MOVIE FINANCING SCENARIOS

ADVISORY
The information provided in this section reflects hypothetical examples of the possible financial benefits that could be derived by utilizing government tax incentive programs generally available to those who finance movie productions. It is not intended to portray exact benefits according to the scenarios depicted for individual circumstances can be impacted by many variables - financial or otherwise - and result in different outcomes which can include not being able to utilize such programs. Reviewers are advised to consult with their financial adviser.

To get a better understanding of the unique and exciting advantages of financing a movie a couple of tables are provided. The first provides a variety of scenarios that describes how much one individual, at varying income levels, would benefit – as a percentage of their original contribution – from producing any of the low budget production types.¹ The second table provides even more scenarios by listing examples of each production type for each type of tax payer filing status.

Note: The following tables provide examples of benefits that could be derived using two government programs, Section 181 U.S. Tax Code and Section 235-17 Hawaii Revised Statutes. With respect to Section 181, it presumes that the person financing the movie is actively involved in the movie production and can therefore utilize the deduction towards ordinary income (for if the person is not actively involved said deduction may only be applied against passive income). With respect to HRS 235-17, as we are based in Hawaii, it assumes that the movie will be produced in Hawaii and therefore any applicable Hawaii tax benefits utilized. But as we are also able to film client productions in any of the 50 states, the estimated state benefits listed below would be replaced by the value of benefits derived from utilizing the state tax benefits associated with the state in which the movie would be shot. Today, the great majority of states have some type of movie tax credit program, some even more advantageous than what is provided in Hawaii. In all cases, when producing a client’s movie, a thorough analysis of the financial benefits of crafting a movie specific to any location in the U.S. will be conducted. For additional information see Government Incentive Programs.

Table I: Utilizing Tax Incentives Can Provide Benefits Of 30% To 40%

The following table provides examples of movies that could be made according to each of the low budget categories; with hypothetical incomes listed in order to demonstrate how the utilization of the U.S. tax deduction for financing movies (Section 181 U.S. Tax Code) and the Hawaii State refundable movie tax credit (Section 235-17 Hawaii Revised Statutes) can serve to reduce investment risk. Investment information for each production budget type is categorized according to each of the IRS tax filing statuses – single, married filing jointly, married filing separately, and head of household.² Figures appearing in bold are referenced in subsequent analyses for each budget type that are described after the table.

Budget Type:BCDE
Initial Production Investment:$1,000,000$500,000$150,000$50,000
Ordinary Income:$500,000$400,000$300,000$200,000
Standard Tax -Single:$154,369$115,606$82,606$49,606
Standard Tax - Married Joint:$143,916$107,529$74,529$43,052
Standard Tax - Married Separate:$170,958$131,358$91,758$53,765
Standard Tax - Head Of Household:$149,518$111,942$78,942$46,435
Section 181 U.S. Tax Deduction:$1,000,000$500,000$150,000$50,000
Adjusted Taxable Income:$0$0$150,000$150,000
Adjusted Tax - Single:$0$0$35,071$35,071
Adjusted Tax - Married Joint:$0$0$29,088$29,088
Adjusted Tax - Married Separate:$0$0$37,265$37,265
Adjusted Tax - Head Of Household:$0$0$32,435$32,435
Tax Savings - Single:$154,369$115,606$47,535$14,535
Tax Savings - Married Joint:$143,916$107,529$45,441$13,964
Tax Savings - Married Separate:$170,958$131,358$54,493$16,500
Tax Savings - Head Of Household:$149,518$111,942$46,507$14,000
Section 235-17 HRS Tax Refund:$200,000$100,000$0$0
Less Tax Refund Administrative Fee:$20,000$10,000$0$0
Tax Refund Passed On To Investor:$180,000$90,000$0$0
Single Filer Net Investment:$665,631$294,394$102,465$35,465
Married Joint Filer Net Investment:$676,084$302,471$104,559$36,036
Married Separate Filer Net Investment:$649,042$278,642$95,507$33,500
Head Of Household Net Investment:$670,482$298,058$103,493$36,000
Single Filer Percentage Benefit:33%41%32%29%
Married Joint Filer Percentage Benefit:32%40%30%30%
Married Separate Filer Percentage Benefit:35%44%36%33%
Head Of Household Filer Percentage Benefit:33%40%31%28%

B Budget Analysis

In our example above a tax payer has elected to finance a $1,000,000 movie and has an annual income that is $500,000. If the tax filer is single and files taxes as such the amount of taxes owed would be approximately $154,369. But as financing a motion picture allows the tax filer to deduct 100% of the production costs through Section 181, effectively the $1,000,000 deduction will reduce their income to $0. This means that the entirety of the $154,369 owed in federal taxes will be returned to the tax filer. In addition, because the production is at least $200,000 (a requirement of HRS 235-17), 20%² of the $1,000,000, which is $200,000, can eventually be refunded to the production. After accounting for an administrative fee to cover the costs to process this transaction, an estimated $180,000 can be returned to the tax filer. The total benefits that are returned for financing $1,000,000 is $334,369 (the estimated $180,000 in state tax refund along with an estimated $154,369 in a federal tax refund). When this is considered, in effect the tax filer has financed a $1,000,000 movie project but it has actually cost $665,631⁴ ($1,000,000 minus $334,369). This essentially means this individual has financed this movie on 67 cents for every dollar spent, since there is a 33% benefit for having invested $1,000,000.

