Tax Incentives For Film and Television Productions: California Joins the Party
California has passed legislation that allows the California Film Commission (CFC) to allocate up to $100 million of tax credits per year for five years to “qualified” taxpayers producing film and video projects as long as they meet certain requirements. Up to $10 million of the $100 million of tax credits each year are reserved for “independent films.” The CFC will issue Tax Credit Certificates beginning on January 1, 2011 but it began accepting applications for the credit on July 1, 2009, and has announced that it has notified twenty-five productions that they qualify for the credits. Under the California Film & Television Tax Credit Program” (the “Program”), an “independent film” and a “television series that relocated to California” can receive a tax credit equal to 25% of “qualified expenditures.” A “feature film,” “miniseries,” “movie of the week” and a “television series” are eligible to obtain a tax credit equal to 20% of “qualified expenditures.” Either 75% of total principal photography days or 75% of the production budget must occur in California to be eligible for the credits.
“Qualified expenditures” include expenditures incurred in California for pre-production, production and post-production. The CFC was empowered to provide a “schedule of qualified expenditures” listing all “qualified expenditures” eligible under the Program (California Code of Regulations, Title 10, Chapter 7.5, “California Film & Tax Credit Programs”), and the CFC has made guidelines available on its website entitled “Qualified Expenditure Charts,” which can be found at http://www.film.ca.gov/incentives/Qualified_Expenditures.html. These charts represent a guide not an exhaustive list of “qualified expenditures.” The CFC states that “qualified expenditures” do not include costs for development, marketing, publicity and distribution. Examples of “qualified expenditures” include but are not limited to: a) wages paid to certain crew and staff; b) equipment and facilities rentals; c) construction and set decorations costs; d) certain vehicle rentals; e) film stock and development; and f) special effects. Examples of costs that are not “qualified expenditures” include but are not limited to: a) expenses with respect to acquisition, development, turn around or related rights; b) wages paid to writers, producers, executive producers, line producers, associate producers, directors, principal cast, supporting cast and stunt players; c) expenses related to financing, overhead, marketing, publicity, promotion or distribution; d) expenses related to the creation of any ancillary products such as soundtracks, toys, video games, trailers or teasers; and e) state and federal taxes.
Certain productions are not eligible to receive tax credits under the Program including the following: a) commercials; b) music videos; c) “television pilots”; d) news programs, current events or public affairs programs; e) talk shows, game shows and “strip shows”; f) sporting events; g) half hour episodic TV shows that are not a “television series that relocated to California”; h) awards shows; i) productions that solicit funds; j) “reality programs”; k) student films, industrial films and documentaries; l) clip-based programs with more than 50% of its content comprised of licensed footage; m) variety programs; n) daytime dramas; and o) sexually explicit programs for which records must be maintained for performers under Section 2257 of Title 18 the United States Code.
There are also minimum and maximum production budget expenditure amounts necessary to qualify for the Program. A “feature film” must have a minimum production budget of $1 million and a maximum of $75 million, while an “independent film” must have a minimum budget of $1 million and a maximum budget of $10 million. A ‘movie of the week” or “miniseries” must have a minimum budget of $500,000 and a “television series” licensed for original distribution on basic cable must have a minimum per episode budget of $1 million. There is no minimum per episode budget requirement for a “television series that relocates to California.”
A “qualified taxpayer” can apply the allocated credit amount against the taxpayer’s “net tax” owed on its tax return filed with the California Franchise Tax Board (“FTB”). The taxpayer generally can elect to split the credit amount and apply it against income tax liability and sales and use tax liability. If the amount of the tax credit exceeds the “net tax” owed by the taxpayer in any tax year then the excess credit amount can be carried forward to reduce the taxpayer’s “net tax” liability for the subsequent five years until the credit amount is exhausted. The tax credits are not refundable which means that the tax credit can reduce a taxpayer’s liability to zero, but cannot create a cash refund to the taxpayer. The tax credits are not transferable to any third party unless the credits are attributable to an “independent film” which generally is a production with a budget between $1 million and $10 million and is produced by a company that is not publicly traded. A “miniseries” or “movie of the week” falling within this latter definition may also be considered an “independent film,” and therefore be eligible to obtain transferable credits. Before selling credits attributable to an “independent film” a taxpayer must notify the California FTB of any such sale and provide further information required by the FTB. Any money received in exchange for the credits is not tax free, and the taxpayer must report the money as taxable income. Further, the qualifying tax credits can only be sold once, i.e., they cannot be resold by the unrelated party to another taxpayer.
There are numerous other requirements for a production to the gain approval to receive the tax credits. The required applications, forms and documents to be submitted are outlined in a checklist provided by the CFC on its website at http://www.film.ca.gov/pdf/Checklist60109.pdf. Although the CFC began accepting applications beginning July 1, 2009 any tax credit ultimately issued to a taxpayer cannot be applied against tax liabilities until the tax year beginning January 1, 2011. The CFC will notify an applicant of acceptance or rejection of its application within twenty business days of receiving a complete application and supporting documents. A taxpayer must then commence principal photography no later than six months after the CFC approves the application, and postproduction must be completed within thirty months of CFC approval.
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