Tax Incentives for Film Production in New York State

By:
Zev Landau, CPA, MBA
Published Date:
Jul 1, 2014

This article is the second in a two-part series about the film industry in New York and how CPAs can get involved. Catch up by reading the previous article, “New York’s Film Tax Credit Program Bolsters Its Success in the Film Industry,” published in the Tax Stringer’s June 2014 issue.

Because New York state is a financial powerhouse (just consider Wall Street), it has an important edge in securing financing for film productions. New York’s government and its wealthy entities can provide financing through government grants, tax incentives, and tax credits. With advancing technology and the growth of New York as a media center, opportunities continue to arise for CPAs to guide clients involved in the film industry.

Government Grants

As one of the world’s largest and most important production centers, New York City is the ultimate place to break into the entertainment industries. To help support its rising film, theater, and broadcasting stars, numerous organizations offer fiscal sponsorship and a variety of other resources. In addition, some nonprofit organizations give grants to film entrepreneurs.

Tax Incentives

As discussed in part one of this series, major tax incentives take the form of production and postproduction credits. The following tax benefits also exist, according to Empire State Development:

  • New York state now has one of the lowest corporate income taxes in the Northeast.
  • It offers low-cost loans or grants to companies that invest significant capital in the state and commit to the creation and retention of private jobs.
  • New York state uses the single sales factor apportionment formula for taxable Income.
  • New York state has a lower corporate tax rate (6.5 percent) for qualified New York state manufacturers.
  • Unlike many other states, which tax both real property and personal property, property taxes in New York state are imposed on real property only. Personal property, whether tangible or intangible, is exempt from state and local taxes.
  • New York state has enacted tax incentives in qualified emerging technology companies (QETC), job creation by QETC, and research and development (R&D) spending by such companies.

Furthermore, businesses that create new jobs and make new investments in production property and equipment may qualify for tax credits of up to 10 percent of their eligible investment. New businesses can elect to receive a refund of certain credits, and all unused credits can be carried forward for 15 years. Owners of qualified New York state film production facilities are entitled to receive an investment tax credit (ITC). The phrase “qualified New York state film production facilities” refers to facilitates where TV shows and films are regularly produced and contain at least one sound stage of at least 7,000 square feet; such facilities must also provide specified services that are enumerated in the law.

For corporate taxpayers, a 5 percent tax credit is available for the first $350 million of investment credit base, and 4 percent with respect to the base in excess of $350 million; for personal income taxpayers, a 4 percent tax credit of the investment credit base is available. Taxpayers claiming the ITC may also be eligible for an additional employment incentive tax credit of 1.5 percent to 2.5 percent of the same new capital (production facilities and equipment only) in each of the two years following the year the ITC is claimed, if employment in those years reaches a specified level.

Sales tax exemptions.The New York State Department of Taxation and Finance has published “A Guide to Sales Tax for the Film Industry” (Publication 28), which states that the production of a film is considered a manufacturing activity when there is intent to sell the film. Only then are filmmakers classified as manufacturers, with exemptions from sales and use tax available to them. Payments made to vendors or lessors of machinery, equipment, parts, tools, and supplies are exempt from all sales and use tax if the items are used or consumed directly and predominantly in the production of a film, according to Publication 28.

Private equity financing. Many accounting firms in New York state offer special services to clients and entrepreneurs who prepare prospectuses for wealthy individuals interested in investing their wealth in film production by forming limited liability companies. Affluent individuals who want to invest in tax-advantaged theatrical film must understand the elements of tax risk. (Internal Revenue Code section181 is most relevant, but it is beyond this article’s scope.)

Setting the Stage for Future Growth

On May 8, 2012, former New York City Mayor Michael R. Bloomberg and Media and Entertainment Commissioner Katherine Oliver announced the results of a December 2012 economic study conducted by Boston Consulting Group (BCG). (The study covered the media sector, which the film industry is only one part of.)

Over the last 10 years, filmed entertainment in New York City has seen remarkable growth and is currently at the strongest point of its history, generating direct spending of $7.1 billion in 2011, an increase of over $2 billion annually since 2002. Film and television production now employs 130,000 people, an increase of 30,000 jobs since 2004. This is impressive in the face of nationwide decline in employment. Two factors contributing to the growth, according to the BCG study, were 1) the change in the incentive programs over time, and 2) New York City provided a stronger infrastructure for television series.

