November 20, 2019
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Essential Guide: California Film Tax Credits

Tom Waddick
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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. Visit our Production Incentive Center for guidance.

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What are film tax incentives?

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 or keeping production there, you’ll stimulate their local economies to stop as they call it, the “runaway productions.”

What kind of tax incentive is the California film tax credit?

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. However, depending on the type of production that is applying, the type of tax credit can differ from what the state offers.

The premise of a film tax credit cancels a portion of the income tax owed to the state by the production company. When this route is the only option for the tax credit, it is called a non-refundable & non-transferable tax credit. This is the only credit option available for studio-level productions and television from California’s 3.0 Incentive Program. 

It works fine for them, as those studios and larger companies are usually CA-based and thus will have liability to offset the credit against. But a lot of production companies (especially for independents) have little to no income tax liability. 

Non-transferable & non-refundable tax credits cannot be resold or refunded for cash; they must be used by the production company to whom they were awarded. The vast majority of California tax credits are non-transferable and non-refundable. They’re allocated for relocating television shows (previously shot outside of CA and relocating to CA), new television shows, television pilots, miniseries, and non-independent features.

California Film Tax Credits - Hollywood Studio Zone - Wrapbook

Few things more iconically Californian than the Hollywood sign from a studio lot.

If your production company falls into this camp, don’t sweat it! It’s worth pointing out that the California film tax credit offers a transferable credit to those projects that fit the criteria of an independent production. 

Transferable tax credits can be sold to a third party to turn into cash. However, they almost always sell at a discounted rate of their face value — so you must speak to a broker in order to get a gauge for the market value of your credits. 

Typically they can range anywhere from a 8-16% discount. California offers transferable tax credits only for independent feature films on their 3.0 Tax credit program.

Below, we’ll walk you through all the requirements and eligible expenses for the California tax credit.

Determining eligibility for a CA tax credit

The California Film Commission breaks its tax credits for film into three distinct categories:

Independent feature films

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.

Relocating television series

Television series (of any episode length) that have filmed the last season (of at least six episodes) outside California are eligible for a 25% non-transferable/non-refundable 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 is filmed in California.

New and existing television series, tv pilots, studio features, miniseries, and movies of the week

New television series, television pilots, non-independent feature films, miniseries, and movies of the week are all eligible for a 20% non-transferable/non refundable 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 million minimum budget to qualify for the California non-transferable/non-refundable 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.

For this final category (all productions eligible for a 20% film tax rebate), the California Film Commission also offers a 5%-10%credit uplifst, for expenditures that fall into one of three buckets:

  1. Expenditures relating to original photography and incurred outside of Los Angeles County’s 30-Mile Studio Zone. (Does not include Post)
  2. Non-independent productions (except for Relocating TV) are eligible to receive an additional 10% tax credit for qualified local-hire labor that reside and work outside the L.A. Zone.. Independent films and relocating TV series are eligible to receive an additional 5% tax credit for qualified local-hire labor.
  3. Visual effects can earn the 5% uplift so long as at least 75% of the total VFX budget or a minimum of $10 million in qualified VFX expenditures are incurred in California.

Keep in mind that the most a qualifying cost can earn is 30%, depending on your type of production and how you structure the uplifts/bonuses.

Beyond the nuances of each bucket, all projects must also meet qualifications as set forth by the California Film Commission, which include but are not limited to:

  • Upon approval of your California tax credit, you will receive a dated Credit Allocation Letter (CAL). Principal photography may not begin before the date on this letter of acceptance.
  • Principal photography must begin, however, within 180 days of CAL date.
  • The project must be completed within 30 months of the CAL date.
  • All costs incurred from the CAL date up to 30 days after creation of the final product are eligible for the California film tax credit.
  • Production reports and the 1st day’s call sheet are required in order to receive the California tax credit.
  • All tangible personal property must be purchased, rented, and utilized in California to qualify.
  • Above the Line Talent and Federal Fringes do not qualify for the California film tax credit.
  • Provide a copy of your diversity initiatives and programs to increase the representation of women and minorities; including a description of what the program is designed to accomplish and information about how the programs are publicized to interested parties.
  • Provide a signed copy of the Unlawful Harassment Policy.
  • Applicants receiving a credit allocation letter are required to make a financial contribution to fund a Pilot Career Pathways Training Program for individuals from underserved communities, to receive training for careers in the industry. Approved applicant’s contribution shall be 0.25% of the estimated tax credit allocation, as verified on the CAL.
  • 75% of the total principal photography days must be shot in California or 75% of the total budget must be spent in the state to qualify for the California production tax credit.

What expenditures qualify for the film tax credit?

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.

Just think of it in terms of boots on the ground. If the tangible item your purchased was from a CA based vendor, or the labor that you hired are working in the state of CA. The one Caveat being that none of your Above the line labor cost will qualify. 

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.

A note about out-of-zone filming, visual effects, & local hires

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."

How to apply for a California film tax credit

The California Tax Credit program has several application periods each fiscal year.

The windows change from year to year and from project type to project type. Always be sure to check the application window to see when the next phase opens for you and your type of production as they do not have many throughout the year. 

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:

Non-Indie

Indie

Jobs Ratio

However, the most unique concept to the application is something that is called the Jobs Ratio.

The Jobs Ratio is basically a scale to weigh how much economic impact your particular project will have on the state. Things like resident hires, location, Out of the zone hires, and your VFX cost can impact how high your Ratio can get. 

Then the film office will take the highest percentage of applicants from the applicants in any given application window and depending on other requirements, allow those into the program. 

Just be sure not to inflate your numbers too high. If they do not line up with what you actually spend and produce in the state, it can come back to bite you as it may reduce your returning credit if your calculation was off. 

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.

The tax credit selection process

So you’ve submitted your application for a California film tax credit. Now what?

Well, the application approval process is a three phase process.

Phase 1 is the basic information. Phase 2 is the next step where more info is needed and they allow even less people in. 

This is the hardest phase as once you get to phase 3 you have been approved ald must pay any related fees mentioned above, ‌submit your required written statements like the diversity and unlawful harassment polices, and you receive the CAL letter. Then the clock starts ticking for you to start your project!

Be aware that this page is related to the CA 3.0 Incentive program. 4.0, which does include a refundable tax credit elected option to be paid out in phases does not go live until 2025

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 2” of the selection process for further evaluation.

When the Phase 2 process is complete (about three weeks), the highest-ranked projects (top 100%) receive a Credit Allocation Letter indicating the amount of tax credits reserved. The remaining projects in Phase 2 are placed on the waitlist according to their jobs' ratio score.

The waitlist expires when the next allocation period for the same category begins.

Wrapping up

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. Or check out or brand new Production Incentive Center, full of useful tools for comparing and finding production incentives.

Disclaimer

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.

About the author
Tom Waddick

Tom is a filmmaker, producer, and marketing specialist based in Los Angeles.

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