The Most Powerful Incentive Tool
A tax credit is the most sought-after form of film production incentive due to its direct financial value. Unlike a deduction, which only reduces your taxable income, a tax credit provides a dollar-for-dollar reduction of the actual taxes you owe. A credit is calculated as a percentage of the production’s ‘qualified expenditures’—the money spent on local labor and services within the jurisdiction offering the credit.
How It Works: Monetizing the Credit
The true power of a modern tax credit incentive lies in its liquidity. Most productions are set up as single-purpose entities that won’t owe enough taxes in a given state to use the full value of the credit they earn. To solve this, states have made their credits valuable through two main mechanisms:
- Transferability: A transferable tax credit can be sold by the production company to another in-state entity that does have a large tax liability. The production sells the credit certificate at a slight discount (e.g., a $1 million credit might be sold for $900,000 in cash). The production gets immediate cash flow, and the buyer gets to save $100,000 on their tax bill.
- Refundability: A refundable tax credit is even more direct. If the production’s earned credit is worth more than the taxes it owes, the state simply pays the difference to the production company in cash.
An Illustrative Example
- A film has a total budget of $20 million.
- It shoots in Georgia, which has a 30% tax credit incentive.
- The production spends $10 million on ‘qualified expenditures’ in Georgia (local crew, studio rental, etc.).
- After an audit, the state of Georgia issues the production a tax credit certificate for 30% of $10 million, which is $3 million.
- The production company, which doesn’t owe $3 million in Georgia taxes, sells this transferable credit to a large Georgia-based corporation for 92 cents on the dollar.
- The production immediately receives $2.76 million in cash, effectively getting a major rebate on its production costs.