What Are Production Incentives? Where Are They Available?

Production incentives are offered as cash rebates, tax credits, or up-front/backend production funding. In addition, numerous jurisdictions offer sales, use, excise, and gross receipts tax relief in the forms of deductions, credits, exemptions, and waivers. In the U.S., the federal government and most states offer production incentives for motion picture and television productions. Many jurisdictions also offer incentives for commercial ad production, digital programming, postproduction, video game production, animation, and other types of production. More than a dozen international jurisdictions offer production incentives open to producers from around the world.

Why Are They Granted?

Governments have long used incentives to foster economic growth, build infrastructure, and create jobs. Incentives are used to attract industries that are viewed as important to the local community. Production of filmed entertainment is especially amenable to incentives because it is highly mobile, environmentally “clean,” capital and labor intensive, and effective in promoting tourism.

What Is a Production Rebate?

A cash rebate or grant is a sum of money paid to a qualifying production company based on the amount of expenditures or jobs created in the jurisdiction on a project. These funds do not require a tax return to be filed. They are often administered by the departments of Trade and Industry, Commerce, or Economic Development.

What Are the Different Types of Tax Credits?

Tax credits can be refundable, transferable, or neither.

Refundable tax credits

A refundable tax credit functions in the same way as a production rebate, but is administered by the local taxing authority and claimed by filing a tax return. The production company must file a tax return regardless of whether it has any income or tax liability within the jurisdiction. If the production company does owe tax, a refund will be granted for the excess of the credit over the amount of tax owed. In some cases, banks or other lenders can monetize refundable tax credits so that the production company can get the money earlier. Generally speaking, a cost is associated with an advance of the funds.

Transferable tax credits

A transferable tax credit is one that may be sold or assigned to a local taxpayer. This transfer can be handled directly by the production company or indirectly through the use of brokers. Brokers will generally charge a commission. In addition, the production company will need to discount the credit from its face value to entice local taxpayers to purchase them. Jurisdictions vary in how they regulate these transfers. Some jurisdictions permit a single credit to be divided among multiple transferees. Others permit multiple transfers, allowing transferees to sell all or a part of the credit they purchased to another taxpayer. Note that tax credits may be recaptured by states after audit. Some states have recapture provisions with recourse to the buyer of a credit.

Nonrefundable, nontransferable tax credits

A nonrefundable, nontransferable tax credit can be used to offset a current tax liability of the production company. The excess can generally be carried forward and used to reduce taxes in subsequent years. Each jurisdiction sets forth the time period within which the tax credit may be carried forward.

What Is an Eligible Production Company?

Each jurisdiction defines which type of business entity is eligible to apply for and claim its production incentives. Many jurisdictions require that the company be exclusively engaged in the business of project production. Some jurisdictions specify the legal structure and/or residence required for eligible production companies.

What Is an Eligible Project?

Each jurisdiction defines the types of projects eligible for the incentive benefits. In many jurisdictions, the scope of eligible projects is very broad, including motion picture, TV, video, digital programming, interactive games, commercial advertisements, animation, and so on. There are frequently exclusions for “adult programming,” news, weather, sports events, infomercials, reality shows, and the like. In addition, many jurisdictions require that the project be intended for commercial exhibition and/or that a distribution deal be in place.

What Is a Qualifying Project?

Most jurisdictions have a minimum spend test; some have a minimum number of local shooting/stage days, resident employee requirement, or some other test so that the project will satisfy the jurisdiction’s goals in building its local industry, revenue base, employment, and so on.

What Is a Qualifying Expenditure?

Each jurisdiction defines the goods and services that constitute qualifying expenditures for the purposes of calculating an incentive benefit. In most jurisdictions, local goods and services directly used in the production are included in the benefit-calculation base. Some jurisdictions allow expenditures incurred in other jurisdictions, but which are used for local production, to qualify. In some cases, both preproduction and postproduction will be included. In most cases, marketing and distribution expenses will be excluded. Entertainment Partners’ handling fees and workers’ compensation insurance fees are qualified expenditures in many jurisdictions.

Funding

For jurisdictions with annual funding caps, it is important to know the fund balance and amount appropriated to date. Find out what is necessary to be certain that the amount needed by your project will be committed to it. Determine which jurisdictions with funding caps allocate funds to productions either on a first-come, first-served basis or on a discretionary basis. Some jurisdictions carry over unused incentive funds to the following year, while others do not carry over any unused funds.

