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NEW YORK REPLENISHES FUND FOR 30% TAX CREDIT ON QUALIFIED FILM PRODUCTIONS COMPLETED IN 2009

In early 2008, New York State allocated $515 million for tax credits to be applied for qualified film production expenditures, in connection with the tripling of the available tax credit from 10% to 30%. By February, 2009, the entire sum had been allocated to qualified productions.

$350 Million now Available for 2009 Productions

On April 1, 2009, as part of this year’s budget adoption process, and on the heels of the financial community’s collapse and New York State’s large budget deficits, Governor Patterson approved an additional $350 million in tax credits for qualified film production expenditures for 2009. No funding has yet been approved for 2010 or beyond. The original $515 million allocation was designed to cover applications through 2013 even though the enabling legislation allowed the use of the funds to be accelerated into earlier years. When combined with the 5% tax credit available in New York City, New York City and New York State remain a financially attractive location to create and produce qualified productions.

Timing of Credit Availability Varies

The GT alert of May 2008 which addressed the increased tax credit, how it can be accessed, and how it is administered remains accurate, except for the following recently-enacted changes. Under the new funding legislation, if the amount of the tax credit is at least $1 million, but less than $5 million, the credit is claimed over a two year period, beginning in the taxable year in which the production of the qualified film is completed, and in the next succeeding taxable year, with one-half of the amount of the credit allowed being claimed in each year. If the amount of the credit is over $5 million, then the credit is spread out over three years, with one-third being made available each year. Although not specifically mentioned in the statute, if the amount of the tax credit is under $1 million it presumably is payable in the year in which the production of the qualified production is completed.

We repeat below the remaining provisions of the May 2008 GT Alert which reflect the portions of the tax credit which remain unchanged.

Application Process

The two New York credits are available through a single application, administered by the Governor’s Office of Film & Television and the Mayor’s Office of Film Theatre and Broadcasting. The production entity completes the application. The production entity is frequently a limited liability company, or limited partnership or other “pass-through” entity for tax purposes. As such, the credit made available passes through pro rata to the members or partners of the production entity.

Qualified Production Costs

The credit is 30% of the “qualified production costs” paid or incurred in the production of a qualified film. “Qualified production costs” are “production costs” attributable to the use of tangible personal property or performance of services within New York directly and predominantly in the production of a qualified film.

“Production costs” are certain “below the line” costs. Excluded from the definition of “production costs” are (i) the costs of story and script, and (ii) wages, salaries or other compensation for writers, directors, producers and performers (other than background actors with no scripted lines). Payments for principal cast members, rights agreements, writers, directors, producers and others generally found “above the line” are not eligible for the credit. Extras and other crew, location and equipment costs are eligible for the credit. Certain additional costs, such as insurance, contingency funds and completion bond fees, are not eligible for the credit. Crew members need not live in New York, but must render services in New York. Travel costs within the state from location to location may be included, although travel from outside New York into the state is not included.

In addition, the “qualified production costs” (excluding post-production costs) that are attributable to the use of tangible personal property or the performance of services at a “qualified film production facility” in the production of a qualified film must be at least 75% of the total production costs (excluding post-production costs) at any production facility in or out of New York. A “qualified film production facility” is a film production facility in New York that contains at least one sound stage with at least 7,000 square feet of contiguous production space. A list of such facilities is available at www.nylovesfilm.com.

However, if the qualified production costs (excluding post-production costs) at a qualified film production facility are less than $3,000,000, then the portion of the qualified production costs attributable to the use of tangible personal property or performance of services outside of a qualified film production facility is allowed only if the shooting days spent in New York outside of a film production facility are at least 75% of the total shooting days spent outside of a film production facility both in and out of New York.

Using Credits as Collateral

If any member or partner of a pass-through entity making the application for the credit in New York has an existing tax liability to the State or City, as applicable, that member's or partner's pro rata share of the credit will be used to offset that liability. The balance of the credit would be available to the remaining members or partners. The effect of this provision may be to make it difficult to use the credit as collateral for a loan.

However, where the production entity is a Subchapter C corporation, rather than a pass-through entity, the credit can be used as collateral for a loan. Where the entity is a C corporation, income tax is imposed at the corporate level, and the income and losses do not pass through the entity to the members or partners. This results in two levels of income tax, one at the corporate level and another at the shareholder level when dividends are paid by the corporation to the corporation’s shareholders. If the C corporation is a special purpose vehicle, formed for the purpose of producing the film, the credit may be used as collateral for a loan. In each circumstance, however, the benefit of securing the value of the tax credit, and financing it, must be weighed against the cost imposed by two levels of tax. Certain banks may also be willing to finance the credit based on representations and warranties of the individual investors that they have no New York State or City tax liability.

The new legislation did not alter the prior legislation which provides for no limit on the credit available per project.


Conclusion

The significant increase in the amount of the Empire State film production credit provides increased financial incentives to produce films and television programs in New York for both residents and non-residents. These benefits are significantly enhanced by the federal provision permitting deduction rather than amortization of expenses for certain qualified film and television productions. For a taxpayer in the highest combined U.S. and New York State and City marginal tax bracket of 45%, these provisions will have significant impact on the computation of the break-even point for profitability, and it is possible that if the film returns only slightly more than half the total cost of production, the net effect may be that the investor still realizes an after-tax profit, even before the picture itself achieves cash flow break even. For non-residents, the State and City film credits provide offsets to the taxes imposed for doing business in New York. The combination of the federal income tax treatment of certain qualified film and television productions with the improved New York State and existing New York City tax credits may make investing in qualified audiovisual productions a significantly tax advantaged investment for qualified investors and qualified films.

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This EASL Blog was written by Marc Jacobson and David Bunning. Questions about this information can be directed to:

• Marc Jacobson—212.801.6516 (jacobsonm@gtlaw.com)
• David Bunning—212.801.9318 (bunningd@gtlaw.com)


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This page contains a single entry from the blog posted on April 26, 2009 10:10 PM.

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