October 24, 2016

10 Things You Should Do to Capitalize on the Illinois Film Production Tax Credit

When we’re sitting on the couch at home watching TV, it’s easy to forget how much effort and resources went into creating that content. In most circumstances, film production entails a significant investment on the part of the filmmakers and their financiers. These funds, in turn, create jobs and generate revenue.

Many state governments have realized the impact that film production can have on the local economy and have attempted to incentivize it within their borders. Illinois is one of these states. The Illinois Department of Commerce encompasses the Illinois Film Office (“IFO”), which administers the Illinois Film Production Tax Credit (“Tax Credit”). The IFO claims that last year this tax incentive accounted for around $330 million of revenue within the state.

The helpful IFO staff recently presented on the topic in detail at the Museum of Broadcast Communications and at 2112. If you're interested in taking advantage of the Tax Credit, here are top 10 things we think you should keep in mind to capitalize on it.

1) Spend As Much As You Want, But . . .
Unlike some other states’ film production tax incentives, Illinois doesn’t have any ceiling on the overall project budget that can qualify for the Tax Credit. If a mega blockbuster wants to spend $100 million in the state, then the Tax Credit can stem from that entire amount. At its most basic, the rate of the Tax Credit is 30 percent, so such a production could ostensibly receive a Tax Credit for $30 million.

The Tax Credit likewise applies for both above- and below-the-line expenses, as well as pre- and post-production phases.

Despite this flexibility, however, guidelines and limitations certainly exist. Wages and fringe benefits qualify only up to a maximum of $100,000 per individual. Understandably, these individuals have to be Illinois residents and, similarly, expenses for goods and services must be supplied by Illinois vendors. In the case of services, not only do they have to be performed by Illinois vendors, but the services actually have to be performed within Illinois.

2) Seek Additional Incentives in Areas of High Unemployment
The 30 percent rate can be increased by an additional 15 percent for salaries paid to individuals living in areas of high unemployment. Such areas are defined as those with at least 13.8 percent unemployment, which can be determined from the Illinois Department of Employment Security. To qualify for the bump in the incentive, the total wages paid to each individual in these areas must be at least $1,000.

The IFO determines residency through a rather simple method – the address on an individual’s driver’s license. It’s common for production personnel to move formally to the location of a particular shoot. If a crew member has the documents required by the Illinois Secretary of State to receive an Illinois driver’s license, then the IFO will presume that the individual is an Illinois resident. As a result, that individual’s wages can qualify toward the overall spend and the accompanying Tax Credit. Just make sure to plan ahead, because the Secretary of State doesn’t give out same-day licenses anymore.

3) Spend More to Save More
The Tax Credit is designed to stimulate the Illinois economy, which means that the state imposes certain minimum thresholds for expenses. For content that runs less than 30 minutes, the state requires a minimum intrastate spend of $50,000. For productions resulting in content 30 minutes and longer, the intrastate expenses have to be at least $100,000.

Because the rate of the Tax Credit is 30 percent, spending $120,000 in Illinois can lead to a credit of $36,000. That means that the net cost of that production could ostensibly be $84,000, while a project with a budget that involves spending a total of $99,000 would not qualify for the Tax Credit. Thus, by spending $21,000 more, the production’s net costs can be reduced by $15,000.

Because applicants for the Tax Credit must submit these numbers, the production’s budget (for Illinois expenditures, at least) must be set before submitting the application.

4) Use the Tax Credit for Online and Digital Content
In order to qualify for the incentive, productions need to fall within certain categories. Predictably, these categories include feature films and TV programs, as well as documentaries, reality TV, animated content, and commercial advertisements.

Most interestingly, however, online and digital content also qualifies for the incentive, which isn’t necessarily the case in other states. This makes the Tax Credit more accessible to today’s filmmakers, who may have opportunities to release their content online but not through more traditional media modes.

It’s also worth noting that certain types of productions do not qualify for the Tax Credit. These include corporate training videos, pornography, sporting events, current events, gameshows, and contests.

