out-of-state shoot advantageous.  First, most states have a residency requirement that rewards the hiring of local crews.  Second, certain states will not allow you to include the budget for the director, actors, producers and writers as part of the qualified production expenses total.  This means that shooting in those states requires a higher budget for below-the-line workers to make up the shortfall.  Third, some states will increase the amount of tax credits if a production utilizes poorer sections for location shooting.  And lastly, every state has detailed rules when it comes to handling of loan-out companies (corporations), local taxes and registration within the state.  Overall, the goal of a state film commission is to spur film and TV productions to use as much local talent as possible, which benefits the state’s economic bottom line.

Most Common Tax Credits

There are several tax credits states often use to attract film and TV productions.  Transferable credits refer to the type of credits that can pay off a state tax bill.  Credits of this nature are not refundable, and are only triggered when there is a tax liability.  Productions that have no tax liability will not receive this credit, but they do have the option of transferring the credit to an entity that owes state taxes.  This type of transferral is often handled by a tax credit broker, and is always sold for an amount below the face value of the credit, due to broker and lender fees.

Another type of tax credit is one that offers a tax refund based on qualified production expenses incurred during the filming of the film or TV show.  Productions awarded this kind of credit can expect a tax refund at the end of filming, which matches the percentage of expenses accrued in the state.  The value of this credit lies in the fact that productions can use the refund to either zero out their tax liability or, in some cases, even receive money back from the state.  For example, a director films a movie in South Carolina that offers a tax refund credit of 50 percent, if the production spends a minimum of $100,000 in qualified expenses.

The production would then file a return and receive $50,000 in a refund check.  Because there are no fees or penalties, tax refund credits are the most attractive kind of incentive for productions that film out of their home state. The third and final kind of credit is the non-transferable and non-refundable credit, which limits a production’s options because the credit isn’t given in a tax refund, nor is it transferable to a third party.

The only option a production has with this type of credit is to pay off their state tax liability.  This is beneficial for a production that does a lot of filming in the state, but for a one-off, it’s the least attractive of the three incentives.  It’s important to remember several caveats about these credits.  States have annual budgets, and because these incentives are given in the order in which filmmakers apply, they can run out in a short period of time.  Most states are flush with money at the beginning of a fiscal year, which is not always the beginning of the calendar year.  Film and TV productions must scour the incentives and application dates of each potential location to determine the optimal time to submit their request.  And because incentive amounts can fluctuate from year to year, a state’s viability as a potential shooting site may be lousy today, but fantastic in 12 months.

Common Application Procedures

Though every state has specific application materials, there are typical steps required of a production applying for incentives.  Productions should first determine the kind of incentive they want, and target the states that meet that criterion. Next, filmmakers must call the film commission in targeted states to obtain full details on all available incentives.  Key details to ask about include the threshold of qualified production expenses, tax refund percentages, availability of local crews, minimum number of shooting days required, accommodations, and tax credit maximums.

At that point, productions should request an application, which will ask for budget, number of shooting days, cast and crew salaries, and the number of local talent the production intends to hire.  Once the application is submitted, the production will hear from the commission, who may want to discuss other items before making a decision. Some states will offer an approval based on certain conditions being met, and reserve the right to revoke the approval if the production fails to meet those conditions.  After the incentive is approved, a production is responsible for notifying the state with all changes to budget, shooting schedule, or any other material fact that could alter the prior approval.  It goes without saying that filmmakers should make copies of all expense reports, shooting schedules, receipts and worker contracts.  Should legal action arise, these records will prove invaluable.

How to Choose the Right State

With nearly all 50 states offering some kind of tax incentive, film and TV productions may find it hard to choose the state that best fits their needs.  Probably the most important element in making that choice is determining what kind of credit a production finds most beneficial.  Some producers are satisfied with tax refunds, while others prefer transferable credits.  Another consideration is the shooting locations within the state.  Are the locales optimal for the production, or are they being chosen only because of the credit that is offered?  For example, shooting in Iowa, and trying to make it look like New York City is a tall task, and can affect how audiences view a film.  In addition, productions must take into account the content of a film or TV show.

Many states have now implemented guidelines about the way they want their state to be portrayed, and productions that feature excessive violence or other negative actions may not be welcome.  Productions need to be aware of the latest state guidelines, because if they misrepresent their content, the state film commission can revoke the tax incentive.  Productions can also seek out states that offer more than just tax credits.

For example, some states will also offer state tax relief and grants for filmmakers in addition to the usual tax incentives.  A final consideration before a production selects a state is seeking federal incentives that may not require the film or TV show to leave its home state.  The government will sometimes offer incentives to productions in which the majority of shooting takes place within the U.S.  This may trump a state-specific incentive because it allows a production to stay in its home state and save on the costs associated with moving cast and crew to another location.  The key for any production is information.  Because incentives in most states are fluid, staying on top of the latest changes in how a state funds productions can save filmmakers hundreds of thousands of dollars.