Film and Entertainment Tax Incentives

The tax incentives in the film industry drive tourism throughout our country

June 18, 2014

During the last decade, many states have launched programs designed to attract film production companies as a way to create jobs and boost tourism. Today, 45 states and Puerto Rico offer tax credits, rebates, and/or exemptions for film and entertainment companies, according to the National Conference of State Legislatures. But unless you’re making a movie, you may think the financial incentives offered by state film commissions don’t apply to you. Think again.

Many of today’s entertainment incentives are broad enough to cover a variety of digital and other media including gaming, websites, TV commercials, and mobile applications. And these incentives can amount to hundreds of thousands of dollars. Yet, most companies either don’t know they exist or don’t think they are worth investigating.

The single biggest mistake people make is assuming they won’t qualify for these incentives. States are looking to attract technology jobs including programmers who create digital applications, video games, and websites. Digital media is considered a green industry. States want these professional, high-paying jobs that don’t have a negative environmental impact.

“45 states and Puerto Rico offer tax credits, rebates, and/or exemptions for film and entertainment companies”

Each state’s incentives are different in terms of the types of incentives offered, the strength of the incentive, and which activities they cover. For example, Virginia offers a base credit of 15% of qualifying expenses with a bonus of 5% if the production takes place in an economically distressed area of the commonwealth. Connecticut established a program for eligible film companies to receive a tax credit of up to 30% of the qualified digital media and motion picture production, pre-production, and post-production expenses incurred. Massachusetts offers a 25% payroll credit, a 25% production expense credit, and a sales and use tax exemption for qualifying projects. California has established a production credit program that grants productions a credit equal to 20% of the production company’s qualifying local expenditures.

The popularity, availability, and requirements of these programs vary widely. For example, California is a hotbed of film and television production activity; however, the California credit program is a relative newcomer to the film incentive industry. The program is only allocated $100M annually for production activity. Film and television production companies line up to reserve their credit on the first day of each fiscal year. Due to the fact that the California film and television industry is so expansive, the entire year’s allotment is assigned in one day.

“California has established a production credit program that grants productions a credit equal to 20% of the production company’s qualifying local expenditures.”

It takes an experienced consultant to know all of the permutations and how they might apply to your company. There is more than meets the cursory eye in many of these programs. For example, an entrepreneur might think the higher the percentage, the better the deal. But that’s not necessarily the case. It takes careful analysis to determine whether a particular activity qualifies in a particular state and exactly how much it qualifies for. One state program may have a very high reimbursement credit rate, but the expenditures that qualify are very narrowly defined. And another program may offer just a 10% credit, but that credit covers a broader array of expenditures. This could ultimately end up netting a company more money in tax credits.

Most states require companies seeking credits to use specified vendors located within the state. Exactly which activities qualify for the credits and the conditions of the procurement, can vary greatly from one state to the next. And there are plenty of other wrinkles. In some states, the buyer gets the incentive while, in other states, it’s the entity performing the work.

People should not dismiss these programs out of hand. If they are an LLC, for example, they may not think they need bother to apply because they don’t need the tax credit. The same may be assumed if a business isn’t yet profitable. However, in some states, the tax credits are transferrable or even refundable. If you qualify but don’t use the credit, you can sell it at a discount to a company that can use it.

Our advice? Research the incentives your state offers through its economic development office and don’t assume you won’t qualify for these incentives. Many types of digital media work, including developing video games and mobile apps, may qualify. Since the rules can be very tricky and vary from state to state, it will likely pay to seek the advice of an expert in working through the process.

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