Tax credit act made easy

Bob Labate

Kristen Fligel

By Bob Labate and Kristen Fligel*

Editor: Attorneys Bob Labate and Kristen Fligel of Holland & Knight law firm give us an easy-to-understand summary of the Film Production Services Tax Credit Act (the “Act” and designated SB0785), whose goal is to promote the employment of Illinois residents who work in the state’s motion picture industry.

A tax credit is not an automatic consequence of shooting your film in Illinois and paying your employees, however. It depends upon a number of factors and circumstances that are not completely clear.

Even basic rules governing the administration of the tax credit program are yet to be developed.

Since the Act expires in one year, the hope is that it will be replaced by something better defined and a bit less restrictive.

So, with the caveat that much remains unresolved (and should be discussed with your attorney or accountant), the following are a few questions and “first look” answers regarding the new Act.

Q. When does the new Act take effect?

A. The Act becomes effect on January 1, 2004 and applies to certain film production companies that employ Illinois residents to produce “accredited productions” in Illinois.

Q. How long does the Act last?

A. As currently enacted, the Act will be automatically repealed on January 1, 2005, one year after its effective date.

Q. What form of tax credit is provided by the Act?

A. A taxpayer who receives a tax credit under the Act is entitled to a credit against the taxpayer’s Illinois state income tax for the year in which the credit is earned. The credit applies only to one taxable year, may not be carried forward or back and may not reduce the taxpayer’s Illinois income tax liability to less than zero.

Q. How much of a tax credit might I receive?

A. The credit is equal to 25% of the Illinois labor expenditure approved by the Illinois Dept. of Commerce & Economic Opportunity (DCEO).

It’s expected that DCEO will work closely with the Illinois Film Office in making such determinations. There appears to be no cap on the total amount of the tax credit that may be approved by DCEO.

Q. What type of expense qualifies as an “Illinois labor expenditure?”

A. It means “salary and wages” paid by the taxpayer to its employees for service on an “accredited production.” Fees to independent contractors such as your attorney or accountant do not qualify. Related costs such as per diems, insurance, travel and accommodations for your employees are not included as an “Illinois labor expense.”

Further, not all salary and wages qualify for the tax credit.

To qualify as an “Illinois labor expenditure” the expenditure must satisfy all of the following requirements:

  1. it must be reasonable;
  2. it must be included in the federal “tax basis” of the film;
  3. it must be incurred on or after January 1, 2004;
  4. it must be incurred for the production stages of the project meaning from the creation of the final script to the end of post-production;
  5. it must be limited to the first $25,000 of wages paid to each employee; (vi) it may not include the salary or wages paid to the two highest paid employees;
  6. it must be directly attributable to the production;
  7. it must be paid in the tax year – or no later than 60 days after the end of the tax year — for which the taxpayer is claiming credit;
  8. it must be paid only to people who are Illinois residents at the time the payment is made;
    and
  9. it must be for services rendered in Illinois.

Q. Who is an Illinois resident?

A. It appears that only “salary and wages” paid to a legal resident of Illinois will qualify for the tax deduction. (Employees who reside in other states do not qualify).

The new statute does not define the term “Illinois resident” (there are different legal definitions for different purposes). But residence normally requires a person to be physically present in a state for a period of time and to intend to remain in that state.

Q. What is an “accredited production?”

A. It’s only a “film, video or television production” that has been certified by DCEO and that, within 12 months after the commencement of principal photography spends at least $100,000 (for productions of 30 minutes or longer) or spends at least $50,000 (for productions of less than 30 minutes) for “Illinois labor expenditures.”

An “accredited production” does not include a production that is:

  1. news, current events or public programming;
  2. a talk show;
  3. a production in respect of a game, questionnaire or contest;
  4. a sports event or activity;
  5. a gala presentation or awards show;
  6. a finished production that solicits funds;
  7. a production that contains one or more visual depictions of sexually explicit conduct and which is subject to the reporting requirements of 18 U.S.C. ? 2257;
    or
  8. a production produced primarily for industrial, corporate or institutional purposes.

Q. How does my project become an “accredited production” that is eligible for the film production tax credit?

A. To qualify for a tax credit, the applicant must file an application on forms approved by DCEO and must provide DCEO with information necessary to calculate the proposed tax credit. Information submitted is in support of an application is confidential and is not considered a public record.

DCEO is currently developing the forms and procedures to be used in determining whether a project may be “accredited” and more information will be available from the Illinois Film Office closer to the January 1, 2004 effective date.

In order to issue an “accredited production certificate,” the Act requires that DECO must find that at least four of the following six factors exist with respect to a film project:

  1. the applicant’s production intends to make expenditures in Illinois;
  2. the applicant’s production is economically sound and will increase opportunities for employment of Illinois residents;
  3. the applicant’s production includes a provision setting forth the percentage of minority workers that the production company plans to employ, subject to any collective bargaining agreement;
  4. the applicant intends to participate in training , education, and recruitment programs that are organized in cooperating with Illinois colleges, universities, labor organizations and the motion picture industry to promote and encourage diversity in hiring Illinois residents;
  5. that if not for the tax credit, the applicant’s production would not occur in Illinois and that without the tax credit the applicant likely would not create or retain jobs in Illinois; and
  6. that awarding the tax credit will have an overall positive impact to the State of Illinois.

Q. And finally, who can be an “Applicant”?

A. An “Applicant” is a taxpayer that is a film production company of an accredited production in Illinois that either owns the copyright in the production or has contracted with the owner of the copyright because the owner is not eligible for the tax credit.

As a result, a non-Illinois entity could likely contract with an Illinois company to produce a film using Illinois people, yet retain the copyright in the film, and still qualify for a tax credit if the other requirements of the Act are met.

See more about the bill at www.legis.state.il.us/legislation.

This article originally appeared in Performink. ReelChicago thanks Performink for allowing us to reprint it.

*?2003 Robert J. Labate and Kristen E. Fligel. This column is provided as a source of information and is not to be construed as legal advice or opinion. You may contact us via e-mail at robert.labate@hklaw.com and kristen.fligel@hklaw.com or, via mail to Bob Labate or Kristen Fligel at Holland & Knight LLC, 131 South Dearborn Street, Suite 3000, Chicago, Illinois 60603, (312) 263-3600.

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