GOVERNMENT INCENTIVE PROGRAMS
Three government incentive programs enable individuals and/or businesses to reap financial and personal benefits by investing in the production of a motion picture. These are the provisions of Section 181 of the IRS tax code that provides investors in a movie production with a 100% tax deduction, Act 88/89 (Section 235-17 of the Hawaii Revised Statutes) that provides investors in a movie production in Hawaii with a 20%-25% refundable tax credit, and the U.S. EB-5 visa program, which enables immigrant investors the opportunity to obtain an extended visa that may eventually gain them permanent resident status and possible U.S. citizenship with an investment of $1 million in a new or recently created U.S. business. If at all possible, YBS will attempt to utilize these programs for the benefit of the production and/or investor.
|The following information is provided as an overview of government programs that may possibly be applicable to financing a movie. As government programs and the rules that apply to each can change, interested parties are highly recommended to seek their own professional guidance for advice and consultation.|
Section 181 U.S. Tax Code¹
You’ve heard of farming subsidies. Well a few years ago forward-minded film lobbyists helped to create subsidies for the film industry. As they outlined the dangers of runaway film productions to Canada, Eastern Europe and Australia (and the loss of good old American tax dollars), Congress passed legislation that resulted in Section 181 of the IRS Tax Code. Put simply, Section 181 states that investment in a motion picture shot in the U.S. is 100% tax deductible for investors in the same year their money was invested. Depending on the relationship of investors to the movie production, money invested can be deducted from either passive or active income. At a minimum, under Section 181 investors may deduct the money which is invested in a film or television production from his or her passive income earned in the same year. However, if investors are actively involved in the operation of the production, they may deduct the amount of investment from all active income earned in the same year. This applies to all productions with budgets of $15,000,000 and below (up to $20,000,000 if shooting in an economically depressed area) which have at least seventy-five percent 75% of its production completed within the United States. A basic overview of the benefits of Section 181 is as follows:
• It is a tax deduction, not a tax credit.
• 100% of the motion picture costs are deductible in the same year of investment.
• $15 million budget cap ($20 million if shooting in an economically depressed area).
• There is no minimum film production budget cost.
• Applies to TV shows, short films, music videos, and feature films.
• Can be applied to passive income.
• Can be applied to ordinary income if the investor is actively involved in the movie.
• Investors can be either individuals or businesses.
• Section 181 is retroactive.¹
• If the film does not get distributed, Section 181 still applies with no penalty.
• Is based on the amount invested, not whether the investment is recouped.
State Film Production Incentives
The use of tax incentives and credits for movie production is a relatively recent concept, established as it became fairly acceptable that movies could be shot anywhere, and not just in the back lots of MGM or Universal Studios, and that such incentives could bring much valued production dollars into a state’s economy. The number of states offering film production incentives grew from just a handful in the early 2000s to a majority of states by 2010. Currently 39 states and Puerto Rico have some form of film production incentives on their books (March 2014).² Discussions as to the merits of each state program are an ongoing debate in each state and the resultant actions are as varied as the states themselves. In recent years, several states, including Arizona, Idaho, Indiana, Iowa, Kansas, Missouri and Wisconsin have ended their incentive programs, or have not included funding for future budgets. Connecticut suspended its incentives for film production, but maintains tax credits for other types of media. Other states have pared back their incentives packages, reducing the overall rebate a production can claim. At the same time, some states, such as Hawaii, have actually increased their allocations for film incentive programs, increasing the credit or rebate amount production companies can receive. Other states that have not previously had production incentives have now created programs. Beginning in 2014, Nevada’s new transferrable tax credit became available for productions that shoot at least 60 percent in-state and spend a minimum of $500,000. Over half of states with incentive programs require a production to spend a minimum amount on goods and services within the state. Another trend in production incentives over the past few years is an audit requirement before a production can receive a rebate or credit. At least 15 states now require an audit or other verification from production companies.³
Note: As our company is based in Hawaii, the following information on Hawaii’s progressive refundable tax program is provided, which would be available for those productions shot in the islands. This program is also referenced when determining possible benefits that may be derived given certain financing examples, as depicted in Movie Financing Scenarios. When considering projects based other than in Hawaii, the incentives offered by the state in which the production is shot should be consulted.
