May 7, 2025 • 26 mins
In this episode, Jeff Deverett dives into the world of tax credits for indie filmmakers. He covers:
- The Dos and Don’ts: Essential tips for navigating the tax credit process successfully.
- Financing Complexities: An in-depth look at how getting financing can be a tangled web.
- Tax Credit Routes: Exploring different ways to receive tax credits, including refundable and transferable options, depending on your state.
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Transcript
Episode Transcript
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Speaker 1 (00:00):
Everybody talks about film tax credits, as you should if
you're an indie filmmaker. Film tax credits are super super important.
They could be a huge, huge contribution to your financing.
But what really are they? What is a film tax credit?
How do you really get it? How much do you
actually really get You need to know the reality of
(00:22):
film tax credits. If you want to be a successful
indie filmmaker, you need to know a lot about not
just the production of movies, but the business. We are
going to tell you the truth and reality of what
really happens in the indie film business. Okay, So remember
(00:44):
I said in the last episode, or actually two episodes ago,
I said that the most of the money that is
going to come from financing your movie is going to
come from high net worth individuals, from Uncle Charlie. That's
where the money is going to come from. And then
last episode we talked about a pitch for Uncle Charlie.
So a lot of people say to me, but what
about film tax credits? I mean that could be twenty
(01:07):
five or even thirty percent of your budget. I mean
that's a big amount. How come you don't talk about that?
Why don't you say that you know, twenty five percent
is going to come from a film tax credit, then
the other seventy five percent from Uncle Charlie. And the
answer is, it's not going to happen that way. See,
it's all about timing. So let's talk about what a
(01:28):
film tax credit is and why it doesn't work the
way you just think it's going to. A film tax
credit is basically an amount of money that you were
going to receive back based on how much money you
spent on the making of your movie, and you're going
to get that money back, usually a year or two
after you make the film, meaning that you're not going
(01:51):
to have that money to use to actually make the film.
That's why I don't include tax credits as part of
the financing package, because the financing package is the money
that you need to make the movie. I talk about
tax credits as revenue that is actually going to come
back to you afterwards to recoup your investment. So let's
(02:13):
just go back and review that for a second. If
you need eight hundred thousand dollars to make the movie,
seven hundred thousand to make it, and one hundred thousand
dollars to do the marketing, that's the example I used
in the last episode. You're going to ask Uncle Charlie
for eight hundred thousand dollars. Then Uncle Charlie's going to say, well,
aren't you getting a tax credit? And you're gonna say, yeah,
we're hoping to get a tax credit. And just to
make the math simple, let's call the tax credit twenty percent.
(02:36):
All right. We're going to go through the details of
a tax credit in a minute. But let's say that
you expect to get twenty percent of seven hundred thousand
dollars your production budget. You're not going to get it
on your marketing, all right, You're only going to get
it on your making. So you're going to get one
hundred and forty thousand dollars back. So Uncle Charlie's going
to say, well, the government of let's just call it Oklahoma,
(02:57):
the state of Oklahoma, their program is actually twenty five
five percent, and actually thirty percent if you shoot regionally.
All right, but let's say you're gonna get twenty percent back.
They're going to give you one hundred and forty thousand dollars.
Why do I need you to give you seven hundred
thousand to make your movie when you're gonna get one
hundred and forty from them. You say, that's correct, Uncle Charlie.
We are going to get one hundred and forty from them,
but we're not going to get it for a year
(03:19):
after we've actually made the movie. So we need the
one hundred and forty thousand dollars today to make the
movie in order to pay the crew, the cast, the locations,
the equipment, we have to pay for everything. The seven
hundred thousand dollars is what we need to pay today
to make the movie in order to qualify to get
(03:40):
the one hundred and forty thousand dollars back in a
year from now after they process all of our expenditures.
So we're going to have a serious cash flow issue
if you only give us, say five sixty, because we're
gonna run out of money because the State of Oklahoma
is not going to give us the money back for
another year. We're gonna be short one hundred and forty
thousand dollars to pay our cast and our crew and
(04:02):
our equipment. So we're not going to be able to
actually finish the movie because we're not going to have
the cash. So I got a better idea, Uncle Charlie.
Why don't you give us the full seven hundred thousand
for the production funds today, and then in a year
from now, when the State of Oklahoma gives us back
one hundred and forty thousand, we'll just give it right
back to you. So in essence, you've given us really
(04:24):
net five sixty seven hundred minus one forty it's a
year difference. So Uncle Charlie will say to you, my
friend told me that you could take your commitment letter
from the state of Oklahoma, and again I'm just using
the state of Oklahoma made that up. I could be
one of any twenty eight or thirty states to give
tax credits, all right. You could take that to the
bank and show them that Oklahoma's committed to giving you
(04:46):
one hundred and forty thousand dollars based on your qualified expenditures,
which I'm going to get into in a minute, all right,
and they'll lend you the money. Why should I give
you the money when you could borrow that money upfront
against the commitment? And you say, fair enough. While that
might be true, let me explain the math on doing
that to you. If I go to the bank to
(05:06):
borrow one hundred and forty thousand dollars based on that commitment. Then,
first of all, and this, by the way, is the reality.
All right, everybody's gonna tell you, Oh, that's the simple math.
Go borrow one hundred and forty thousand from a bank. Yeah,
no problem. Have you ever tried to borrow one hundred
and forty thousand dollars from a bank for a tax credit?
Let me tell you exactly what's gonna happen. Remember this
(05:27):
is called truth and reality. Here's the truth and reality
of borrowing one hundred and forty thousand dollars against a
tax credit commitment. The bank is going to say, we
will lend you seventy five percent of that. We will
only lend you a three quarters of that amount, just
in case you misdid your tax credit calculation or you
(05:47):
come in at the wrong number. We don't want to
take the full risk. We're gonna say, lend you, just
to make the math simple, one hundred thousand of the
one hundred and forty thousand. The cost of making that loan,
We're gonna charge you fifteen percent in interest per year.
If you lean for a year, is going to be
fifteen thousand dollars in interest and there's gonna be twenty
five thousand dollars in setup fees and legal fees to
(06:08):
do the loan, and we're gonna make you personally guarantee it.
