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Borrowing against tax credits can be an efficient way to complete financing for a film or television series. However, the practice is also complex and requires productions to plan carefully for the long-term.
That’s why we’re breaking down the process, evaluating the risks, and exploring how you can get the most bang for your tax-credited buck.
For this article, we enlisted the expertise of Will French, Senior Managing Director, Fallbrook Film Finance. With French’s wealth of knowledge on tax credit programs across the U.S., we’ll give you a crash course in leveraging tax credits to finance your project.
The task of understanding production incentives can feel intimidating all on its own. Add to it the complexities of borrowing, and you have a film finance cocktail strong enough to make even seasoned producers a bit tipsy.
Fortunately, the gist of borrowing against tax credits is relatively simple. It requires that a production use expected future tax credits as collateral to secure other financing upfront. Doing so enables filmmakers to leverage their credits during production—instead of after—thereby increasing operational budgets and reducing cash flow constraints.
Of course, there are multiple steps involved in the process, and their difficulty can vary from state to state. With any borrowing agreement, it’s always best to seek the advice of a qualified professional to ensure the best terms, but it can be helpful to understand the general process.
We can break it down into nine component parts:
To borrow against tax credits, you’ll first have to be formally admitted into a tax credit program to be entitled to earn credits through upcoming production spending. Therefore, the first step is to apply for relevant tax credits through their state-specific programs.
Application requirements will vary from state to state. California’s tax credit programs are completely separate from those in New York, which are completely separate from those in New Mexico, Hawaii, or Massachusetts.
Apply early, as some states take a while to approve applications.
To find the best states for incentives and tax breaks for your next production, check out our free Production Incentive Finder or reach out to one of Wrapbook’s in-house incentive experts for tailored insights.
Once your applications are in, you’ll have to wait for approval. The approval is generally a letter or similar short form which certifies that the production company is eligible to earn tax credits in connection with the identified film or television project, but sometimes it can take the shape of a long-form Incentives Agreement.
Initial approval is essential for transforming the possibility of a credit into an item of real-world value. Your lender will want to see the official document.
After receiving initial approval, your production will need to partner with an organization that maintains expertise in tax credit monetization. This will typically be either a bank or finance company experienced in film incentives.
Financing partnership will provide the mechanism for exchanging your tax credits for tangible funds once they have been formally certified.
Collateralization is the process of leveraging the value of your tax credit to secure a loan. You’re essentially giving the bank or finance company the right to seize your credits in the event that you don’t pay them back for the money they’re going to give you upfront, much like putting a mortgage on your house or copyright.
This process is the heart of borrowing against tax credits as a film financing tool. It is the pledge of the tax credits that makes the strategy viable for all parties.
Lenders will place a lien on the tax credits through Uniform Commercial Code (UCC) filings in both the state where the production company is domiciled and the state that will issue the tax credits.
Once your credits are collateralized, the bank or finance company will approve your loan. Funds will be disbursed according to whatever agreement you negotiate with your chosen institution. In some cases (usually where there is a completion bond in place) the financier will release the full tax credit loan amount at the start of filming. In other cases, the financier may want to verify that qualified spending has taken place and release the funds in increments only as tax credits are earned (called “tranches”).
This money can then feed your production budget. Depending on when the loan is disbursed, the funds will help you navigate some part of the pipeline from pre-production through post-production.
These days, most states require audits to be completed by certified public accountants in order to verify what spending was qualified and what wasn’t. The auditor will undergo a rigorous review of production accounting records, so the pro tip here is to keep excellent and organized accounting documents!
The audit will get submitted to the state for final review and approval. As long as there are no issues, the state will issue a formal certification of the tax credits. This is the critical step that results in a credit that is now ready to be rebated, refunded or traded to a taxpayer for cash.
Depending on the state, you may need to assign the tax credits to a taxpayer from the given state in exchange for cash. In other cases, you can send the certification back to the state to receive a direct payment in the form of a rebate or a tax refund. Now you’ve got your cash!
If you’ve borrowed money against tax credits, your creditor will expect you to repay the loan with the cash received within a timeframe stipulated by the associated loan agreement, with interest of course.
The fact that you can do something doesn’t necessarily mean that you should.