C Budget Analysis

In our example above a tax payer has elected to finance a $500,000 movie and has an annual income of $400,000. If the tax filer is married and files a joint federal tax return, then the amount of taxes owed would be approximately $107,529. But as financing a motion picture allows the tax filer to deduct 100% of the production costs through Section 181, effectively the $500,000 deduction will reduce their income to $0. This means that the entirety of the $107,529 owed in federal taxes will be returned to the tax filer. In addition, because the production is at least $200,000 (a requirement of HRS 235-17), 20%³ of the $500,000, which is $100,000, can eventually be refunded to the production. After accounting for an administrative fee to cover the costs to process this transaction, an estimated $90,000 can be returned to the tax filer. The total benefits that are returned for financing $500,000 is $197,529 (the estimated $90,000 in state tax refund along with an estimated $107,529 in a federal tax refund). When this is considered, in effect the tax filer has financed a $500,000 movie project but it has actually cost $302,471⁴ ($500,000 minus $197,529). This essentially means this individual has financed this movie on 60 cents for every dollar spent, since there is a 40% benefit for having invested $500,000.

D Budget Analysis

In our example above a tax filer has elected to finance a $150,000 movie and has an annual income of $300,000. If the tax filer is married but is filing separately, then the amount of taxes owed would be approximately $91,758. But as financing a motion picture allows the tax filer to deduct 100% of the production costs through Section 181, effectively the $150,000 deduction will reduce their income to $150,000. This means that the initial $91,758 in federal taxes owed will be reduced to $37,265. This will result in a tax savings of $54,493 that will eventually be returned to the tax filer. Unfortunately HRS 235-17 requires a minimum investment of $200,000 so the 20%³ Hawaii State tax refund will not be applicable for these productions. As such, the amounts for the refund, administrative fee, and refund passed to the investor are all $0. Still, savings incurred from the U.S. tax deduction, coupled with the lower production budget makes this an attractive financing opportunity. The total benefit returned for financing $150,000 is $54,493 (the estimated U.S. tax savings). When this is considered, in effect the tax filer has financed a $150,000 movie project but it has actually cost $95,507⁴ ($150,000 minus $54,493). This essentially means the individual has financed this movie on 64 cents for every dollar spent, since there is a 36% benefit for having invested $150,000.

E Budget Analysis

In our example above a tax filer has elected to finance a $50,000 movie and has an annual income of $200,000. If the tax filer is filing as the head of the household, then the amount of taxes owed would be approximately $46,435. But as financing a motion picture allows the tax filer to deduct 100% of the production costs through Section 181, effectively the $50,000 deduction will reduce their income to $150,000. This means that the initial $46,435 in federal taxes owed will be reduced to $32,435. This will result in a tax savings of $14,000 that will eventually be returned to the tax filer. Unfortunately HRS 235-17 requires a minimum investment of $200,000 so the 20%³ Hawaii State tax refund will not be applicable for these productions. As such, the amounts for the refund, administrative fee, and refund passed to the investor are all $0. Still, savings incurred from the U.S. tax deduction, coupled with the lower production budget makes this an attractive financing opportunity. The total benefit returned for financing $50,000 is $14,000 (the estimated U.S. tax savings). When this is considered, in effect the tax filer has financed a $50,000 movie project but it has actually cost $36,000⁴ ($50,000 minus $14,000). This essentially means the individual has financed this movie on 72 cents for every dollar spent, since there is a 28% benefit for having invested $50,000.

Table II: When Financing Movies Focus On The “Net Cost”

The next table shows even more examples of possible financing scenarios. It has been formulated to reflect each of the different filing statuses for tax filers who are in the upper income brackets.⁵ In every example, one sees that regardless of the type of filing status, level of income, and type of movie production, the eventual net cost is significantly less than what would originally be financed.