So right away, you've got twenty five thousand dollars in
legal and setup fees, you've got fifteen thousand dollars in interest,
and they're only loaning you one hundred thousand dollars, So
you're gonna get net sixty thousand dollars from your one
hundred and forty thousand dollars tax commitment. So now you're
gonna get sixty thousand dollars up front. Because you have
(06:31):
to reserve the other twenty five for setup fees and
fifteen in interest to pay the bank back, you're still
gonna be short ninety thousand dollars just based on the
fees and the interest, you're going to be short that
amount of money. So you're still going to run it
into a cash flow issue, not to mention that you
have to personally guarantee the loan. Anyways, and by the way,
(06:52):
the banks aren't being evil. If I was a bank,
I would do the same thing. They don't want to
take the movie over. This is not one hundred million
dollar epic Marvel Fell. This is a low budget, seven
hundred thousand dollars indie film. They're worried you're even gonna
finish it. They might say to you, you need to
get a completion bond, meaning like an insurance policy, saying
that if you don't even complete the movie, that somebody's
(07:14):
gonna take it over and complete it for you. That's
gonna cost you another twenty thousand dollars. All of a sudden,
you've eaten up your entire tax credit trying to get
a loan on your tax credit. It's not worth it, folks.
The math does not make sense on borrowing money against
a low budget indie film tax credit. The numbers don't
work out just the cost of setting up the loan,
(07:37):
say twenty five thousand dollars. Again, I'm making that number up.
It could be high, it could be low. It's in
the ballpark against one hundred and forty thousand dollars loan,
which is only going to be one hundred thousand dollars loan.
When you're talking about a you know, a five million
or ten million dollar loan, and you're spending twenty five
to fifty thousand on legal fees. That's not a big deal.
But when you're talking about one hundred thousand dollars loan,
(07:58):
that's a huge amount out of the loan amount. The
math doesn't make sense to do that, all right, So
do not think that you're going to finance your tax credit.
Even if you could get a bank to loan you,
it's not worth it to you. It's going to eat
up most of the credit. So don't consider a tax
credit as financing for your movie. Consider it as revenue
(08:21):
afterwards that you're going to recoup your investment from. That's
part of the revenue stream, because that is realistically how
it's going to work. If you're lucky, you'll get the
money in a year. Some jurisdictions take two years, some
even take longer, and that's assuming you're super organized. You
get everything in on time, you get your audit done,
you get everything done properly. So that's the reality. So
(08:42):
what I'm saying is, get the entire amount from Uncle Charlie.
Get this seven hundred thousand dollars of production funding from
Uncle Charlie upfront, because you're going to need it to
cash flow your movie, and consider your tax credit as
revenue and give it back to Uncle Charlie afterwards when
you get it. Don't put it into your financing plan
and think that you're going to get it from a bank,
because you won't. All right, now, let's look at what
(09:04):
tax credits actually are. So people use the words tax
credit very loosely. There are about thirty states right now
in the United States that give what we call financial incentives.
Some of them are tax credits, but some of them
actually aren't tax credits. Some of them are just basically
grants or rebates. They're giving you the money and it's
(09:25):
not necessarily about anything to do with tax So I'm
going to sort of debunk the myths of what all
these things are. It's a little complicated and I'm not
going to go into a ton of detail. So viewers
who have questions, if you want to write in, we
can get into more detail. But if you really really
want to know about this stuff, go either read about
(09:46):
it more online or go see your accountant and get
the reality of it. All right, there's kind of three
levels or three styles. The first style there's these states
state thirty states right now in the United States that
say to filmmakers we want you to bring your film
to our state. Why they want you to spend the
(10:08):
money that you're going to use to make the film.
That's seven hundred thousand dollars that we keep talking about.
They want you to spend it in their local economy.
Sixty percent of that money is going to be spent
on labor approximately. Okay, that's more or less. When you
look at a film, budgets sixty percents about labor on
a low budget indie film. So you're going to spend
four hundred and twenty thousand, sixty percent of seven hundred
(10:29):
thousand employing people in their jurisdiction. That's good job creation.
They want job creation. The other amount you're going to
spend the other three hundred, two hundred and eighty thousand dollars,
you're going to be spending it on goods and services,
So that's going to stimulate their economy. You're going to
be using their hotel rooms, their equipment suppliers, their ubers,
(10:50):
their food suppliers, all their services. You're going to be
spending money in their state as opposed to another state.
One seven hundred thousand dollars film is not going to
change the needle but once you start looking at hundreds
of films or hundreds of bigger films, like in the
state of say Georgia, where they're doing billions of dollars
worth of production, that creates a lot of economic stimulation
(11:12):
in that economy. Hence the reason that states like to
attract that business. Now, states don't just give tax credits
and the financial incentives to films. They give it to
lots of other industries as well, research and development, biotech, mining,
all kinds of industries get these credits because states want
the labor and the economic activity to come to their state,
(11:34):
all right, So films is just one of those categories,
and it has been a very lucrative category for lots
of states. I mean today the biggest state is Georgia
is doing the most. California, where I live, is trying
to catch up, but we have a limited amount. George's
got an unlimited amount of tax credit, so they do billions.
We do here in California three hundred and thirty million.
The governors trying to increase that. Double it and we'll
(11:57):
see what happens. Louisiana used to do big numbers. New Mexico,
New York's doing huge numbers. Now they're using these financial
incentives to attract the business to come to their economies
so that people will spend the money in their economies
and create jobs and other economic activity. That's the reason
it's done. Now. There's lots of arguments, by the way,
(12:18):
from a lot of legislatures saying it's not worth it.
We're spending more than the benefit that we're getting. So
I love reading about this stuff. I find it fascinating.
I know you probably find it super boring reading tax
analysis and all this kind of stuff, But like, is
a tax credit actually good for the local economy or bad?
