Motion Picture and Television Production Tax Incentives (hereinafter “MPIs”) are tax incentives that are available at the U.S. Federal Level, at most of the U.S. Multi-State Levels, and on a Global Level through nearly a hundred participating countries worldwide and should certainly be incorporated into the tax planning process for movie and television studios to properly tax affect their costs of production.
Three Primary Phases of Film 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 should be duly noted that it is fairly common practice in the movie and television studio industry to shoot the aforementioned phases of qualified production throughout several locations (e.g., Qualified Production Phase in the City of Los Angeles, California, USA and the Qualified Post-Production Phase in the City of Vancouver, British Columbia, Canada). Consequently it is critical to be cognizant of tax incentives available, as applicable, not only state by state within the United States but also country by country worldwide in order to reduce a movie or television studios global effective tax rate.
Required Nexus between QPAs and QPEs
While the applicable Qualifying Production Activities (hereinafter “QPAs”) vary significantly from state-to-state and country-to-country many common QPAs include, but are certainly not limited to, feature films; episodic television series; relocated television series; television pilots; television movies; and miniseries. In contrast, as a caveat, many states and countries alike generally consider the subsequent productions to be non-qualified production activities and consequently not eligible for MPIs such as documentaries; news programs; interview / talk programs; instructional videos; sports events; daytime soap operas; reality programs; commercials; and music videos. Additionally, while the applicable Qualifying Production Expenditures (hereinafter “QPEs”) 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 is 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
It should be further duly noted that the structure, type, and size of the incentives vary significantly from state to state and country-to-country as well. Many MPIs may include tax credits, tax rebates and / or exemptions (e.g., sales and use tax exemptions on movie production equipment; sales and use tax exemptions on lodging; etc.) while other incentive packages may include cash grants, fee-free locations amongst many other highly diverse and advantageous incentives some of which may be statutorily based while other incentives may be discretionarily based which will need to be properly negotiated upfront before the onset of the filming. There are approximately forty states that currently offer MPIs with most being either transferable (e.g., 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) or refundable (e.g., refundable credits are such that the state will pay the production company the balance in excess of the qualified expenses) and nearly one hundred countries that offer MPIs worldwide with varying structures and highly diverse programs.
A lookback at California’s Film & Television Tax Credit Program 2.0
On September 18, 2014 in a highly strategic effort to mitigate the exodus of movie and television production to other states throughout the United States as well as to other countries, California lawmakers enacted an increase to its then current Film & Television Tax Credit Program to more than triple the annual credits available from $100 million to $330 million, and to extend 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% to independent films; 35% to feature films from major players; 20% to relocating television series; and 40% to new television series, pilots, movies-of-the-week and mini-series. It should be duly recalled that prior to the overhauling of the California Film and Television Tax Credit Program by the Legislature in 2014, 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 films production in California declined by 30 percent and 1-hour basic cable production market share dropped by 48 percent. Since the film and television 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.
Spotlight on California’s Film & Television Tax Credit Program 3.0
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 (hereinafter the “Bill”) on the Assembly Floor on June 18, 2018 which extends and expands the tax incentives for film production within California’s 2018-2019 Budget (hereinafter the “Budget”) and will be known as the California Film & Television Tax Credit Program 3.0 (hereinafter the “Program”). This Bill extends the Program to 2025 and makes several important improvements to ensure wider program applicability and to properly keep pace with the changing entertainment industry landscape. More specifically, 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 their 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 public diversity-related information and data. 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.
Assembly member Bloom indicated that “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.”
The bill now heads to the Governor for signature.
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, television studio, or production conglomerate whether your client is one of the “Big Six Majors” (e.g., Paramount Motion Pictures Group (Viacom); Warner Bros. Entertainment (Time Warner); The Walt Disney Studios (The Walt Disney Company); NBC Universal (Comcast); Columbia TriStar Motion Pictures Group (Sony); and Fox Filmed Entertainment (21st Century Fox).) or a leading independent producer/distributor commonly referred to as the “Mini-Majors” (e.g., Lionsgate Films; Open Road Films; CBS Films; DreamWorks Studios; and MGM Pictures) or a smaller production and / or distribution company known as independents or “indies”. As a direct result of these advantageous MPIs, filmmakers that are properly represented by a trusted tax adviser are able to delightfully end their productions with “Lights, Camera, Action and Tax Cut!”
Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for the Americas at Prager Metis CPAs, LLC a member of The Prager Metis International Group. Peter is a highly distinguished BIG 4 Alumni Tax Practice Leader and has over twenty five years of progressive CPA Firm experience developing, managing and leading multi-million dollar tax advisory practices on a regional, national, and global level. Peter serves on both the Board of Directors and Board of Editors for The American Society of Tax Professionals (ASTP) and is the Founding President and Chairman of both The Northeastern Region Tax Roundtable and The Washington National Tax Roundtable, operating divisions of ASTP.
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