Borrowing against tax credits can expose your production to unique risks as well as opportunities. If not properly handled, these extra risk exposures could create excessive financial burdens and threaten the long-term success of your project.
That’s why it’s so important to adequately assess your risk factors when seeking a loan against tax credits. Responsible risk management is a fundamental part of protecting your production company, and that’s no less true when working with production incentives.
The details of your specific risk exposure will vary according to the incentive program in question and the features of your individual production. However, the risk of securing loans with tax credits is generally rooted in the completion and distribution requirements of either the loan agreement or the credits themselves.
With that in mind, let’s talk about three specific risk factors that you should consider when borrowing against tax credits:
In film production, timing is everything. That’s just as true for matters of film finance as it is for a shooting schedule.
Depending on the incentive program, the tax credit itself might have unique time frame restrictions to consider. These restrictions may also complicate any time constraints stipulated in the terms of your loan agreement.
For example, a portion of Georgia’s film tax incentives program requires that a production provide proof of multimarket distribution. In practical terms, this means that the production will not receive their full tax credit until the project itself has actually been released in theaters or has been made available for streaming.
The timing of your distribution could, therefore, affect your ability to pay back a loan. That could be a serious problem if your loan agreement stipulates repayment in a shorter time frame.
The value of a tax credit may be discounted when sold or leveraged as collateral to secure a loan. Such discounts are applied in order to create value for the buyer within the exchange.
The basic premise of this exchange is simple. In the event of a sale, the production effectively trades a larger tax savings that they would only see later for a smaller amount of direct funding that they can use right now. The same principle applies when using tax credits as collateral.
When borrowing against a tax credit, producers must be careful to consider the difference between a credit’s market value and its tax value. A miscalculation could result in a missed opportunity at best or a serious long-term cash flow problem at worst.
The greatest danger of any loan is its accumulation of interest. If payments are not managed responsibly, swelling interest can quickly transform a strategic decision into a financial emergency.
Tax credits may provide the collateral you need to secure the loan, but they won’t automatically make borrowing a good idea. Careful planning and due diligence will help you determine whether a loan is feasible for you, your production, and your production company.
When borrowing against tax credits, there is simply no replacement for qualified, professional consultation. Film financing with tax credits is a highly specialized field, and a proven track record represents an invaluable recommendation. From helping you pick the perfect location to navigating complex rules, partnering with an expert is the best way to maximize the financial benefits of your tax incentives.
Here are two ways that an expert can specifically help you to borrow against tax credits better:
Between program details and discount amounts, there are an awful lot of opportunities to miscalculate the precise way that a tax credit will affect your bottom line. When you take all of the relevant factors into consideration, the actual dollar-for-dollar offset of a tax credit might be considerably different than it seems at a glance.
However, qualified incentive experts can provide a clearer, more realistic picture. They can help avoid misconceptions and optimize your tax credit plan.
By nature, tax credits must be part of a holistic film finance strategy. There are many factors that could affect their value from negotiated loan terms to your production’s own expenses.
Experts can help you understand those factors by showing you how they interact with one another to determine the real-world value of your tax credits. That knowledge is the key to effective credit management.
The potential rewards of borrowing against tax credits are considerable, but the process is not without its risks. You’ll need transparency, due diligence, and qualified expertise to unlock this powerful film finance tool.
Many thanks again to Will French of Fallbrook Film Finance for his invaluable insights. To hear more from French about the tax incentive landscape, check out our podcast episode with him.
And to upgrade your incentives strategy, be sure to visit Wrapbook’s Production Incentive Center. We offer invaluable tools like our State Incentive Map, Incentive Comparison Tool, and Government Form Center—all at no cost to you.
At Wrapbook, we pride ourselves on providing outstanding free resources to producers and their crews, but this post is for informational purposes only as of the date above. The content on our website is not intended to provide and should not be relied on for legal, accounting, or tax advice. You should consult with your own legal, accounting, or tax advisors to determine how this general information may apply to your specific circumstances.
Loring is a Los Angeles-based writer, director, and creative producer. His work has been commissioned by a diverse range of clients- from Havas Worldwide to Wisecrack, inc.- and has been screened around the world. Through a background that blends project development with physical production across multiple formats, Loring has developed a uniquely eclectic skillset as a visual storyteller.