So I love that. That's another lecture for another time
in another webcast, because I'm not going into that, but
(12:41):
I do enjoy trying to understand that. So let's look
at what these financial incentives are, all right. So the
first type of financial incentive is called a rebate. So
a rebate is basically giving money back to a filmmaker
based on the amount of money that they spend in
the local economy, based on expenditures that the government there
(13:03):
wants them to spend on. Call it the Film Commission
of the state will have a list in their financial
incentive program and say, here's what you need to spend on,
and these are what we call qualified expenditures, right, these
are expenditures that qualify for an incentive. So, say the
(13:23):
state of Oklahoma says to you, if you spend money
on our local labor, on our trucks, on our equipment,
on our locations, our hotels, and they list it, and
the lists are very long, like hundreds and hundreds of
items of things that are qualified expenditures, then we will
give you back thirty cents for every dollar you spend
(13:44):
thirty percent. I'm just using that as a number. Sometimes
it's thirty five, sometimes it's twenty five, it's twenty depending.
So basically, after you're finished shooting, you keep your receipts,
you keep everything in order because you need to prove
to us that you actually made those expenses. And to
prove it to us, you're going to submit your reports.
But you're also going to have to have an audit done.
(14:06):
So you're going to hire a CPA firm, registered CPA firm.
They're going to do an audit on your expenses and
they're going to verify that you actually spend the money
that you did. And once we verify that, we're going
to give you back thirty percent of that as a
reward for spending your money in our state on our
people and our qualified expenditures. That's fantastic and it works.
(14:27):
And if you keep your expenses proper and you get
the audit done and everything like that, you're going to
get your money. It's going to take about a year
from the end of the time you finished shooting, and
then you've got to post and do all this kind
of stuff. Depending on where you spend your money, it's
about a year to get that money. You know. Sometimes
it's longer depending on the jurisdiction because they're backed up
a little bit more so, say a year to two years.
(14:47):
Sometimes you get it quicker. Certain jurisdictions are very quick.
But you're going to get that money. It's fantastic. Now,
a thirty percent rebate means they're just going to send
you a check for thirty percent of your qualified expend
You're not going to have to file taxes, you're not
gonna have to go through the tax department. It means
you spend the money here, we are going to reward you.
(15:07):
We're sending you back a check against that money. So
people still call that a tax credit, but it's actually
not a tax credit. It's a rebate. It's a gift
back to you, rewarding you for spending your money. That's
level one. Level two is what we call a tax credit.
So now they're going to say to you, same type
of things, spend your money on. These qualified expenditures will
(15:29):
give you thirty percent of it. So let's say that
you have a tax credit. I'm just going to gain
make up a number of two hundred thousand dollars. We're
going to send you a check for two hundred thousand dollars,
all right, So then they say to you, okay, but
we're not sending you a check in the case of
a tax credit. What we're gonna do is if you
have taxes owing in our state. So you have a
(15:51):
company here and you've generated a certain amount of profit,
and you have taxes owing against that profit, you can
offset those taxes owing with the amount of tax credit
we gave you. So if you have two hundred thousand
dollars of taxes owing to the government based on your
profitability as in your company, then we will allow you
(16:13):
to take that tax credit. You aren't and reduce your
two hundred thousand dollars by two hundred thousand and pay
US zero. You don't know any taxes because you've got
a tax credit of two hundred thousand. So that's an
offsetting and that's actually a real tax credit, where you're
getting the credit to offset the amount of taxes that
you have to pay. That's a true tax credit. Now,
(16:33):
what happens if you don't have any business in that state? Like,
for instance, I live in California and I go shoot
my movie in Oklahoma, which, by the way, I did.
I shot a movie there, Okay, but I don't have
a business there. I don't have any revenue. I don't
have any taxes. Owing, well, that's a rebate program. But
let's say it was a tax credit. Right then they
say to me, we're going to give you a tax credit,
(16:56):
and I say, well, that's wonderful, but I don't owe
any tax Is what am I going to do with
a two hundred thousand dollars tax credit if I don't
have to pay tax because I didn't earn any revenue here.
So some say say too bad. And if they're going
to say too bad, that's not good for you because
you're going to basically walk away from that whole program.
You just spend all your money there for the reason
(17:17):
of getting the tax credit. So they say, what will
allow you to do is you can sell your tax
credit to a local company that actually does have taxes owing.
So there's a lot of big companies that have a
lot of taxes owing and they'd be willing to buy
your tax credit from you. Why would they want to
buy your tax credit because you're going to have to
(17:39):
sell it at a little bit of a discount. So
if you have a two hundred thousand dollars tax credit,
they might say to you, will give you one hundred
and eighty five thousand dollars for your tax credit, so
you'll get that, will write you a check for that,
and then we'll take that tax credit and offset two
hundred thousand dollars worth of taxes. So they're getting a
fifteen thousand dollar benefit from buying your tax credit from you.
(18:03):
And that is what we call a transferable tax credit.
So you're transferring your tax credit because you can't use
it to a company that can at a discount. Now,
you're also probably going to need a broker to do
that because somebody is going to have to figure out
who's buying credits and who's selling them. So there's a
broker involved, just like there are in real estate deals
(18:23):
or any deal, and they'll take a little bit of
a commission, you know, two or three or maybe five
percent or something on that sale. So maybe you've discounted
it by fifteen percent, and then you have to pay
a brokerage free of say five thousand. So you're going
to get one hundred and eighty thousand dollars on your
two hundred thousand dollars tax credit just because you had
to sell it. Because you're not eligible. You don't have
(18:44):
taxes owing, so you can't use it for anything that's
called transferable. Now. The only other sort of level is
sort of a combination of rebatable and transferable. So let's
say that you have two hundred thousand dollars tax credit,
right and you have one hundred thousand dollars of taxes owing,
(19:05):
so you can't use your whole tax credit. But you
actually have business and you have one hundred thousand dollars
a tax credit, but you have a two hundred thousand
dollars tax credit. So what you can do in certain states,
is you can take the two hundred thousand, use one
hundred thousand of it to offset the one hundred thousand
dollars in tax credit owing. So now you've got an
extra hundred thousand that you didn't do. Then the state
(19:27):
will refund it to you. They'll actually send you a
check for the difference. That's called a refund, and that's
called a refundable tax credit, meaning the difference between what
you offset your taxes and what the tax credit is.
