Cheaters Never Prosper (and Other Rules of Using Tax Credits)

Stick to the letter of the law, not just the spirit, or you'll end up repaying incentive cash

It’s no surprise finance plans contain tax credits as part of their budget.

However, many producers are naive about what the amount really is. Just because you want the amount to be a certain sum doesn’t make it so. You can’t take the gross credit and forget the discounted value that a lender will advance on. I and other financiers have spent countless hours combing through budgets, line by line, in search of expenses that won’t qualify or shouldn’t be advanced against.

Don’t get me wrong, I’m all for maximizing tax credit benefits. But it’s fascinating that, in a time when state incentive programs are cannibalizing each other in endless one-upmanship, producers continue to push the envelope on what legitimately qualifies as “qualified spending.”

THE PROBLEM: In some states, producers can legitimately net upwards of 30% of their budgets from state-backed incentives, but nefarious practices of grossing-up producer fees, inflating budgets, round-tripping, etc., still seem to persist.

THE SCENARIO: Iowa and Louisiana legitimately qualified round-tripped fees. Example: A producer is paid a $300,000 fee by the production, during principal photography, but then writes a check to the production for $150,000, as an “investment” in the film.

WHAT WENT WRONG?

1. Even though the spend was qualified, it still went against the “spirit” of the law. Which means you’ll probably get your credit, but when the legislators hear about it, they will kill the program.
2. The producer will be liable for income taxes from that $300,000 payment.
3. You defrauded the government. You’re not pulling a fast one against some fly-by-night production company, or Johnny-come-lately investor. The feds will catch up to you, as they are doing in Iowa.

Actual conversation conveyed to me at this last AFM:

BANKER: You do know who that is that just left your office.
FILM COMMISSIONER: Yes, that was Mr. Johnson, a producer
BANKER: You do know about his reputation for fraud, don’t you?
FILM COMMISSIONER: I was told it was forgery, not fraud.
JEFF STEELE: (in his head) What the %#&*!?

Coincidentally, this Mr. Johnson was also caught up in the Iowa fiasco, which continues to have a negative economic impact on the innocent local community.

SOLUTION: Ask yourself: is this money being spent on goods purchased within that state, or services performed within that state (aka “boots on the ground”)? Don’t qualify a producer fee for a writer’s manager who never stepped foot in the state.

If you still need help, the easiest way to make sure you’re not overestimating the value of your tax credits (lest you be stuck with a shortfall that you have to repay) is to use a company like Global Incentives or the Incentives Office, to not only vet your budget for qualified spending (while you’re creating your finance plan), but also to oversee production spending and manage the certification process.