Employment Issues

Are the cast and crew subject to tax in the jurisdiction where the filming occurs? If so, what steps must be taken to ensure compliance? If a jurisdiction has a residency requirement, what is the definition of a resident cast/crew member? Are there specific documents that must be obtained by the production to qualify these individuals? If any members of the cast or crew have established personal service or loan-out corporations through which their services are provided, is the corporation required to register to do business in the local jurisdiction? Are payments to the corporation subject to tax and/or withholding in the local jurisdiction to qualify for the incentive benefits? Is the corporation subject to tax at the entity level in addition to the tax imposed on the talent?

Confidential Financial Information

If confidential financial information is required as part of the application and/or certification process, how can it be protected from public disclosure?

End Credits

Does the jurisdiction require an acknowledgement of support as a condition of receiving the benefit? If so, what are the requirements?

Local Advice

Local film offices are set up to enhance local production. Contact with the local film office will enable you to find locations, coordinate crews, and access local goods and services. Be sure to find out which local auditing and legal services will be needed.

Sunset Dates

Many production incentive statutes are limited in duration. The statute will have a termination date (or “sunset date”) after which the benefits are no longer available. Will your project be qualified before the incentive expires?

Tax Year

When considering the timing as to when a production can potentially receive a credit, the credit’s tax year becomes an important factor. For example, a production receiving a 2017 tax credit in January may potentially have to wait till 2018 to file a tax return. It then may take several months to receive the credit from the time the return is initially filed. Depending on the jurisdiction, tax year can be defined by a number of elements including the production’s completion year and/or allocation year. It is also important to consider the date as to when the tax year closes for the entity earning the credit.

Structure of the Applicant Entity

Taking into account the issues referenced with tax year, the applicant’s entity structure plays a role not only with the timing to receiving the credit, but also whether financiers would be interested in lending against it. Refundable tax credits are used to offset any tax liabilities owed by the entity receiving the incentive. LLC, partnerships, and S-Corps may have multiple owners. The tax credit will drill down to the EIN or SSN of each of these owners. It is also important to note that incentive jurisdictions vary in their rules as to what is necessary to receive the credit with regards to LLCs, partnerships, and S-Corps. With regards to tax credit financing, a lender may be cautious with loaning against a tax credit where the entity is an LLC, partnership, or S-Corp because the incentive would first be used to offset any tax liabilities owed by the owner(s) of the applicant entity.

Logistics

An incentive jurisdiction may look enticing on paper, but strong consideration must be given as to what it will actually take to produce the project on the ground at this location. Listed below are some of the items to consider:

• Cast/Crew:

  Some jurisdictions are extremely busy or not enough so to support incoming productions. Additional non-resident cast/crew may be necessary and their wages, fringes, taxes, airfare and travel/living may not necessarily qualify for the incentive.

• Equipment/Vehicles Rentals:

  Will production equipment and vehicles need to be shipped in from out of state? How much will the shipping cost? Will these out of state expenditures qualify? If these out of state expenditures do not qualify, is it possibly to qualify them thru a local procurement company? If so, what are the requirements?

• Production Purchases:

  Will Set Dressing/Props/SPFX/Wardrobe items need to be purchased from out of state? Will these out-of-state expenditures qualify? If these out-of-state expenditures do not qualify, is it possibly to qualify them through a local procurement company? If so, what are the requirements?

• Soundstage:

  Are there available soundstages? If so, will they be accessible at the time of filming?

• Distance of Filming Location:

  What is the distance of the filming location in respect to the production office and cast/crew lodging?

Qualifying Production Expenditures

Jurisdictions provide a general listing of qualifying production expenditures—specifically purchases and rentals of tangible production equipment and supplies for U.S. jurisdictions. These expenditures are broken down into in-state vendors (as defined by local law) and out-of-state vendors.

U.S. jurisdictions can qualify fringes (e.g., pension, health, welfare, vacation, and holiday) and taxes (e.g., FICA, FUTA, SUI, and Medicare), as well as certain fringes (e.g., taxable per diems versus nontaxable per diems) and certain taxes. A detailed listing of all qualified fringes and taxes should be confirmed with each jurisdiction.

Some jurisdictions require qualified expenditures to be subject to taxes (e.g., sales, gross receipts, income, and excise taxes) for these expenditures to qualify. Most jurisdictions do not qualify marketing, advertising, and development expenditures. Note that some jurisdictions provide a detailed list of qualifying expenditures. In addition, certain jurisdictions may qualify out-of-state vendors on a case-by-case basis. Please consult with the local Film Commission to confirm qualifying vendors.