That's the amount of refund you're going to get. Now,
all of this sounds like a lot of Google egoch,
I'm sure to a lot of you. Why because your filmmakers,
(19:50):
who make films, your artists, and this is all accounting
tax talk. I mean when I teach my students this,
their eyes roll to the back of their head and
their head spins around. Literally, this makes everybody's head spin
what I just talked about. So here's the thing. You
do not have to know how to do this stuff.
You just have to know that it exists, all right.
(20:10):
As an artistic filmmaker, I don't expect you to understand
tax credits. I mean I understand it because I teach
it and I do it, and I like it, and
I have a finance background, all right, so that's why
I understand it. But you don't need to know the
details that I just explained. You just have to understand
that this stuff exists, and you have to know that
it's accessible and that you should be looking into it
(20:32):
and assessing it for your project because it helps it's
revenue afterwards that is going to help recoup your investment.
So don't leave it on the table, and just understand
the narrative that people who are going to process it
for you are talking about. So hire a lawyer, hire
an accountant, hire a producer or somebody who understands how
(20:54):
to do this stuff and let them do it for you.
Let them assess it, figure it out, manage it for you.
You'll obviously pay them a fee, but it's worth it
because there's a lot of money involved here, and if
it's going to make your head spend, no problem. Just
understand that it needs to get done. It's another one
of these things that that's not your skill set, but
it's somebody else's, So bring them in to let them
(21:17):
help you manage that, all right. I just explain on
a very sort of cursory level how it all works.
But if you don't want to go down that road,
don't worry. Just understand that you should be accessing these
incentives because they're important and they matter. I don't want
to complicate a little bit more, but I do have
to explain this one component because this is super important.
(21:38):
So a lot of people get this wrong. They just
assume that the amount of the tax credit program is
the amount that they're going to get in a tax
credit or in a financial incentive, and that is usually
never the case. It's very rare. So if a program says,
let's say a twenty five percent tax credit program, let's
(22:00):
make the math simple. Okay, you're spending a million dollars
in a state and they say you're getting twenty five
percent tax credit. Well, first of all, you're only getting
twenty five percent on the eligible expenditures. Remember, it's only
the things that they say you have to spend your
money on. Now, I am telling you from experience that
even if you use all the resources, even if you
(22:22):
spend everything in that state, there's some things that you're
going to have to spend on that are not going
to be eligible expenditures. So on average, only ninety percent
of your expenditures are going to be eligible or qualified expenditures.
Qualified was the word I use. Right The other ten percent,
even though you're spending the money there, they're just not
(22:44):
on the list of qualified expenditures. So right away, you're
only going to get twenty five percent of nine hundred thousand,
not a million. So that's going to take the amount down.
So now instead of getting two hundred and fifty thousand,
maybe you're getting ten percent two hundred and forty thousand,
So right away you're not getting twenty five percent. Then
(23:05):
if you have to sell your credit, then you're gonna
have to discount it. You might have to discount it
by ten to fifteen percent. You might have to pay
a broker another five percent. So right away, that's going
to reduce the credit by another, say, fifteen to twenty percent.
So now all of a sudden, you're two hundred and
forty thousand dollars. Tax credit might be worth two hundred thousand.
(23:27):
And again I'm not doing the math properly here. Okay,
I could do it on a computer for you, but
I'm just trying to simplify it. So now all of
a sudden, you have a two hundred thousand dollars tax
credit on a program that was twenty five percent, and
you factored in that, you're getting twenty five percent of
a million. You factored in two hundred and fifty thousand,
but in essence, you're only getting two hundred thousand, and
by the way, it's going to take you two years
(23:48):
to get it. So if you borrowed money against it,
it might be another fifty thousand dollars in interest in
borrowing fees, which means you're only going to get one
hundred and fifty. But let's not factor that in. Okay,
so you your twenty five percent tax credit in essence
is actually only worth twenty percent. That's the reality. So
when you're doing your planning, this is money you're getting
(24:11):
back after the fact. So this is revenue coming in.
So when you factored into that, what it's really going
to be two hundred thousand, twenty percent, not twenty five percent,
even though the program states twenty five percent. But I'm
telling you from experience, a lot of these expenditures won't qualify,
and then there's going to be fees and other costs
(24:32):
and everything to actually process it and put it through,
not to mention the cost of doing the audit, the
cost of applying for the tax credit. There's other administrative
costs that I didn't even factor in that are going
to reduce the effective net amount of the tax credit.
In essence, I am telling you from experience that most
(24:52):
financial incentives i e. Tax Credit amounts come in at
about seventy five to eighty percent of what the program
actually is. So if it says it's a thirty five
or thirty percent tax credit, you're probably gonna get twenty
one percent or twenty two percent or something like that.
All right, You're not gonna get thirty percent, because I'm
(25:15):
talking after all of the costs, all of the elements
are factored in. So so many filmmakers make the mistake
of saying, when they're doing their plans, oh, got a
million dollar film, thirty percent tax credit, three hundred thousand dollars,
that's my revenue. No, No, it's gonna be two hundred
and twenty thousand dollars. If you actually know what you're
doing and you know how this this whole system works.
(25:37):
So just be real, be practical, so that you don't
have to be disappointed because In this case that I
just gave, you're going to be eighty thousand dollars is
seventy two seventy eight thousand dollars out of pocket that
you planned for from a tax credit that you never got,
and that's not going to look good on you. It's
gonna be disaster because the money all of a sudden
disappeared because you didn't know how to factor it in.
(25:58):
And again this all comes with ex experience. So that's
why I say, if you don't know what you're doing,
deal with somebody who does, and who tells you the
truth and is honest and works out the net amounts
exactly right. But in the end, these are great, great
incentive programs, so tap into them as much as you can.