The BCG study noted that there was a boom in 2011 after the New York state budget passed the new postproduction credit. A strong film industry in New York City has a vast impact on tourism, restaurants, and hotels, In addition, the growth of the city’s digital sector has helped attract film producers and a pool of young, cross-disciplinary talent. Many high-tech companies opened offices in New York City and venture capital is funding more companies than ever. This is a strong leverage for the development of filmed entertainment.

BCG offered many ideas for New York state to improve its positioning in the global film industry, including the following:

  • Increasing New York City postproduction activity, which has grown in the past several years but is still behind Los Angeles and London
  • Creating more special effects capabilities and postproduction talent bases
  • Attracting talents (especially engineers)
  • Developing infrastructure and spreading wealth through the five boroughs.

The Competition

World Book observes that “Hollywood is still the dominant and primary nexus of the U.S. film industry”; however, four of the six major Hollywood film studios were owned by East Coast companies. When New York state enacted the new bill for expansion of postproduction credit mentioned above, members of the film community in other states were enthusiastic. One article in Crain described the excitement, especially by postproduction specialists who are changing their plan and moving their headquarters to New York City. On the other hand, the media has also reported an expansion of the film industry in Florida through the building of new studios and in Georgia, which is “becoming the new southern Hollywood,” due to increasing tax incentives. 

Globally, the United Kingdom, Australia, Ireland, Germany, the Netherlands, and especially Canada are considered competitors of the United States in terms of film productions. The Canadian support package includes direct financial and tax incentives, labor credits, and aggressive marketing campaigns promoting Canada as a production destination. The Federal Production Service in Canada reimburses a percentage of labor costs. Filmmakers do not have to apply for refunds by filing tax returns; the reimbursement is independent of the ultimate tax liability and is awarded before the tax returns are filed.

The film industry in the United States is still strong, diversified, and vibrant, but the rate of growth in many foreign countries may well have outstripped the U.S. growth rate over the past decade. The worldwide consumer demand for film entertainment is increasing, and new state-of-the-art studios have been constructed around the globe. Business and tax incentives by foreign governments are significant factors to consider, whereas film budgets in the United States are consumed by high production costs.

Foreign and local film industries are seeing new possibilities, and entrepreneurs want to have a piece of the action. In the United States, CPAs are well equipped to guide them through the tax incentives of production and postproduction in New York state.

New Technology

The technological developments achieved between 1970 and 1980 were responsible for lighting up the film, video, and communication landscape of the 21st century. Insiders of the film industry say the technological revolution has changed the norms of film production. Largely gone are the days when film editors had to splice and dice reels of film. Directors, actors, and other participants no longer have to be in the location where the movie is being shot. Now, after shooting, a film is transferred to videotape format, digitalized, and transmitted over the Internet. Editors from any location can use computers and sophisticated software programs to perform the necessary editing tasks.

In the heyday of Hollywood, most films were produced in the major studios. It was there that words and phrases like “controlled environment,” “proximity of all facilities to the major studio,” and “elaborate production sets” could be heard. Decades ago, it would have been inefficient to produce a film in many foreign countries, even if they offered lower labor costs. With new technology, the filmmakers have more mobility—hence the name “floating factory” for the production set. This term and the changes that influenced its creation can help demonstrate why New York’s chances to better perform in the film industry are looking up.


Zev Landau CPA, MBAZev Landau CPA, MBA (taxation), practiced in the area of taxation for over 30 years. He has published numerous tax articles, as well as articles about industries and the accounting profession in professional publications such as The CPA Journal, The Trusted Professional, and the Journal of Accountancy. In addition, he served as a member in numerous tax committees affiliated with the NYSSCPA. He was also an instructor in accounting and taxation at Pace University and LaGuardia Community Colleges. He earned his MBA degree in taxation from Bernard Baruch College and an MBA degree from Tel Aviv University in Israel. He can be reached by e-mail at zevlandau@gmail.com.

 
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