Production Incentives Pain Point #2
I have to do WHAT to get my money?
I’ve noticed a pattern when I talk to producers new to production incentives. They get excited about the possibilities - until they hear those dreaded two words:
Tax credits.
I feel ya. Anything tax-related can provoke untold angst.
But wading into tax credit waters doesn’t have to feel like this:
For part two of our series on production incentives pain points (find part 1 here), we’re tackling how to turn transferable tax credits into cash.
To guide us, I spoke with the incredibly helpful Chad Agena, Managing Director and Head of Tax Credit Brokerage at TPC. TPC offers an array of services related to production incentives, from advocacy and administration to post-production accounting, lending, and (cue Chad) tax credit brokerage.
But First: A Word on Refundable v. Transferable Tax Credits
Before we dig in, a refresher on different types of tax credits:
In brief, with a refundable tax credit, you register as a legal entity in the state, which is usually inexpensive and can be done online (sound too complicated already? Don’t worry - Chad’s colleagues at TPC can help). You follow the necessary steps to report qualifying expenses and apply for the production incentive, which the state then issues in the form of a tax credit. Then, when you file your state return and report the credit, you’ll receive a cash refund for any amount above your tax liability in that state. Hawaii and New Mexico are two states that offer these types of tax credits.
Transferable tax credits are different.
With transferable tax credits, if you don’t have a tax liability in the state, you can sell your credit on the open market through a broker like our friend Chad. Brokers essentially hunt for a buyer (usually a corporation) looking to save on their taxes by buying credits at a discount—say, 85 or 90 cents on the dollar. You get cash for your credit, they lower their taxes, and everyone wins!
At least a dozen states offer transferable production tax credits, including Georgia, New Jersey, Illinois, Connecticut, Massachusetts, Minnesota, Montana, and Arkansas. Some international destinations do, too, including the Dominican Republic and Colombia.
Cashing in on Transferable Tax Credits
So how do you quickly and painlessly convert transferable tax credits to cash?
Chad shared these tips:
Find an experienced broker. As Chad says, “My job is to make people's lives easier. I want to get you paid as fast as possible, and as much as possible, and take all that work off your hands.” Music to our ears!
Know the difference between “discount rate” and “net to production.”
A reliable broker like Chad will tell you from the outset exactly how much money you’ll receive on the dollar for your credit - a.k.a. the “net to production.” Chad presents clients with an engagement letter that details the net to production, which includes any fees. “If I tell them 90 (cents on the dollar) and I can’t get 90, that’s on me. I eat the difference,” he says. No hidden fees, no “sorry, turns out this was the best I could do.” We love that about Chad.
Less scrupulous brokers will often only share a discount rate (a.k.a. the rate they’ll sell the credit for) and then tack their fees on later - an unwelcome surprise for the unprepared. So be sure to ask a broker what the “net to production” will be for your credit to ensure all fees are included in the calculation - and if they guarantee that rate.
Get it in writing. As mentioned, a trustworthy broker will offer an engagement letter that states the net to production you’ll receive for your credit. Depending on the situation and your requirements, such a letter can also specify the amount of time the broker has to sell the credit. “If it’s a state where we know we can sell it right away, great,” Chad says. “Within two weeks, you’ll have your money.” For tougher states, that window may be as much as 60 days, but Chad’s quick to note that they rarely take that long.
Bring the broker in early. You can make everyone’s job easier by reaching out to your broker early in the process (a couple of months’ lead time is best). Some credits are harder to sell than others, depending on the size of the credit, season, and jurisdiction, so it’s best to get it on the broker’s radar early. If the credit is large (congrats!) and/or in a state where the market for credits is tighter, it might take a little more time to find a buyer. As Chad notes, advanced notice will also give him time to get all parties’ accounts onboarded and a wire set up - which means you’ll get your money faster.
But Keep in Mind:
Be wary of brokers who aren’t transparent in how they present pricing. Remember that magic phrase: ”net to production” - and get terms in writing.
The process of brokering tax credits is essentially the same for foreign production companies; however, such companies need to make doubly sure they set up their local entity correctly or it could lead to delays and/or (gasp!) a smaller payout. Talk to a trusted tax professional. Chad’s colleagues at TPC can help you set everything up correctly and avoid any nasty surprises.
Remember: Not all tax credits are created equal. Transferable tax credits will return different rates depending on factors like jurisdiction, size, and even time of year. Some state tax credits, like California’s, are easier to sell and will return a higher net to production, while Connecticut’s can be more challenging and yield a lower rate. Don’t make any assumptions about how much cash you’ll receive for your transferable tax credit until you talk to a broker - and if you’re selling it, never assume you’ll keep 100%.
Refundable tax credits are a different beast. Getting 100% of a credit back (after any tax liability) may sound enticing, but states like New York have sometimes taken years to fully pay out on such credits because of yearly caps and bureaucratic delays. That could cost you - especially if you borrow against the credit. When comparing incentives programs in different jurisdictions, it’s crucial to thoroughly research the pros and cons and payout potential—or enlist the help of a professional.
That wasn’t so scary, was it?
Many thanks to Chad Agena at TPC for sharing his wisdom! If you’d like to get in touch with Chad about brokering credits (or any other TPC services), reach out to him at cagena@tpc.us - and tell him Carrie at Production Incentives Insider sent you!
Production Companies: Budgets have never been tighter, and greenlights harder to come by. We can help you leverage production incentives to make your development slate more competitive.
Film commissions: Need help luring productions? Contact us and brag about your incentive in this newsletter!
Just drop us a line at carrie@globalcontentstrategies.com, or via our website.