All right. They're all over the place. Check them out,
read about them, and get somebody to hold your hand
(26:20):
who knows them better than you do, and then you
will get the benefit of them. So good luck. I
encourage all of my listeners to send me questions if
they're curious about certain topics or they want more information
on things that I've spoken about. So my email address
is Jdeverrett at Deverettmedia dot com. It will be in
(26:41):
the show notes, and feel free to send in your
questions and we will hopefully be able to get to
them and expand and give you the answers
Everybody talks about film tax credits, as you should if
you're an indie filmmaker. Film tax credits are super super important.
They could be a huge, huge contribution to your financing.
But what really are they? What is a film tax credit?
How do you really get it? How much do you
actually really get You need to know the reality of
(00:22):
film tax credits. If you want to be a successful
indie filmmaker, you need to know a lot about not
just the production of movies, but the business. We are
going to tell you the truth and reality of what
really happens in the indie film business. Okay, So remember
(00:44):
I said in the last episode, or actually two episodes ago,
I said that the most of the money that is
going to come from financing your movie is going to
come from high net worth individuals, from Uncle Charlie. That's
where the money is going to come from. And then
last episode we talked about a pitch for Uncle Charlie.
So a lot of people say to me, but what
about film tax credits? I mean that could be twenty
(01:07):
five or even thirty percent of your budget. I mean
that's a big amount. How come you don't talk about that?
Why don't you say that you know, twenty five percent
is going to come from a film tax credit, then
the other seventy five percent from Uncle Charlie. And the
answer is, it's not going to happen that way. See,
it's all about timing. So let's talk about what a
(01:28):
film tax credit is and why it doesn't work the
way you just think it's going to. A film tax
credit is basically an amount of money that you were
going to receive back based on how much money you
spent on the making of your movie, and you're going
to get that money back, usually a year or two
after you make the film, meaning that you're not going
(01:51):
to have that money to use to actually make the film.
That's why I don't include tax credits as part of
the financing package, because the financing package is the money
that you need to make the movie. I talk about
tax credits as revenue that is actually going to come
back to you afterwards to recoup your investment. So let's
(02:13):
just go back and review that for a second. If
you need eight hundred thousand dollars to make the movie,
seven hundred thousand to make it, and one hundred thousand
dollars to do the marketing, that's the example I used
in the last episode. You're going to ask Uncle Charlie
for eight hundred thousand dollars. Then Uncle Charlie's going to say, well,
aren't you getting a tax credit? And you're gonna say, yeah,
we're hoping to get a tax credit. And just to
make the math simple, let's call the tax credit twenty percent.
(02:36):
All right. We're going to go through the details of
a tax credit in a minute. But let's say that
you expect to get twenty percent of seven hundred thousand
dollars your production budget. You're not going to get it
on your marketing, all right, You're only going to get
it on your making. So you're going to get one
hundred and forty thousand dollars back. So Uncle Charlie's going
to say, well, the government of let's just call it Oklahoma,
(02:57):
the state of Oklahoma, their program is actually twenty five
five percent, and actually thirty percent if you shoot regionally.
All right, but let's say you're gonna get twenty percent back.
They're going to give you one hundred and forty thousand dollars.
Why do I need you to give you seven hundred
thousand to make your movie when you're gonna get one
hundred and forty from them. You say, that's correct, Uncle Charlie.
We are going to get one hundred and forty from them,
but we're not going to get it for a year
(03:19):
after we've actually made the movie. So we need the
one hundred and forty thousand dollars today to make the
movie in order to pay the crew, the cast, the locations,
the equipment, we have to pay for everything. The seven
hundred thousand dollars is what we need to pay today
to make the movie in order to qualify to get
(03:40):
the one hundred and forty thousand dollars back in a
year from now after they process all of our expenditures.
So we're going to have a serious cash flow issue
if you only give us, say five sixty, because we're
gonna run out of money because the State of Oklahoma
is not going to give us the money back for
another year. We're gonna be short one hundred and forty
thousand dollars to pay our cast and our crew and
(04:02):
our equipment. So we're not going to be able to
actually finish the movie because we're not going to have
the cash. So I got a better idea, Uncle Charlie.
Why don't you give us the full seven hundred thousand
for the production funds today, and then in a year
from now, when the State of Oklahoma gives us back
one hundred and forty thousand, we'll just give it right
back to you. So in essence, you've given us really
(04:24):
net five sixty seven hundred minus one forty it's a
year difference. So Uncle Charlie will say to you, my
friend told me that you could take your commitment letter
from the state of Oklahoma, and again I'm just using
the state of Oklahoma made that up. I could be
one of any twenty eight or thirty states to give
tax credits, all right. You could take that to the
bank and show them that Oklahoma's committed to giving you
(04:46):
one hundred and forty thousand dollars based on your qualified expenditures,
which I'm going to get into in a minute, all right,
and they'll lend you the money. Why should I give
you the money when you could borrow that money upfront
against the commitment? And you say, fair enough. While that
might be true, let me explain the math on doing
that to you. If I go to the bank to
(05:06):
borrow one hundred and forty thousand dollars based on that commitment. Then,
first of all, and this, by the way, is the reality.
All right, everybody's gonna tell you, Oh, that's the simple math.
Go borrow one hundred and forty thousand from a bank. Yeah,
no problem. Have you ever tried to borrow one hundred
and forty thousand dollars from a bank for a tax credit?
Let me tell you exactly what's gonna happen. Remember this
(05:27):
is called truth and reality. Here's the truth and reality
of borrowing one hundred and forty thousand dollars against a
tax credit commitment. The bank is going to say, we
will lend you seventy five percent of that. We will
only lend you a three quarters of that amount, just
in case you misdid your tax credit calculation or you
(05:47):
come in at the wrong number. We don't want to
take the full risk. We're gonna say, lend you, just
to make the math simple, one hundred thousand of the
one hundred and forty thousand. The cost of making that loan,
We're gonna charge you fifteen percent in interest per year.
If you lean for a year, is going to be
fifteen thousand dollars in interest and there's gonna be twenty
five thousand dollars in setup fees and legal fees to
(06:08):
do the loan, and we're gonna make you personally guarantee it.
