August 23, 2023

California's Expanded Film Tax Credit is a Challenge to Georgia’s Thriving Film Industry

Courtesy of Freepik.com

Signed into law in July, California Film Tax Credit Program 4.0 significantly extended and expanded its film and television credit program. The new law makes a number of changes to the program with the following substantial modifications:

1. Extends the program for another 5 years;

2. Increases the maximum credit from 25% to 30%;

3. Allows studios to claim the tax credit for up to five years after the production is completed, providing more flexibility in how the credit is used; and

4. Makes the tax credits refundable, meaning companies could receive a refund for a portion of their credits that exceed their tax liability.

However, the most significant deviations from previous years’ programs relates to the increased credit percentage (finally 30%!) and the adjustment of the previous use-it-or-lose-it credit to a refundable one.

Examining the Current California Program: 3.0

Under the state's current 3.0 program, the vast majority of California film tax credits are non-transferable and non-refundable. Only independent feature films with expenses of less than $10M, the smallest category of tax credit recipients in the program, were allowed to transfer credits to third-party buyers when there is insufficient tax liability for use on its return.

Non-transferable and non-refundable tax credits can neither be resold to a third-party buyer nor refunded from the state when there isn’t sufficient tax liability to use the entire credit amount. Program 3.0 only allows studio credits to be used against the applicant production company’s income tax liability in the current or future years. If the studio doesn’t have enough revenue to equate to a large enough California income tax liability but shot a film/television series in the state, it is stuck with a credit that it can’t use.

As you can imagine, changing the tax credit to be refundable, which will start in 2025, was a top priority for studios. Starting with Program 4.0, studios will receive a refund equal to either (i) the lesser of 18% of the credit or (ii) 90% of the portion of the credit exceeding their tax liability. Similar to the mechanics of incentive programs in transferable tax credit states (e.g., Georgia and Illinois), studios that elect to receive such a refund will forfeit a portion of their credit.

Governor Newsom, the California state assembly and its Film Commission were very specific in noting that this year’s changes were aimed at curbing the flight of productions from California to other states with more generous production incentive programs. And the changes to the program are definitely a positive step for the California film industry! For the first time in years, California will be more competitive with other states’ production incentives, and this will inevitably encourage studios to produce more films and television shows “at home.”

Since Georgia has been dubbed “Hollywood South” and is in California’s sights as one of its largest industry rivals, the question remains whether these changes will in fact steal projects from GA for production in CA. In my humble opinion: maybe a few studio projects!

There are still vast differences between the CA and GA incentives that fall in GA’s favor. One of the largest factors: Georgia’s film tax credit applies to more projects than does the California incentive. In Georgia, unscripted projects (i.e., documentary films, reality television series, music videos, games shows, etc.) qualify for the incentive whereas only scripted projects qualify in California. Furthermore, Georgia also has a thriving industry for commercial producers who know and understand that California won’t incentivize their productions.

Another notch in Georgia’s belt is one major category of expenditures that qualify for the incentive. In Georgia, above-the-line (ATL) talent’s wages and fringes qualify for the incentive; there is a limit of up to $500k on the amount of each individual person’s wages that qualify. Nevertheless, the wages for a production’s top talent, including its cast, producers, directors, etc., will be included as a qualified spend in calculating its incentive. The same is not in the case in California; wages and fringes for ATL do not qualify for the California film tax credit.

And finally, Georgia only requires that production companies spend at least $500k in order to qualify for its film tax credit. In California, the minimum spend is $1M. For small indie films and/or web-based episodic series that have less than a $1M budget, California isn’t even a consideration for those projects.

All in all, I anticipate that California’s expanded incentive has done a great job of encouraging several studio projects to stay home but will neither persuade any additional indie projects nor studio projects with a large above-the-line to set up base camp in California. But you don’t have to take my word for it. Let’s connect in 2025 and evaluate Program 4.0 together!