BY ROBERT lABATE AND KRISTEN FLIGEL
A few months ago,
we wrote about some new legislation—“The Film Production Services
Tax Credit Act.” The purpose of the act is to revive sagging film
production in Illinois and promote the employment of Illinois residents
by granting certain “accredited productions” up to a 25 percent
tax credit for Illinois labor expenditures incurred during 2004. A complete
description of the rules governing the act, together with application
forms, are available at the Illinois Film Office Web site (www.illinoisbiz.biz/film
or www.filmillinois.state.il.us).
While
the act provides general parameters for who can qualify for the 25 percent
tax credit for “Illinois labor expenditures,” it granted final
rule-making authority to the Illinois Department of Commerce’s Economic
Office (DCEO) to administer the program and make final determinations
regarding who can qualify under what conditions. Based upon our recent
discussions with the Illinois Film Office (IFO), it appears that the DCEO
interprets the act very broadly so that it will apply to the widest possible
variety of production companies and circumstances.
Tinkering
With The Act
Let’s
be clear that the act, even when broadly interpreted, has its limits.
But by adopting producer-friendly rules, the DCEO appears able to offer
some significant benefits that are not obvious from a quick reading of
the act.
For
example, the act’s tax credit can be applied only against Illinois
income taxes (not federal or local taxes), the credit applies only to
a single taxable year and the tax credit cannot be carried forward or
back. In other words, if the production company’s tax credit is
greater than its Illinois income tax liability, it will be lost (remember,
this is a tax credit not a tax refund).
The
problem is that many production companies do not earn significant income
in the same year they incur the most production expenses. To remedy this
concern, the DCEO (with the blessing of the Illinois Department of Revenue
or IDOR) appears willing to allow the production to be finally “accredited”
in any of three years—2004, 2005 or 2006—depending on which
year a tax credit would be most beneficial to the production company.
Thus, by adopting flexible rules, DCEO and IDOR increase the possibility
that the tax credit will be used to greatest advantage by the production
company.
Second,
only “accredited productions” may take advantage of the tax
credit, meaning that an outright sale or transfer of the tax credit to
an unrelated third party is not permitted. However, some production companies
prefer immediate cash from an immediate sale of their tax credit (even
at a discount) to the use of a full-value tax credit in two or three years.
To
accommodate such cash-poor companies, DCEO (with IDOR’s approval)
allows the production company to create a partnership or LLC with a third
party. The newly formed partnership or LLC (not the production company)
would be designated as the “accredited production” and the
third party partner (or LLC member ) would be entitled to exercise the
tax credit. Exactly what a third party might be willing to pay for tax
credits is uncertain, as is the exact form of such partnership/LLC documents.
But, the flexible rules created by the DCEO are an improvement.
A third
major issue is “What constitutes 'Illinois labor expenditures’
under the act?” The answer is important because the amount of the
tax credit is based on the “amount of the Illinois labor expenditures
[minus the two highest Illinois labor salaries or wages] approved by the
DCEO for the production.” Further, to qualify for the tax credit
an “accredited production” must spend at least $100,000 (for
productions of 30 minutes or longer) or $50,000 (for productions of less
than 30 minutes) for Illinois labor expenditure.
Preliminary
comments by the DCEO and the ILO indicate that all Illinois labor expenditures,
even expenditures for independent consultants, will be counted for purposes
of qualifying for the act, as well as for determining the amount of the
tax credit. If independent consultants are included, then a substantial
number of film productions will qualify for the act and for a tax credit.
Despite
these limitations (some of which might be addressed by the legislature
this year), the DCEO has worked closely with the IDOR to develop rules
and procedures that are producer-friendly and which provide maximum benefit
for film and commercial production companies who qualify under the act.
Using
The Act
The
Illinois Film Production Services Tax Credit Act is not a simple piece
of legislation but, based on early comments by the DCEO and the IFO, two
things are clear. First, the DCEO and the IFO will do everything possible
to assist production companies who may qualify for tax credits under the
act. Second, the act is a work-in-progress that is being defined and developed
on an almost weekly basis, and our comments may change greatly as the
DCEO develops rules or if the Illinois legislature decides to extend or
expand the act this year.
Given
the fluid situation, it is absolutely essential that you consult your
tax advisor or attorney before deciding whether and to what degree
your company may benefit from the tax.
©Robert
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 mail at Robert Labate or Kristen Fligel at Holland & Knight
LLC, 131 South Dearborn Street, Suite 3000, Chicago, Illinois 60603, 312/263-3600.