So right away, you've got twenty five thousand dollars in
legal and setup fees, you've got fifteen thousand dollars in interest,
and they're only loaning you one hundred thousand dollars, So
you're gonna get net sixty thousand dollars from your one
hundred and forty thousand dollars tax commitment. So now you're
gonna get sixty thousand dollars up front. Because you have
(06:31):
to reserve the other twenty five for setup fees and
fifteen in interest to pay the bank back, you're still
gonna be short ninety thousand dollars just based on the
fees and the interest, you're going to be short that
amount of money. So you're still going to run it
into a cash flow issue, not to mention that you
have to personally guarantee the loan. Anyways, and by the way,
(06:52):
the banks aren't being evil. If I was a bank,
I would do the same thing. They don't want to
take the movie over. This is not one hundred million
dollar epic Marvel Fell. This is a low budget, seven
hundred thousand dollars indie film. They're worried you're even gonna
finish it. They might say to you, you need to
get a completion bond, meaning like an insurance policy, saying
that if you don't even complete the movie, that somebody's
(07:14):
gonna take it over and complete it for you. That's
gonna cost you another twenty thousand dollars. All of a sudden,
you've eaten up your entire tax credit trying to get
a loan on your tax credit. It's not worth it, folks.
The math does not make sense on borrowing money against
a low budget indie film tax credit. The numbers don't
work out just the cost of setting up the loan,
(07:37):
say twenty five thousand dollars. Again, I'm making that number up.
It could be high, it could be low. It's in
the ballpark against one hundred and forty thousand dollars loan,
which is only going to be one hundred thousand dollars loan.
When you're talking about a you know, a five million
or ten million dollar loan, and you're spending twenty five
to fifty thousand on legal fees. That's not a big deal.
But when you're talking about one hundred thousand dollars loan,
(07:58):
that's a huge amount out of the loan amount. The
math doesn't make sense to do that, all right, So
do not think that you're going to finance your tax credit.
Even if you could get a bank to loan you,
it's not worth it to you. It's going to eat
up most of the credit. So don't consider a tax
credit as financing for your movie. Consider it as revenue
(08:21):
afterwards that you're going to recoup your investment from. That's
part of the revenue stream, because that is realistically how
it's going to work. If you're lucky, you'll get the
money in a year. Some jurisdictions take two years, some
even take longer, and that's assuming you're super organized. You
get everything in on time, you get your audit done,
you get everything done properly. So that's the reality. So
(08:42):
what I'm saying is, get the entire amount from Uncle Charlie.
Get this seven hundred thousand dollars of production funding from
Uncle Charlie upfront, because you're going to need it to
cash flow your movie, and consider your tax credit as
revenue and give it back to Uncle Charlie afterwards when
you get it. Don't put it into your financing plan
and think that you're going to get it from a bank,
because you won't. All right, now, let's look at what
(09:04):
tax credits actually are. So people use the words tax
credit very loosely. There are about thirty states right now
in the United States that give what we call financial incentives.
Some of them are tax credits, but some of them
actually aren't tax credits. Some of them are just basically
grants or rebates. They're giving you the money and it's
(09:25):
not necessarily about anything to do with tax So I'm
going to sort of debunk the myths of what all
these things are. It's a little complicated and I'm not
going to go into a ton of detail. So viewers
who have questions, if you want to write in, we
can get into more detail. But if you really really
want to know about this stuff, go either read about
(09:46):
it more online or go see your accountant and get
the reality of it. All right, there's kind of three
levels or three styles. The first style there's these states
state thirty states right now in the United States that
say to filmmakers we want you to bring your film
to our state. Why they want you to spend the
(10:08):
money that you're going to use to make the film.
That's seven hundred thousand dollars that we keep talking about.
They want you to spend it in their local economy.
Sixty percent of that money is going to be spent
on labor approximately. Okay, that's more or less. When you
look at a film, budgets sixty percents about labor on
a low budget indie film. So you're going to spend
four hundred and twenty thousand, sixty percent of seven hundred
(10:29):
thousand employing people in their jurisdiction. That's good job creation.
They want job creation. The other amount you're going to
spend the other three hundred, two hundred and eighty thousand dollars,
you're going to be spending it on goods and services,
So that's going to stimulate their economy. You're going to
be using their hotel rooms, their equipment suppliers, their ubers,
(10:50):
their food suppliers, all their services. You're going to be
spending money in their state as opposed to another state.
One seven hundred thousand dollars film is not going to
change the needle but once you start looking at hundreds
of films or hundreds of bigger films, like in the
state of say Georgia, where they're doing billions of dollars
worth of production, that creates a lot of economic stimulation
(11:12):
in that economy. Hence the reason that states like to
attract that business. Now, states don't just give tax credits
and the financial incentives to films. They give it to
lots of other industries as well, research and development, biotech, mining,
all kinds of industries get these credits because states want
the labor and the economic activity to come to their state,
(11:34):
all right, So films is just one of those categories,
and it has been a very lucrative category for lots
of states. I mean today the biggest state is Georgia
is doing the most. California, where I live, is trying
to catch up, but we have a limited amount. George's
got an unlimited amount of tax credit, so they do billions.
We do here in California three hundred and thirty million.
The governors trying to increase that. Double it and we'll
(11:57):
see what happens. Louisiana used to do big numbers. New Mexico,
New York's doing huge numbers. Now they're using these financial
incentives to attract the business to come to their economies
so that people will spend the money in their economies
and create jobs and other economic activity. That's the reason
it's done. Now. There's lots of arguments, by the way,
(12:18):
from a lot of legislatures saying it's not worth it.
We're spending more than the benefit that we're getting. So
I love reading about this stuff. I find it fascinating.
I know you probably find it super boring reading tax
analysis and all this kind of stuff, But like, is
a tax credit actually good for the local economy or bad?
