Today I’m going to explain how tax incentives are used in film productions. I’ll keep it short otherwise it might be too much to handle.
introduction
When you hear about film investments you probably think about someone putting in a huge sum of money into a production. What you think about is most definitely equity financing and while equity is used in film finance, something else is equally common and that is tax financing or using tax incentives, another word for it can be tax subsidies.
Above is an old picture from the production of Transformers 3, Dark of the moon
What doesn’t work
So, let’s go through the basics of using tax subsidies to help finance a film and more importantly, what you should not do. First of all, tax shelters does not work the way you think. You can sell the rights back and forth through a leaseback model but in the end that might give you about eight to ten percent of your budget and it is a lot of work getting this to work. So, this is not recommended and it will probably just take time and not much of an upside.
Another thing that is cute but does not work like you might think is section 181 in the U.S. Section 181 is a deduction that let’s film productions deduct the first fifteen million dollars of the cost of making a film if it’s produced in the U.S. This sounds great, I know but it does not work since it is only a deduction. So if someone mentions section 181 as a way to finance a film or part of a film, know it is only a deduction, not a credit.
What actually works
What works is state tax credits in the United States or tax incentives in other countries. Unfortunately, we don’t have any tax incentives in Sweden so I can’t help you there but there are many other countries who understand the value of having film productions in their respective countries.
The film industry thrives on tax credits because states and countries are competing with each other to see how much they can give a production to use their services and areas.
Two types of tax incentives
You can say there are two different models of tax credits. One is assignable where you get your tax credit based on producing in the local jurisdiction and how your budget looks like. You go and sell that credit to some buyer who's a taxpayer in that jurisdiction and you both go home happy.
The other one is the one where you get a refundable tax rebate or credit. This can be as much as 30% of your total spending in that country or state. So quite a lot for any project. This helps you borrow against the tax credit and in turn be able to raise money for your production. Today, country and or state tax credits are easily the best and most viable form of film financing. More and more countries see the value and more countries are willing and competing with each other to give the best tax incentives to productions. More now than ever before so this is highly recommended and you should use this advantage for your film.
conclusion
While tax financing can be difficult to get your head around it is actually a very viable option and not that hard once you start to understand. It is worth noting that some countries and areas have complicated structures. However, all areas have experts ready to help you.
I hope you learned something new about tax incentives and I want to thank you for visiting.