How does the California film tax credit work?
Whether you are producing a network pilot or an independent feature, your goal as a producer is always the same: save as much money as possible. A great way to do that? Take advantage of a film tax credit.
In this article, we will break down the California film tax credit: what it is, how to apply, and how it could substantially help your next production.
"Eligible projects may receive an additional 5% or 10% credit for the following expenditures:
Out-of-Zone Filming: Expenditures relating to original photography and incurred outside the 30-Mile Studio Zone (pre-production through strike). Eligible expenditures include qualified wages paid for services performed outside the Zone, and expenditures purchased or leased and used outside the Zone.
Visual Effects: To qualify, visual effects work must represent at least 75% of the VFX budget or a minimum of $10 million in qualified VFX expenditures incurred in California.
Local Hire Labor: Non-independent productions (except for Relocating TV) are eligible to receive an additional 10% tax credit for qualified local hire labor. Independent films and relocating TV series are eligible to receive an additional 5% tax credit for qualified local hire labor."
In short, film tax incentives are tax benefits offered throughout the United States to encourage in-state film production.
These tax credits for film started in the 1990s, after similar Canadian incentives drove hordes of movie productions north. Since then, states have offered increasingly competitive incentives to win productions away from other states.
The aim of California’s film tax credit program is that by moving production there, you’ll stimulate their local economies.
While film tax incentives cover a broad range of things from fee-free locations, to sales tax exemptions, to plush cash grants, California’s primary method of incentivizing film production is a film tax credit.
A film tax credit cancels a portion of the income tax owed to the state by the production company. But a lot of production companies have little to no income tax liability as limited-purpose business entities. If your production company falls into this camp, don’t sweat it!
A film tax credit, technically, has nothing to do with tax — they’re simply spending programs that use state revenue services as a filing and payment agent. In essence, they’re rebates, and the exact amount of your film tax rebate is based on several eligible expenses. Below, we’ll walk you through all the requirements and eligible expenses for the California tax credit.
But first, it’s worth pointing out that the California film tax credit is refundable. If a production company does not have any tax liability, the full amount of the credit is rendered as a tax refund. If the production company does owe income tax, the amount owed is first reduced by the amount of the credit.
It’s also important to note that California offers both a transferable and non-transferable film tax credit.
Transferable tax credits can be sold to a third party, however, they almost always sell for a fraction of their face value — for anywhere between 45 to 85 cents on the dollar. California offers transferable tax credits only for independent feature films.
Non-transferable tax credits cannot be resold; they must be used by the production company to whom they were awarded. The vast majority of California tax credits are non-transferable and allocated for relocating television shows (shot outside of CA and relocating to CA), new television shows, television pilots, miniseries, and non-independent features.
Which brings us to…
The California Film Commission breaks its tax credits for film into three distinct categories:
Independent Feature Films are eligible for a 25% transferable California film tax credit, provided they have a $1 million minimum budget. The California production tax credit applies only to the first $10 million of qualified expenditures.
Television series (of any episode length) that have filmed the last season (of at least 6 episodes) outside of California are eligible for a 25% non-transferable California film tax credit upon relocating production to California. To qualify, the series must have a $1 million minimum budget per episode. Credit is reduced to 20% after the first season filmed in California.
New television series, television pilots, non-independent feature films, miniseries, and movies-of-the-week are all eligible for a 20% non-transferable California film tax credit.
Feature films must have a $1 million minimum budget and credit allocation applies only to the first $100 million in qualified expenditures, plus uplifts.
New television series and TV pilots must have a $1 million budget per episode. And miniseries and movies-of-the-week must have a $1,000,000 minimum budget to qualify for the California tax credit. New series, tv pilots, miniseries, and movies-of-the-week must be at least 40 minutes per episode. Additionally, non-pilot programming needs to be scripted to be eligible for the CA film tax credit.
Starting in 2022, productions may also be eligible for an additional 2% tax credit based on making a good faith effort or meeting the diversity goals or the workplace a production employs. A 2% tax credit may also be obtained for meeting or making a good faith effort to meet diversity for hiring above-the-line individuals.
For this final category (all productions eligible for a 20% film tax rebate), the California Film Commission also offers a 5% credit uplift, or an additional 5% California tax credit for expenditures that fall into one of three buckets:
Beyond the nuances of each bucket, all projects must also meet these qualifications as set forth by the California Film Commission:
And most importantly:
More than a few qualifications must be met in order to receive a California film tax credit. But what expenses does the film tax rebate actually cover?
Short answer: a lot.
Anything from craft services, to rental fees for comfy screening rooms, to bread and circuses to keep your underpaid writers well-fed and quiet. Basically, if you can dream it up and your line producer can write it down, it’s probably covered by the California film tax credit.
Full lists of all qualifying expenditures are available on the California Film Commission’s website, along with how-to videos, frequently asked questions, and other indie film resources.
The California Tax Credit program has several application periods each fiscal year.
In this upcoming year, television project applications can be made between March 7--14, 2022, with an approval letter due on April 11, 2022. Feature film applications, for both independent and non-independent features, can be made between January 24-31, 2022, with California tax credit approval letters due on February 28, 2022.
All applications can be made through the California film tax credit program website.
Each California tax credit application requires different documentation, depending on the type of production. Specifics, including guidelines and checklists for the California film tax credit application can also be found here.
In all cases, you will be required to tag and track your production budget, submit your screenplay and proof of financing, and write a detailed narrative statement for your California tax credit application.
So you’ve submitted your application for a California film tax credit. Now what?
Well, the approval process is a two phase process.
First, applications are ranked within categories based upon their jobs ratio ranking. The jobs ratio ranking is just a way for the Film Commission to figure out how much economic stimulus a project will bring to the state. You can calculate your jobs ratio score before submitting your application on the program’s website. Learn more about the jobs ratio ranking on page 9 of this PDF.
The categories are: TV Projects, Relocating TV Series, Indie Feature Films, and Non-Indie Feature Films.
The Film Commission will determine the amount of tax credits available for each category before each application period.
Once the application period closes, the Commission determines a list of finalists for each category. This list includes those projects that would be selected (based on their jobs ratio score) if the allocation of tax credits for the category was double (or 200%) the predetermined amount.
These projects advance to “Phase II” of the selection process for further evaluation.
When the Phase II process is complete (about 3 weeks), the highest-ranked projects (top 100%) receive a Credit Allocation Letter indicating the amount of tax credits reserved. The remaining projects in Phase II are placed on the waitlist according to their jobs' ratio score.
The waitlist expires when the next allocation period for the same category begins.
Utilizing a California film tax credit can be an excellent way to offset the cost of your film. While the process may be selective, once you’ve been awarded a tax credit, you can write off responsibly and save cold hard cash.
If filming on the East Coast is more your thing, discover how to tackle the same process for attaining New York film tax credits.
At Wrapbook, we pride ourselves on providing outstanding free resources to producers and their crews, but this post is for informational purposes only as of the date above. The content on our website is not intended to provide and should not be relied on for legal, accounting, or tax advice. You should consult with your own legal, accounting, or tax advisors to determine how this general information may apply to your specific circumstances.