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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
Major Studios and Guilds Forge New COVID-19 Production Safety Agreement
As production begins to restart in an ever changing COVID-19 landscape, The Alliance of Motion Picture and Television Producers (AMPTP) and other major studios announced an important deal with the DGA, IATSE, Teamsters, Basic Crafts, and SAG-AFTRA -- meant to ensure the safety and security of their members during the upcoming months. Read more.
September 22 2020
New York City Reopens for Film and Television Production
On July 17, 2020 NYC Mayor Bill de Blasio announced that, with the City entering Phase Four of Reopening on Monday July 20th, 2020, film and television production in the City can restart again in earnest. Read more.
July 21 2020
Los Angeles County Authorizes Television, Film, and Music Production Resume on June 12, 2020 With Strict Regulations
On June 11, Los Angeles County approved a staged resumption of film and TV production beginning June 12, 2020. However, it comes with extensive regulations. Read more.
June 16 2020