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July 18th, 2016
Film Tax Credits: New York Appeals Court Rejects Portion of Filmmaker’s Expenses
The New York film production tax credit is often a crucial piece of the financing for a film. But the rules governing qualification of expenses are strict. If you claim a New York tax credit for a non-qualifying expense, such as the cost of acquiring intellectual property rights, or if you fail to properly substantiate an otherwise qualified expense, your claim could be denied. That's what recently happened to the New York producer of a feature-length film adaptation of a Broadway show.
NYS Tax Law §24 allows a tax credit equal to 30% of "qualified production costs" paid or incurred in the production of a "qualified film," assuming certain requirements relating to the company's level of activity in New York are satisfied. For 2015 - 2019, an additional 10% credit may be available for amounts paid to individuals for services performed on a qualified film with a minimum budget of $500,000 in certain upstate New York counties.
What are "qualified production costs"?
The New York statute defines "production costs" as "costs for tangible property used and services performed directly and predominantly in the production (including pre-production and post-production) of a qualified film," including generally "technical and crew production costs, such as expenditures for film production facilities, ... props, makeup, wardrobe, film processing, camera, sound recording, set construction, lighting, shooting, editing and meals." "Production costs," however, 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 Broadway Worldwide decision
In In re Broadway Worldwide, Inc. v. N.Y.S. Dept. of Economic Development, a production company failed to establish that amounts paid to a choreographer and others involved in the design elements of a feature-length film of the Broadway musical Memphis were for services qualifying for the New York film production tax credit. The producer's contract with each of these individuals "contained some mention concerning services, in addition to provisions concerning royalties, but the contracts failed to specify what compensation related to the services," and the producer was unable to prove that these individuals even rendered the services in New York State for which they were engaged. In the absence of such evidence, the court found that the payments constituted royalties from the play that did not qualify for New York's film production tax credit. The court also affirmed that compensation paid to the director was not a qualified production expense under NYS Tax Law §24.
What this means
The Broadway Worldwide decision is significant because it is one of the few reported judicial decisions concerning New York's film production tax credit and sheds useful light on the process by which claims of entitlement to the credit may be disallowed. While application of the decision may be limited because of its particular facts - it involved the filming of a live play - it highlights the distinction between eligible services and ineligible intellectual property rights and illustrates the importance of separating the two - preferably in separate agreements. In those (albeit rare) instances where both rights and services are addressed in one agreement, the compensation payable for each must be clearly delineated and performance of the services must be properly documented.
If you have any questions about the Broadway Worldwide case, or about other media and entertainment tax and finance matters, please contact Jeffrey Marks at (212) 826 5536 or firstname.lastname@example.org, Thomas D. Selz at (212) 826 5535 or email@example.com, Bernard C. Topper at (212) 826 5547 or firstname.lastname@example.org, or any other member of the Frankfurt Kurnit Corporate & Finance Group.
Other Entertainment Law Alerts
New York Adds New Tax Credit for Minority and Women TV Writers’ and Directors’ Fees/Salaries
Effective December 18, 2019, New York State has amended its Tax Law to provide a new franchise tax and personal income tax credit for minority and women television writers' and directors' fees and salaries. Read more.
December 27 2019
New Federal Budget Revives Section 181
Among the provisions of the Bipartisan Budget Act of 2018 passed by Congress and signed by the President on February 9 is a retroactive extension of Internal Revenue Code Section 181. Read more.
February 15 2018
Section 181 Revived
The new tax law, commonly referred to as the Tax Cuts and Jobs Act (the "Act"), contains some good news for producers of motion pictures, television programs and live theatrical shows (each a "Production") and their investors. Read more.
January 11 2018