So I love that. That's another lecture for another time
in another webcast, because I'm not going into that, but
(12:41):
I do enjoy trying to understand that. So let's look
at what these financial incentives are, all right. So the
first type of financial incentive is called a rebate. So
a rebate is basically giving money back to a filmmaker
based on the amount of money that they spend in
the local economy, based on expenditures that the government there
(13:03):
wants them to spend on. Call it the Film Commission
of the state will have a list in their financial
incentive program and say, here's what you need to spend on,
and these are what we call qualified expenditures, right, these
are expenditures that qualify for an incentive. So, say the
(13:23):
state of Oklahoma says to you, if you spend money
on our local labor, on our trucks, on our equipment,
on our locations, our hotels, and they list it, and
the lists are very long, like hundreds and hundreds of
items of things that are qualified expenditures, then we will
give you back thirty cents for every dollar you spend
(13:44):
thirty percent. I'm just using that as a number. Sometimes
it's thirty five, sometimes it's twenty five, it's twenty depending.
So basically, after you're finished shooting, you keep your receipts,
you keep everything in order because you need to prove
to us that you actually made those expenses. And to
prove it to us, you're going to submit your reports.
But you're also going to have to have an audit done.
(14:06):
So you're going to hire a CPA firm, registered CPA firm.
They're going to do an audit on your expenses and
they're going to verify that you actually spend the money
that you did. And once we verify that, we're going
to give you back thirty percent of that as a
reward for spending your money in our state on our
people and our qualified expenditures. That's fantastic and it works.
(14:27):
And if you keep your expenses proper and you get
the audit done and everything like that, you're going to
get your money. It's going to take about a year
from the end of the time you finished shooting, and
then you've got to post and do all this kind
of stuff. Depending on where you spend your money, it's
about a year to get that money. You know. Sometimes
it's longer depending on the jurisdiction because they're backed up
a little bit more so, say a year to two years.
(14:47):
Sometimes you get it quicker. Certain jurisdictions are very quick.
But you're going to get that money. It's fantastic. Now,
a thirty percent rebate means they're just going to send
you a check for thirty percent of your qualified expend
You're not going to have to file taxes, you're not
gonna have to go through the tax department. It means
you spend the money here, we are going to reward you.
(15:07):
We're sending you back a check against that money. So
people still call that a tax credit, but it's actually
not a tax credit. It's a rebate. It's a gift
back to you, rewarding you for spending your money. That's
level one. Level two is what we call a tax credit.
So now they're going to say to you, same type
of things, spend your money on. These qualified expenditures will
(15:29):
give you thirty percent of it. So let's say that
you have a tax credit. I'm just going to gain
make up a number of two hundred thousand dollars. We're
going to send you a check for two hundred thousand dollars,
all right, So then they say to you, okay, but
we're not sending you a check in the case of
a tax credit. What we're gonna do is if you
have taxes owing in our state. So you have a
(15:51):
company here and you've generated a certain amount of profit,
and you have taxes owing against that profit, you can
offset those taxes owing with the amount of tax credit
we gave you. So if you have two hundred thousand
dollars of taxes owing to the government based on your
profitability as in your company, then we will allow you
(16:13):
to take that tax credit. You aren't and reduce your
two hundred thousand dollars by two hundred thousand and pay
US zero. You don't know any taxes because you've got
a tax credit of two hundred thousand. So that's an
offsetting and that's actually a real tax credit, where you're
getting the credit to offset the amount of taxes that
you have to pay. That's a true tax credit. Now,
(16:33):
what happens if you don't have any business in that state? Like,
for instance, I live in California and I go shoot
my movie in Oklahoma, which, by the way, I did.
I shot a movie there, Okay, but I don't have
a business there. I don't have any revenue. I don't
have any taxes. Owing, well, that's a rebate program. But
let's say it was a tax credit. Right then they
say to me, we're going to give you a tax credit,
(16:56):
and I say, well, that's wonderful, but I don't owe
any tax Is what am I going to do with
a two hundred thousand dollars tax credit if I don't
have to pay tax because I didn't earn any revenue here.
So some say say too bad. And if they're going
to say too bad, that's not good for you because
you're going to basically walk away from that whole program.
You just spend all your money there for the reason
(17:17):
of getting the tax credit. So they say, what will
allow you to do is you can sell your tax
credit to a local company that actually does have taxes owing.
So there's a lot of big companies that have a
lot of taxes owing and they'd be willing to buy
your tax credit from you. Why would they want to
buy your tax credit because you're going to have to
(17:39):
sell it at a little bit of a discount. So
if you have a two hundred thousand dollars tax credit,
they might say to you, will give you one hundred
and eighty five thousand dollars for your tax credit, so
you'll get that, will write you a check for that,
and then we'll take that tax credit and offset two
hundred thousand dollars worth of taxes. So they're getting a
fifteen thousand dollar benefit from buying your tax credit from you.
(18:03):
And that is what we call a transferable tax credit.
So you're transferring your tax credit because you can't use
it to a company that can at a discount. Now,
you're also probably going to need a broker to do
that because somebody is going to have to figure out
who's buying credits and who's selling them. So there's a
broker involved, just like there are in real estate deals
(18:23):
or any deal, and they'll take a little bit of
a commission, you know, two or three or maybe five
percent or something on that sale. So maybe you've discounted
it by fifteen percent, and then you have to pay
a brokerage free of say five thousand. So you're going
to get one hundred and eighty thousand dollars on your
two hundred thousand dollars tax credit just because you had
to sell it. Because you're not eligible. You don't have
(18:44):
taxes owing, so you can't use it for anything that's
called transferable. Now. The only other sort of level is
sort of a combination of rebatable and transferable. So let's
say that you have two hundred thousand dollars tax credit,
right and you have one hundred thousand dollars of taxes owing,
(19:05):
so you can't use your whole tax credit. But you
actually have business and you have one hundred thousand dollars
a tax credit, but you have a two hundred thousand
dollars tax credit. So what you can do in certain states,
is you can take the two hundred thousand, use one
hundred thousand of it to offset the one hundred thousand
dollars in tax credit owing. So now you've got an
extra hundred thousand that you didn't do. Then the state
(19:27):
will refund it to you. They'll actually send you a
check for the difference. That's called a refund, and that's
called a refundable tax credit, meaning the difference between what
you offset your taxes and what the tax credit is.
