Tax incentives are a key component to independent film budgets nowadays, and are practically vital to the financial safety of a production given the current market saturation of content—and the therefore markedly lower purchase prices as of late. Film and television tax incentives are a method by which governments attract productions to come to their state or country, thereby boosting the local economy; productions hire local crew, and purchase and rent local goods from secondary institutions such as restaurants, car dealerships, and generator rental companies. Depending on the “flavor” of tax incentive offered—such as transferable tax credits—completely unrelated companies can benefit by purchasing these credits at cents on the dollar, and reduce their tax obligations. All that said, not all tax incentives are created equal.
First of all, while we love California, we have a difficult time recommending it for independent filmmaking. In 2014, S&R Films’ own Gato Scatena consulted for California Assemblyman Adrin Nazarian in regards to proposed modifications to the state’s film tax incentive legislation. To Scatena, it was obvious that the language in the active statutes were the direct result of meetings with only the largest studios and production companies, and were therefore not designed with independents in mind. One such feature of the California tax incentive that makes it difficult for independent filmmakers is the fact that the law requires movie productions to have a minimum qualified spend of $1 Million. To make matters worse, no above-the-line talent and crew expenses are “qualified,” resulting in a realistic total minimum budget of somewhere around $1.3 Million. And much to the Assemblyman’s surprise, during the course of these meetings he discovered that while over 70% of movies produced and sold each year are independently financed, the majority of those films have total budgets under $1 Million (take for instance S&R Films’ Lifetime movie, Imaginary Friend, shot for under $1 Million). To prove the point that California’s incentives are inadequate to keep jobs from being deported to other states and countries, Scatena noted that the entire roster of films acquired that year by Grindstone (a Lionsgate distribution company) were shot outside of California! Among other things, the modifications recommended by Mr. Scatena included the removal of the lottery approval process, and inclusion of a percentage of above-the-line costs as qualified expenses. Assemblyman Nazarian did everything he could, but at the end of the day, it was more popular to voters to simply increase the annual spend—another signal that the lay person simply does not understand the intricacies of film finance and production. So, while we wait and hope for California to catch up with the competitive states and countries, let’s explore some better options.
Mississippi and Louisiana make shooting movies in Dixie fun and profitable! In 2002, Louisiana was the first to realize the local economic benefits of offering film tax incentives (in the form of credits), and was so aggressive in their laws that they had productions running year-round, and hoards of life-long California film crew permanently moved their residences to the Pelican State. On average, shooting in Louisiana allows producers to count on about 20-25% of their budget coming back to them in the form of tax credits [that they could then sell back to the state at 85% face value, or better-yet, sell to a highly-taxed local company for closer to 90-95% face value]. The more diligent filmmakers can eek out closer to 25-30% in tax credits. The state became so dependable in regards to delivering on their promised tax credits, that many films started to partially finance their productions by having companies or individuals “cashflow” the projected tax incentives prior to filming, and with a built-in return to the lender. That said, Louisiana did recently drop the ball on paying out their credits on time, and from July 1, 2015 and June 30, 2016, the state was refusing to buy their credits back at the aforementioned 85% face value. This caused some problems with banks and lenders, so to a certain extent, the state is now rebuilding its trustworthiness with financiers. Regardless, Louisiana is a tax incentive powerhouse, and a beautiful location at that. On another note, when Louisiana was going through their brief lapse in judgment, their neighbor to the east was rolling out an ingenious tax incentive plan of their own!
What’s better than a tax credit?! According to Mississippi, cash is better than a tax credit! The state’s tax incentives come in the form of a cash rebate after the Mississippi Department of Revenue audits the production. Most of the incentive program’s features are comparable or identical to those found in Louisiana. The program only requires a $50,000 in-state spend, and while productions can receive a 30% rebate on local hires, you’ll still earn 25% on out-of-state hires… that includes all of the highly trained crew now located right next door in Louisiana. The tax rebate program in Mississippi is certainly younger than several other states, but with crew and facility shortages in Louisiana and Georgia (due to high number of productions), Mississippi is already attracting a good number of filmmakers in the know.
Some of the other dependable tax incentivized territories for independent filmmakers in the United States include Alabama, Georgia, Kentucky, Massachusetts, Pennsylvania, and Puerto Rico.
Over the past couple decades, producing feature length films has become a much more accessible endeavor, and as such, there’s a lot more content being produced than distributors need. The result is a classic supply & demand boolean equation: is there more supply than demand? Yes. Therefore, the value of the supply has gone down. The droves of first, second, and even third-time filmmakers financing their productions with friends, family, and debt are already placing their speculatively produced projects in a tough marketplace, so why on Earth would you leave money on the table? If you’re in development or pre-production on a movie right now, don’t move forward without at least considering all of your tax incentive options—it could very well be the difference between profit and loss.