BY:Michael I. Rudell
(Originally published in the Entertainment Law column in the New York Law Journal, January 28, 2005.)
An amendment to the Administrative Code of New York City has been enacted which grants to qualified film production companies a five percent tax credit on production costs of certain films if the predominant amount of those costs are expended in New York City.1 This legislation was authorized under a law enacted in August of 2004 providing for a ten percent tax credit offered by New York State under its Film Production Tax Credit Program. 2
The laws were passed to counter tax incentives offered by other localities designed to lure film and television production there. For example, in the mid-1990’s, Canada began offering substantial credits for film production based upon salary costs incurred. These credits, together with a favorable exchange rate, allowed Toronto and Vancouver to become major film production cities, with the value of United States film production spending in Toronto rising from $84.7 Million in 1993 to almost $570 Million in 2001. (Since 2001, however, it appears that the rising Canadian dollar and increased competition and incentives offered by other countries have contributed to a substantial decline in Canadian production.)
The credit offered by New York City is five percent of the qualified production costs paid or incurred in the production of a qualified film. To “qualify,” production costs must be attributable to the use of tangible property or the performance of services within the city of New York, directly and predominantly in the production (including pre-production and post production) of a qualified film.
Production costs essentially are below-the-line costs. They are defined as any costs for tangible property used and services performed directly and predominantly in the production (including pre-production and post production) of a qualified film. They do not include (i) costs for a story, script or scenario to be used for a qualified film and (ii) wages or salaries or other compensation for writers, directors (including music directors), producers and performers (other than background actors with no scripted lines). The amendment states that production costs generally include technical and crew production costs, such as expenditures for film production facilities, or any part thereof, props, makeup, wardrobe, film processing, camera, sound recording, set construction, lighting, shooting, editing and meals.
A “qualified film” for which the credit will apply is defined as a feature-length film, television film, television pilot and/or each episode of a television series, regardless of the medium by means of which same is created or conveyed. Certain productions are specifically excluded from being a qualified film. These include a documentary film, news or current affairs program, interview or talk program, “how to” (i.e., instructional) film or program, a film or program consisting primarily of stock footage, sporting event or sporting program, game show, awards ceremony, film or program intended primarily for industrial, corporate or institutional end-users, fund-raising film or program, daytime drama (i.e., daytime “soap opera”), commercials, music videos or “reality” programs.
In order for the credit to apply, the qualified production costs (excluding post-production costs) paid or incurred which are attributable to the use of tangible property or the performance of services at a qualified film production facility must equal or exceed 75% of production costs (excluding post-production costs) paid or incurred, which are attributable to the use of tangible property or the performance of services at any film production facility within and without the city of New York. There are special provisions if the qualified production costs are less than $3 million.
A film production facility means a building and/or complex of buildings and their improvements and associated back-lot facilities in which films are or are intended to be regularly produced and which contain at least one sound stage. To be a qualified film production facility, the facility must be in the city of New York and contain at least one sound stage having a minimum of 7,000 square feet of contiguous production space.
The film production credit may be taken after all other credits against the General Corporation Tax and the Unincorporated Business Income Tax have been taken. The aggregate amount of credits may not exceed $12.5 Million in any calendar year; if applications are received for any tax year in excess of that amount, the excess will be treated as having been applied for on the first day of the next tax year. The aggregate amount is to be allocated by the Mayor’s office of Film, Theatre and Broadcasting among taxpayers in the order of priority based upon the date of filing and application for allocation of film production credits with such office.
There are limitations prescribed in the amendments relating to the maximum amount by which the tax due in any given year may be reduced and the means by which credits may be carried over to the immediately succeeding taxable year.
The Mayor’s office is to promulgate rules to establish procedures for the allocation of the tax credits. Such rules shall include provisions describing the application process, the due dates for the applications, the standards which shall be used to evaluate the applications, the documentation that will be provided to taxpayers to substantiate the amount of tax credits allocated to such taxpayers and such other provisions as deemed necessary and appropriate.
The law applies to taxable years beginning on or after January 1, 2005 with respect to qualified production costs paid or incurred on or after August 20, 2004 in connection with qualified films completed on or after January 1, 2005, regardless of whether the production of the qualified film commenced before August 20, 2004. The law is to expire as of August 20, 2008, but the expiration is not to affect the carryover of any credit allowed thereunder.
As indicated in the report by the Committee on Finance relating to this legislation, industry representatives believe that the three primary factors in determining where a film or television program will be produced are (i) demand made by stars or talent; (ii) cost, and (iii) script requirements. If neither the script nor the stars require or demand production in New York City, cost factors to date generally have dictated that it will be produced elsewhere. It is hoped that the new legislation will provide sufficient incentive to induce production companies to utilize more frequently the varied and impressive locations and facilities offered by New York City.
1 NYC Administrative Code, Section 11-604(20)
2 Tax Law, Section 24