Thursday, February 14, 2013

The Wonderful Nightmare of Tax Credits

Anyone who's involved in filmmaking has obviously heard of state tax credits.  Basically these are state government subsidies to film productions shooting in their locale.  On paper, these incentives look awesome as they provide cash back to a production, and can be used as a financing tool to secure financing for your film budget.

For example, New Mexico has a tax credit of up to 25% for qualified in-state spending for film productions.  So if you have a $1M budget, then that's $250K cash back from the state of NM...theoretically.  The catch is qualified expenses.  You need to make sure that you follow the guidelines and use proper accounting so that the state audit will accept all of the expenses and spending you've tagged as qualified.

This is where it's critical to have production accountants who understand these programs and how to tag your spending in the budget and cost report so that the expenses budgeted as being qualified will actually end up being qualified and not disallowed.   Many of the large studios fail to properly do this, and so a portion of the budgeted credit ends up being disallowed.

For a big studio, it's a headache, but not the end of the world since they already have millions of $$$ in their coffers, and these tax credits end up being icing on the cake and a way to recoup some of the budget.  But for an indie producer who is lured into this poppy field of "free government money", the results could be as disastrous as getting hooked on the opium that said poppies produce (ala that scene in Wizard of Oz -- you know the one!)

First off, most of the state tax incentives require you to use local hire crew and even for some of the cast.  Depending on where you shoot, star actors paid through a loanout may or may not qualify.  And since a name actor is going to be a huge chunk of an indie budget, that's a big portion that won't qualify.

Regarding crew, if you're shooting on HD, chances are your film crew will be a fraction of the number of crew on a big budget Hollywood production.  The DP you hire will often bring his own camera crew and sometimes hook you up with gaffers, grips etc. -- people they've worked with before.  There's a synergy with a crew that are veterans on many shoots. Having to rely on a local crew may or may not end up costing you more in the long run.

My recommendation is to not rush foolishly into this world of tax credits.  If you're shooting a feature film, consider the possibility that it actually might be cheaper to lay off the plane tickets and hotel rooms and shoot your movie in Los Angeles.  Unless of course you live in Santa Fe, obviously!

If you need to use tax credits to provide gap financing to cover funding that you're unable to raise, then you're going to want to engage a company that will float you the cash for the credit.  Again, you want to do your research.  Plus, in my opinion, tax credits only make sense if you have name attachments to your project that inflates the budget into the $3M + range.  If you're working on a shoestring budget, you're probably better off looking towards crowdfunding for your film.  And that's a totally different topic altogether.

Happy Filmmaking!

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