BY BOB LABATE & KRISTEN FLIGEL
Something
rather remarkable happened this summer in Springfield. In a time of budget
deficits and spending cuts, the Illinois legislature passed and the Governor
signed a tax credit for certain forms of film production that employ Illinois
residents. That the Film Production Services Tax Credit Act is not a perfect
piece of legislation is less surprising than the fact that Illinois is
taking steps to provide financial incentives to support film production.
The
goal of the act (designated SB0785 and available online at www.legis.state.il.us/legislation)
is to promote the employment of Illinois residents who work in the motion
picture industry in Illinois. A tax credit is not an automatic consequence
of shooting your film in Illinois and paying your employees, however,
and depends upon a number of factors and circumstances that are not completely
clear. Even basic rules governing the administration of the tax credit
program are yet to be developed. Since the act expires in one year, the
hope is that it will be replaced by something better defined and a bit
less restrictive.
So,
with the caveat that much remains unresolved (and should be discussed
with your attorney or accountant), the following are a few questions and
first look answers regarding the new act.
Q.
When does the new act take effect?
A.
The act takes effect on Jan. 1, 2004 and applies to certain film production
companies that employ Illinois residents to produce accredited productions
in Illinois.
Q.
What form of tax credit is provided by the act?
A.
A taxpayer who receives a tax credit under the act is entitled to a credit
against the taxpayer’s Illinois state income tax for the year in
which the credit is earned. The credit applies only to one taxable year,
may not be carried forward or back and may not reduce the taxpayer’s
Illinois income tax liability to less than zero.
Q.
How much of a tax credit might I receive?
A.
The credit provided under the act is equal to 25 percent of the Illinois
labor expenditure approved by the Illinois Department of Commerce and
Community Affairs (DCCA). It is expected that the DCCA will work closely
with the Illinois Film Office in making such determinations. There appears
to be no cap on the total amount of the tax credit that may be approved
by the DCCA.
Q.
What type of expense qualifies as an Illinois labor expenditure?
A.
An Illinois labor expenditure means salary and wages paid by the taxpayer
to its employees for service on an accredited production. Fees to independent
contractors such as your attorney or accountant do not qualify. Related
costs such as per diems, insurance, travel and accommodations for your
employees are not included as an Illinois labor expense.
Further,
not all salary and wages qualify for the tax credit. To qualify as an
Illinois labor expenditure, the expenditure must satisfy all of the following
requirements: (i) it must be reasonable, (ii) it must be included in the
federal tax basis of the film, (iii) it must be incurred on or after Jan.
1, 2004, (iv) it must be incurred for the production stages of the project—meaning
from the creation of the final script to the end of post-production, (v)
it must be limited to the first $25,000 of wages paid to each employee,
(vi) it may not include the salary or wages paid to the two highest paid
employees, (vii) it must be directly attributable to the production, (viii)
it must be paid in the tax year—or no later than 60 days after the
end of the tax year—for which the taxpayer is claiming credit, (ix)
it must be paid only to people who are Illinois residents at the time
the payment is made, and (x) it must be for services rendered in Illinois.
Q.
Who is an Illinois resident?
A.
The new statute does not define the term Illinois resident (there are
different legal definitions for different purposes) but residence normally
requires a person to be physically present in a state for a period of
time and to intend to remain in that state.
Q.
What is an accredited production?
A.
An accredited production is only a film, video or television production
that has been certified by the DCCA and that, within 12 months after the
commencement of principle photography, spends at least $100,000 (for productions
of 30 minutes or longer) or spends at least $50,000 (for productions of
less than 30 minutes) for Illinois labor expenditures. An accredited production
does not include a production that is: (i) news, current events or public
programming; (ii) a talk show; (iii) a production in respect of a game,
questionnaire or contest; (iv) a sports event or activity; (v) a gala
presentation or awards show; (vi) a finished production that solicits
funds; (vii) a production that contains one or more visual depictions
of sexually explicit conduct and which is subject to the reporting requirements
of 18 U.S.C. § 2257; or (viii) a production produced primarily for
industrial, corporate or institutional purposes.
Q.
How does my project become an accredited production that is eligible for
the film production tax credit?
A.
To qualify for a tax credit, the applicant must file an application on
forms approved by the DCCA and must provide the DCCA with information
necessary to calculate the proposed tax credit. The information submitted
to the DCCA in support of an application is confidential and is not considered
a public record. The DCCA is currently developing the forms and procedures
to be used in determining whether a project may be accredited, and more
information will be available from the Illinois Film Office closer to
the Jan. 1, 2004 effective date.
Q.
And finally, who can be an applicant?
A.
An applicant is a taxpayer that is a film production company of an accredited
production in Illinois that either owns the copyright in the production
or has contracted with the owner of the copyright because the owner is
not eligible for the tax credit.
©2003
Robert J. Labate and Kristen E. Fligel. This column is provided as a source
of information and is not to be construed as legal advice or opinion.
You may contact us via e-mail at robert.labate@hklaw.com and kristen.fligel@hklaw.com
or, via mail to Bob Labate or Kristen Fligel at Holland & Knight LLC,
131 South Dearborn Street, Suite 3000, Chicago, Illinois 60603, 312/263-3600.