Essential Guide: California Film Tax Credits
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 help your next production.
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 your moving production there you’ll stimulate their local economies.
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.
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…
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 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. After the first season of filming in California, the series becomes eligible for the next type of California film tax credit.
New and Existing Television Series, TV Pilots, Studio Features, Miniseries, and Movies of the Week
New and existing 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 $1 million minimum budget and credit allocation applies only to the first $100 million in qualified expenditures. Existing television series, new television series, and TV pilots must have a $1 million budget per episode. And miniseries and movies-of-the-week must have a $500,000 minimum budget to qualify for the California tax credit.
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: filming done in California but outside of Los Angeles County’s 30-Mile Studio Zone, music scoring and music track recording by professional musicians, and visual effects that represent at least 75% of the total VFX budget.
Beyond the nuance of each bucket, all projects must also meet these qualifications as set forth by the California Film Commission:
- 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.
And most importantly:
- 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.
Anything from crafties, 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.
How to apply for a California film tax credit
The California Tax Credit program has several application periods each fiscal year.
In this upcoming year, television project applications can be made between February 3-7, 2020, with an approval letter due on March 9, 2020. And feature film applications, for both independent and non-independent features, can be made between March 9-13, 2020, with California tax credit approval letters due on April 13, 2020.
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.
The tax credit selection process
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 scores. The jobs ratio score 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.
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. And 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 almost anything.
Got a lingering question about tax credits in California? Drop us a line at email@example.com.