Act 88/89, Section 235-17, of the Hawaii Revised Statutes (HRS), provides a refundable income tax credit for each taxpayer with qualified production costs, up to a certain amount, incurred by each qualified production in any taxable year. A qualified production means a production, with expenditures in the State, for the total or partial production which includes a feature-length motion picture, short film, made-for-television movie, commercial, music video, interactive game, television series pilot, single season (up to twenty-two episodes) of a television series regularly filmed in the State of Hawaii (if the number of episodes per single season exceeds twenty-two, additional episodes for the same season shall constitute a separate qualified production), television special, single television episode that is not part of a television series regularly filmed or based in the State, national magazine show, or national talk show. The amount of the credit is 20% for any production filmed in any county of the State with a population of over 700,000 (basically, this is the island of Oahu), and 25% for any production filmed in a county with a population of 700,000 and less (all other islands). To qualify for this tax credit the production shall:
• Meet the definition of a qualified production.
• Have qualified production costs totaling at least $200,000.
• Provide the State, at a minimum, a shared-card, end-title screen credit.
• Provide evidence of reasonable efforts to hire local talent and crew.
• Provide evidence of financial or in-kind contributions or educational or workforce development efforts, in partnership with related local industry labor organizations, educational institutions, or both, toward the furtherance of the local film and television and digital media industries.
• Total tax credits claimed per qualified production shall not exceed $15,000,000.
The EB-5 Visa is a U.S. visa program administered by the United States Citizenship and Immigration Service (USCIS) designed for immigrant investors created by the Immigration Act of 1990. This visa program provides a method of obtaining a green card for foreign nationals who invest money in the United States. To obtain the visa, individuals must invest $1,000,000 (or at least $500,000 in a “Targeted Employment Area” – high unemployment or rural area), creating or preserving at least 10 jobs for U.S. workers excluding the investors and their immediate family. The investment can be made directly in a job-generating commercial enterprise (new or existing), or into a “Regional Center,” a 3rd party-managed investment vehicle (private or public), which assumes the responsibility of creating the requisite jobs. Regional Centers may charge an administration fee for managing the investor’s investment. When the foreign national investor’s petition is approved, the investor and their dependents will be granted conditional permanent residence valid for two years. Within the 90 day period before the conditional permanent residence expires, the investor must submit evidence documenting that the full required investment has been made and that 10 jobs have been maintained, or 10 jobs have been created or will be created within a reasonable time period. An investor in the EB-5 program may eventually apply for U.S. citizenship five years after the initial grant of conditional permanent residence. The advantages of the EB-5 program are as follows:
• Permanent residence for the whole family with one investment.
• Husband, wife and all unmarried children under 21 receive Green Cards.
• Live anywhere in the USA.
• Take any job, run or start any business, even retire.
• Any nationality may apply.
• No language requirement.
• Same privileges as a U.S. citizen such as free public school education, same university fees, access to Medicare after 5 years.
• Wider job market for investor’s children in the future.
• Citizenship after five years.
Note: Financing of movies for EB-5 purposes must be of an amount sufficient enough to meet the requirements of creating the minimum number of jobs for the expected time frame as stipulated in the regulations.
¹As has been the general process since it was first enacted in 2004, Section 181 has typically expired at the close of a calendar year and then has been subsequently extended for the ensuing year by Congress.
²Due to recent changes, current statuses may not reflect the designations portrayed in the inset photo.
³For more information and a overview of the programs offered in each state, a very good article can be found at the following link: http://www.ncsl.org/documents/fiscal/2014FilmIncentivePrograms.pdf