Motion picture and television production tax incentives are available at the federal level, in most states, and on a global level in nearly 100 countries. They should certainly be incorporated into the tax planning process for movie and TV studios to lower their costs of production.

The three primary phases of qualified filmmaking production include the qualified pre-production phase, the qualified production phase and the qualified post-production phase. It’s fairly common practice in the movie and TV studio industry to shoot the phases of qualified production throughout several locations. For example, the qualified production phase can occur in Los Angeles and the qualified post-production phase in Vancouver, Canada. Consequently it’s critical to know about the tax incentives available not only state by state but country by country worldwide in order to reduce a movie or TV studio’s global effective tax rate.

Nexus between QPAs and QPEs

While the qualifying production activities can vary significantly from state to state and country to country, many common QPAs include, but are certainly not limited to, feature films, episodic TV series, relocated TV series, TV pilots, TV movies and miniseries. In contrast, many states and countries generally consider the subsequent productions to be non-qualified production activities and consequently not eligible for motion picture incentives, including documentaries, news programs, interview and talk programs, instructional videos, sports events, daytime soap operas, reality TV programs, commercials and music videos. Additionally, while the qualifying production expenditures also vary significantly from state to state and country to country, many common QPEs include, but are not limited to, salaries, facilities, props, travel, wardrobe and set construction. It’s always critical to establish clear and concise nexus between QPAs and corresponding QPEs to ensure a sustainable tax return filing position.

Diverse Range of Incentives Available

The structure, type and size of the motion picture incentives vary significantly from state to state and country to country as well. Many MPIs may include tax credits, tax rebates and exemptions (such as sales and use tax exemptions on movie production equipment, sales and use tax exemptions on lodging, etc.). Other incentive packages may include cash grants and fee-free locations.

There are many other diverse and advantageous incentives. Some may be statutorily based, while other incentives may be more discretionary, and will need to be negotiated upfront before filming starts. Approximately 40 states currently offer MPIs, with most being either transferable or refundable. Transferable credits allow production companies that generate tax credits greater than their tax liability to sell those credits to other taxpayers, who then use them to reduce or eliminate their own tax liability. With refundable credits, the state will pay the production company the balance in excess of the qualified expenses. Nearly 100 countries also offer MPIs with varying structures and programs.

California’s Film & Television Tax Credit Program 2.0

In September 2014, California lawmakers expanded the state’s Film & Television Tax Credit Program in hopes of mitigating the exodus of movie and TV production to other states and countries. The state more than tripled the annual credits available from $100 million to $330 million and extended the program through the year 2020.

The enhanced California Film & Television Tax Credit Program 2.0 now allocates the available annual pool of credits 5 percent to independent films, 35 percent to feature films from major players, 20 percent to relocating television series, and 40 percent to new TV series, pilots, movies of the week and miniseries. Before the legislature overhauled the California Film and Television Tax Credit Program, the film industry had been moving out of California for years, drawn by financial incentives being offered by other states and countries. At one point feature film production in California declined 30 percent and one-hour basic cable production market share dropped 48 percent. Since the film and TV industry peaked in the late 1990s, California has lost 90,000 middle-class jobs and $3 billion in wages, severely impacting many small businesses that rely on a robust local entertainment industry.

The tremendous success of the California Film & Television Tax Credit Program 2.0 over the past few years allowed the passage of Senate Bill 871 on the Assembly floor last month, extending and expanding the tax incentives for film production in California’s 2018-2019 budget. It will be known as the California Film & Television Tax Credit Program 3.0. The bill extends the program to 2025 and makes several important improvements to ensure wider applicability and keep pace with the changing entertainment industry landscape.

In addition to continuing to allocate $330 million in available tax credits, the bill also implements new provisions around workforce training, sexual harassment and diversity. Under the bill, applicants will be required to include written policies against unlawful harassment as well as information about their programs to increase the representation of minorities and women in key positions. The California Film Commission will also be required to make diversity-related information and data public. The measure also pilots the Career Pathways Training program, which will create opportunities for individuals from underserved communities to gain employment in the film and television industry.

California Assemblymember Richard Bloom said, “Today, we voted to extend one of California’s most successful tax-incentive programs as California has been the capital of the entertainment industry since its inception. It is an industry that employs hundreds of thousands of people, including many of my constituents, and supports small businesses throughout the state. SB 871 helps us stay competitive and will help keep Hollywood in California, where it was born.” Governor Jerry Brown signed the bill into law in late June.

It is imperative to properly design and implement a sustainable methodology that will incorporate all applicable MPIs to properly tax affect the cost of filmmaking regardless of the size and structure of the movie studio, TV studio or production conglomerate whether your client is a major studio such as Paramount, a “mini-major” such as Lionsgate, or a smaller “indie” studio or distributor. As a direct result of these advantageous MPIs, filmmakers that are properly represented by a trusted tax advisor are able to delightfully end their productions with “Lights, camera, action and tax cut!”