A tax incentive can be one of the greatest sources of cash for a production, and can basically mean free money for your next film or TV show.
This can often account for 20%-30% of a project’s budget, and is used by small and large productions alike. Studios have entire divisions of well-paid executives studying tax incentives!
Every single filmmaker should consider how they can take advantage of a tax incentive when putting together their next project.
HOW DOES IT WORK?
A tax incentive is generated once your production has been completed. At that point, the state or country that you shot in will generate either a tax rebate check or a tax credit certificate for the agreed amount, and send it over to you.
This will be for a percentage of the amount of qualified expenses you’ve spent when shooting your film or TV show. The percentage amount varies from location to location.
If your film or TV show is financed entirely by equity investors or a studio, you can simply build the returns from the tax incentive into your recoupment plan. Once the production is completed, your investors will recoup the money it generates as part of their returns.
But what if you’re not backed by a studio, or don’t have enough equity finance to get you through the production? What if you can’t wait until the project is completed to get that money, but instead you need it now?
The answer, for many, is to ‘cash-flow’ the tax incentive and get that money up-front for use during the production itself.
What Does ‘Cash-Flowing A Tax Incentive’ Mean?
Cash-flowing a tax incentive describes the process of obtaining financing (usually in the form of a loan) secured uniquely against the tax incentive. The money generated by the loan can then be used for your production expenses.
So, let’s say you are you shooting in a state that offers you a tax rebate. Before you start production, you and your line producer calculate that the tax rebate will end up being worth $1m.
You can then take all your documentation to a financier (such as a bank) and tell them that you expect to generate a tax rebate of $1m once you have finished production.
The financier will do their own calculations on this and make sure that they agree with your figures. If they do, they will then lend you a certain amount of money secured against this tax credit.
This probably won’t be the full $1m (just in case there are any changes in your budget), but it may be $800k-$900k. That’s still a lot of money and could be the difference between your next film getting made or not!
They will also charge you some fees and interest for their trouble, which will probably be built into the loan as well.
Then, once the production is completed and the tax rebate check is generated, the financier will receive all the money they are owed from it.
Simple!
SOUNDS EASY
As with most things, it’s never quite as easy as it sounds...
Especially if you have a tax credit rather than a tax rebate, there are a few more steps involved (which we discuss in more detail in our book on tax incentives).
And it is not completely without risk. There are a few things that can go wrong and that you need to be aware of before you start spending all this free money.
But this is generally regarded as the simplest - and often the cheapest and least risky - form of production financing, and it is something that EVERY filmmaker should be aware of.
Not all projects will shoot in a location that offers a tax incentive. Sometimes there is a really good reason for this.
But if you are trying to mount a production, or creating a project and trying to make it attractive to investors, make sure you’re aware of any incentives that you might qualify for.
It could make all the difference in getting YOUR next film or TV show financed and produced!
Ricky Margolis has over 15 years' experience in the entertainment industry, and has been involved in the finance, development, production, and/or distribution of over 30 titles.
The above is an excerpt from his book "How The Hell... Do I Get My Film Financed? Book One: Tax Incentives". Click here to learn more about how you can use Tax Incentives to get YOUR next project financed and produced.
To check out all the books in our series "How The Hell... Do I Get My Film Financed?" on film & TV finance and production, please click here.
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