The introduction of the Motion Picture, Television and Entertainment Revitalization Act could mark one of the most significant developments for the United States entertainment industry in years. While the bill is still in its early stages and will undoubtedly evolve as it moves through Congress, it reflects something the industry has been discussing for a long time: how can the U.S. entertainment sector become more competitive as productions continue to migrate overseas?

For decades, producers have relied primarily on state tax incentives and international production programs when deciding where to film. This proposal would introduce a permanent federal incentive designed specifically for film, television and visual effects production. More importantly, it is intended to complement — not replace — existing state incentive programs. The enactment of this incentive would mean producers could potentially combine federal and state incentives; fundamentally changing the economics of producing content in the U.S.

PROPOSED FEDERAL ENTERTAINMENT TAX CREDIT 

The proposal centers around a 20% federal tax credit on qualified U.S. production labor costs for eligible productions, with the opportunity to increase the credit to as much as 30% through various bonus provisions. 

Eligible productions generally include feature films, television pilots and television series with budgets exceeding $1 million, provided that at least 75% of principal photography takes place in the U.S.

The legislation also recognizes the evolution of the industry and includes credits for not just production labor but qualifying visual effects and post-production work performed in the U.S., too. As post-production work moves overseas, this could become an important incentive for domestic visual effects houses, editors, sound facilities and other post-production companies.

A TRANSFERABLE TAX

The proposed credit is unique in that it would be transferable, meaning the credit could become another financeable asset that producers would be able to monetize during production, rather than waiting until a tax return gets filed. Transferable state tax credits have become increasingly valuable in financing independent productions, and therefore, it is likely that a transferable federal credit would become another important piece of the capital stack.

OTHER INCLUDED BONUS CREDITS

The proposal also includes additional bonus credits intended to encourage specific policy goals, including filming in rural Opportunity Zones or federally declared disaster areas, supporting qualifying independent productions, encouraging multi-state production activity and rewarding companies that shift more production back to the U.S. 

OBJECTIVES OF THE PROPOSED LEGISLATION 

The legislation is designed to strengthen domestic production while improving the country's competitiveness against jurisdictions such as Canada, the United Kingdom and Australia that have successfully attracted productions through national incentive programs.

Many of the practical details of the tax proposal, including qualification requirements, substantiation, reporting obligations and ownership rules, need to be addressed through Treasury regulations. Those regulations will likely determine how easy or difficult it will be for productions to benefit from the credit.

WHAT TO WATCH

If this legislation moves forward, there are several issues worth watching:

Layering Federal Incentives with Existing State Tax Credits

First, producers and financiers will undoubtedly look at how a federal incentive can be layered with existing state tax credits when structuring productions. That could have a meaningful impact on where projects are filmed and how financing packages are assembled.

Options for Financing 

Second, lenders will likely evaluate whether the federal credit can be financed in the same way many state incentives are financed today. If so, this could improve liquidity and reduce the amount of equity needed to get projects off the ground.

The Impact on Production Financing Agreements and Profit Participation

The legislation specifically excludes participations and residuals from qualified compensation. With this in mind, producers, financiers and investors may need to ask:

  • How is the value of the federal tax credit treated under financing agreements and net profit definitions?
  • Will the credit reduce production costs for purposes of investor recoupment? 
  • Will it be shared with equity investors? 
  • Could it affect when profit participants begin receiving distributions?

Answers to these questions are unlikely to come from the statute itself. Instead, they will depend on how financing documents, distribution agreements and profit participation provisions are negotiated going forward.

NEXT STEPS FOR INDUSTRY LEADERS 

This tax credit itself is significant, but the way it is incorporated into financing structures and contractual relationships may prove just as important.

The bill is still early in the legislative process, and many provisions could change before anything becomes law. Nevertheless, this is legislation that those involved in the business side of entertainment should watch closely. If enacted, it has the potential to influence not only where productions are made, but also how they are financed, how deals are negotiated and, ultimately, how financial returns are shared throughout the industry. 

Learn more about the impact this legislation could have on your production by contacting the Entertainment Practice at GHJ.