Filing StatusTaxable IncomeStandard TaxProduction TypeInitial CostAdjusted IncomeAdjusted TaxTax SavingsTax RefundTotal BenefitsNet Cost
Single$150,000$35,071E$35,000$115,000$25,271$9,800N/A$9,800$25,200
Single$250,000$66,106E$100,000$150,000$35,071$31,035N/A$31,035$68,965
Single$400,000$115,606D$250,000$150,000$35,071$80,535$45,000$125,535$124,465
Single$1,000,000$352,369B$1,000,000$0$0$352,369$180,000$532,369$467,631
Married(J)$140,000$26,588E $45,000$95,000$15,344$11,244N/A$11,244$33,756
Married(J)$200,000$43,052D$130,000$70,000$9,581$33,471N/A$33,471$96,529
Married(J)$350,000$91,029C $350,000$0$0$91,029$63,000$154,029$195,971
Married(J)$400,000$107,529B$1,250,000$0$0$107,529$225,000$332,529$917,471
Married(J)$2,000,000$737,916B$1,500,000$500,000$143,916$594,000$270,000$864,000$636,000
Married(S)$110,000$24,326E$55,000$55,000$9,550$14,776N/A$14,776$42,244
Married(S)$150,000$37,265D$160,000$0$0$37,265N/A$37,265$122,735
Married(S)$220,000$60,650C$450,000$0$0$60,650$81,000$141,650$308,350
Married(S)$1,500,000$566,958A$1,750,000$0$0$566,958$315,000$881,958$868,042
HHH $120,000$24,323E$65,000$55,000$8,079$16,244N/A$16,244$48,757
HHH$200,000$46,435D$190,000$10,000$1,003$45,432N/A$45,432$144,568
HHH$350,000$95,442C$550,000$0$0$95,442$99,000$194,442$355,558
HHH$420,000$118,712A$2,000,000$0$0$118,712$360,000$478,712$1,521,288
HHH$3,000,000$1,139,518A$2,250,000$750,000$248,518$891,000$405,000$1,296,000$954,000

Table Analysis

Each of the four IRS tax filing statuses – single, married filing jointly (Married(J)), married filing separately (Married(S)), and head of household (HHH) – are provided under “Filing Status” along with a variety of example incomes which are listed under “Taxable Income”. Given these filing statuses and income figures the amount the tax payer would routinely be expected to pay in terms of federal taxes are listed under “Standard Tax.” Under “Production Type” are listed corresponding examples of one of the four low budget movie productions, along with a hypothetical financing budget under “Initial Cost”. Presuming this financial contribution the tax filer’s income is then reduced by the amount of the contribution due to the provisions of Section 181 of the U.S. Tax Code (again, the person must be actively involved in the production to qualify). This reduction is reflected under “Adjusted Income”. Given this reduction in taxable income, the individual’s tax is correspondingly reduced and this reduced tax liability is reflected under “Adjusted Tax”. The resultant figures listed under “Tax Savings” are the difference between the tax filer’s original taxes that would have been due (“Standard Tax”) less what would now be due after the Section 181 movie deduction was considered (“Adjusted Tax”). If the amount of the movie production budget is at least $200,000 (and this amount is spent entirely in the State of Hawaii), then an expected refundable Hawaii State tax credit (HRS 235-17) would be provided back to the tax filer and that estimated amount is listed under “Tax Refund”.⁶ The combination of the individual’s tax savings and possible tax refund is reflected under “Total Benefits”. This amount is then subtracted from the tax filer’s original contribution to produce the amounts listed under “Net Cost” to reflect what the tax filer would have ultimately financed their movie for after the tax incentive programs were applied.

Combining Low Budgets With Tax Incentives Lowers Financial Risk

What the examples demonstrate is that by utilizing at least Section 181 of the U.S. Tax Code to deduct the cost of financing a movie against one’s taxable income, and, for productions of at least $200,000, benefiting from Section 235-17 of the Hawaii Revised Statutes, the actual cost of financing a movie can be significantly less than the original amount.

 

¹A Budget movies are productions with budgets above $1,500,000 to $2,500,000. B Budget movies are productions with budgets above $700,000 to $1,500,000. C Budget movies are productions with budgets above $250,000 to $700,000. D Budget movies are productions with budgets above $100,000 to $250,000. E Budget movies are productions with budgets above $20,000 to under $100,000.

²Estimated taxes are calculated utilizing the 2015 IRS Tax Table and Tax Computation Worksheet.

³The 20% refund rate assumes the movie production is filmed on the island of Oahu. Should a production take place on any of the outer islands (e.g. Hawaii, Maui, Kauai, etc.) the refund rate is increased to 25%.

It should be noted that in all cases involving net revenue distribution from any movie sales realized – see Proposed Return Schedule – the amount returned is based on the original amount financed regardless of any government incentive programs providing significant financial benefits to the individual.

⁵The standard taxes depicted in the table above were calculated using the 2015 Tax Computation Worksheet for incomes of $100,000 and greater. Adjusted taxes were calculated using both the worksheet and the tax table depending on the amount of the adjusted income.

⁶The figures listed utilize the 20% refund ratio (for productions filmed on Oahu, Hawaii) and deduct a standard transaction fee of 10% for LegacyVision Films monitoring the application process to eventually obtain the credit. It should be noted that while the refund is typically returned after the production has been completed, there is an option of monetizing the tax refund prior to or during the movie production and contributing it as an added contribution to the movie budget. In such cases a greater transaction fee will be required. 

 

 

 

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