That's the amount of refund you're going to get. Now,
all of this sounds like a lot of Google egoch,
I'm sure to a lot of you. Why because your filmmakers,
(19:50):
who make films, your artists, and this is all accounting
tax talk. I mean when I teach my students this,
their eyes roll to the back of their head and
their head spins around. Literally, this makes everybody's head spin
what I just talked about. So here's the thing. You
do not have to know how to do this stuff.
You just have to know that it exists, all right.
(20:10):
As an artistic filmmaker, I don't expect you to understand
tax credits. I mean I understand it because I teach
it and I do it, and I like it, and
I have a finance background, all right, so that's why
I understand it. But you don't need to know the
details that I just explained. You just have to understand
that this stuff exists, and you have to know that
it's accessible and that you should be looking into it
(20:32):
and assessing it for your project because it helps it's
revenue afterwards that is going to help recoup your investment.
So don't leave it on the table, and just understand
the narrative that people who are going to process it
for you are talking about. So hire a lawyer, hire
an accountant, hire a producer or somebody who understands how
(20:54):
to do this stuff and let them do it for you.
Let them assess it, figure it out, manage it for you.
You'll obviously pay them a fee, but it's worth it
because there's a lot of money involved here, and if
it's going to make your head spend, no problem. Just
understand that it needs to get done. It's another one
of these things that that's not your skill set, but
it's somebody else's, So bring them in to let them
(21:17):
help you manage that, all right. I just explain on
a very sort of cursory level how it all works.
But if you don't want to go down that road,
don't worry. Just understand that you should be accessing these
incentives because they're important and they matter. I don't want
to complicate a little bit more, but I do have
to explain this one component because this is super important.
(21:38):
So a lot of people get this wrong. They just
assume that the amount of the tax credit program is
the amount that they're going to get in a tax
credit or in a financial incentive, and that is usually
never the case. It's very rare. So if a program says,
let's say a twenty five percent tax credit program, let's
(22:00):
make the math simple. Okay, you're spending a million dollars
in a state and they say you're getting twenty five
percent tax credit. Well, first of all, you're only getting
twenty five percent on the eligible expenditures. Remember, it's only
the things that they say you have to spend your
money on. Now, I am telling you from experience that
even if you use all the resources, even if you
(22:22):
spend everything in that state, there's some things that you're
going to have to spend on that are not going
to be eligible expenditures. So on average, only ninety percent
of your expenditures are going to be eligible or qualified expenditures.
Qualified was the word I use. Right The other ten percent,
even though you're spending the money there, they're just not
(22:44):
on the list of qualified expenditures. So right away, you're
only going to get twenty five percent of nine hundred thousand,
not a million. So that's going to take the amount down.
So now instead of getting two hundred and fifty thousand,
maybe you're getting ten percent two hundred and forty thousand,
So right away you're not getting twenty five percent. Then
(23:05):
if you have to sell your credit, then you're gonna
have to discount it. You might have to discount it
by ten to fifteen percent. You might have to pay
a broker another five percent. So right away, that's going
to reduce the credit by another, say, fifteen to twenty percent.
So now all of a sudden, you're two hundred and
forty thousand dollars. Tax credit might be worth two hundred thousand.
(23:27):
And again I'm not doing the math properly here. Okay,
I could do it on a computer for you, but
I'm just trying to simplify it. So now all of
a sudden, you have a two hundred thousand dollars tax
credit on a program that was twenty five percent, and
you factored in that, you're getting twenty five percent of
a million. You factored in two hundred and fifty thousand,
but in essence, you're only getting two hundred thousand, and
by the way, it's going to take you two years
(23:48):
to get it. So if you borrowed money against it,
it might be another fifty thousand dollars in interest in
borrowing fees, which means you're only going to get one
hundred and fifty. But let's not factor that in. Okay,
so you your twenty five percent tax credit in essence
is actually only worth twenty percent. That's the reality. So
when you're doing your planning, this is money you're getting
(24:11):
back after the fact. So this is revenue coming in.
So when you factored into that, what it's really going
to be two hundred thousand, twenty percent, not twenty five percent,
even though the program states twenty five percent. But I'm
telling you from experience, a lot of these expenditures won't qualify,
and then there's going to be fees and other costs
(24:32):
and everything to actually process it and put it through,
not to mention the cost of doing the audit, the
cost of applying for the tax credit. There's other administrative
costs that I didn't even factor in that are going
to reduce the effective net amount of the tax credit.
In essence, I am telling you from experience that most
(24:52):
financial incentives i e. Tax Credit amounts come in at
about seventy five to eighty percent of what the program
actually is. So if it says it's a thirty five
or thirty percent tax credit, you're probably gonna get twenty
one percent or twenty two percent or something like that.
All right, You're not gonna get thirty percent, because I'm
(25:15):
talking after all of the costs, all of the elements
are factored in. So so many filmmakers make the mistake
of saying, when they're doing their plans, oh, got a
million dollar film, thirty percent tax credit, three hundred thousand dollars,
that's my revenue. No, No, it's gonna be two hundred
and twenty thousand dollars. If you actually know what you're
doing and you know how this this whole system works.
(25:37):
So just be real, be practical, so that you don't
have to be disappointed because In this case that I
just gave, you're going to be eighty thousand dollars is
seventy two seventy eight thousand dollars out of pocket that
you planned for from a tax credit that you never got,
and that's not going to look good on you. It's
gonna be disaster because the money all of a sudden
disappeared because you didn't know how to factor it in.
(25:58):
And again this all comes with ex experience. So that's
why I say, if you don't know what you're doing,
deal with somebody who does, and who tells you the
truth and is honest and works out the net amounts
exactly right. But in the end, these are great, great
incentive programs, so tap into them as much as you can.
All right. They're all over the place. Check them out,
read about them, and get somebody to hold your hand
(26:20):
who knows them better than you do, and then you
will get the benefit of them. So good luck. I
encourage all of my listeners to send me questions if
they're curious about certain topics or they want more information
on things that I've spoken about. So my email address
is Jdeverrett at Deverettmedia dot com. It will be in
(26:41):
the show notes, and feel free to send in your
questions and we will hopefully be able to get to
them and expand and give you the answers
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