5) Don’t Overcommit to Illinois
In order to qualify for the Tax Credit, applicants must be ready to shoot elsewhere. Sounds counterintuitive? That’s not a typo.

Because the Tax Credit exists as an incentive for business to come to Illinois, applicants must provide a Competitive Need Statement. That entails convincing the IFO that without the Tax Credit, the production would go elsewhere. That means that the filmmakers must assess potential alternatives and, through that due diligence, determine that the Tax Credit results in a lower overall cost for the production.

Just because all of the movers and shakers for the production are located in Illinois (or that the entire script is about Chicago) doesn’t mean that the production can’t be shot elsewhere. There are plenty of other locations that look like Illinois on film, and there is plenty of content filmed in Illinois that supposedly takes place elsewhere.

This same requirement also means that beginning to film in Illinois before submitting the application to the IFO actually excludes such an applicant from qualifying for the Tax Credit. The reasoning goes that if the filmmaker begins principal photography before applying for the Tax Credit, then that filmmaker did not need the Tax Credit to incentivize him to bring business to Illinois.

As a result, applications for film and TV programs must be submitted at least 5 days prior to beginning principal photography in the state. Applications for commercials must be received at least 24 hours in advance.

6) Try to Include Diverse Personnel
One of the requirements imposed on applicants for the Tax Credit is that they need to make a good-faith attempt to include minorities in crew and production capacities. Importantly, that means that actors are not part of the equation.

In some instances, crew and production personnel may operate through loan-out companies. Under that circumstance, the IFO would look at the function performed by the individual. In other words, if the production technically engages an LLC, but that LLC is owned by someone who would personally contribute to the diversity statistics, then such an arrangement will still serve as evidence of the necessary good faith effort.

In addition, the Business Enterprise Program can serve as a good source of vendors that would contribute to the diversity component, and filmmakers should seek to do business with them throughout the production.

7) Apply for Copyright Protection Beforehand
For purposes of deeming the production to be “serious,” the IFO requires Tax Credit applicants to have applied for copyright registration – typically, for the script – with the U.S. Copyright Office. Because a certificate of copyright registration might take a while to arrive, the IFO accepts a notarized affidavit from the applicant, claiming that the applicant has submitted the copyright registration. If the applicant is a producer who has received an assignment of someone else’s copyright, then the affidavit can reflect that.

8) Don’t Fear Disclosure of Proprietary Components
The application submitted to the IFO will necessarily include a description of the project. Some projects are innovational, and applicants may be reluctant to disclose details out of fear that such information will become public. This is a real concern, because the records of the IFO are subject to the Freedom of Information Act. Nevertheless, if the applicant is explicit about the proprietary nature of the submitted information, the IFO will reject outside requests to produce the paperwork.

9) Benefit from the Tax Credit Without Using It
One of the primary benefits of the Tax Credit is that a claimant can elect to either (1) use the credit or (2) transfer it to up to ten different recipients. That makes the Tax Credit extremely versatile.

It’s important to note that the Tax Credit applies toward sales or use taxes paid to the Illinois Department of Revenue. Not every production will have a tax liability in the amount of the Tax Credit. In order to maximize the benefits from the Tax Credit, a producer may transfer it to others within one year of issuance.

For example, if a film production spends $1 million in Illinois, the Tax Credit can equal $300,000. The filmmakers themselves might not have a sales and use tax liability of $300,000. Instead of using the Tax Credit themselves, the filmmakers can sell off the rights to any portion of the Tax Credit to retailers that have a much higher tax exposure. The Tax Credit might be sold at a discount to the retailers for total revenues of $270,000. The retailers still succeed in lowering their tax liabilities, while the filmmakers have cash in hand. (Unofficial data from the state suggests that transfers are at worst 90 cents on the dollar.)

The state only participates in the transfer process to the extent necessary to get the appropriate names onto the formal documents. That means that the actual deals transferring the Tax Credit are handled privately through contracts between the transferor and the transferee.

10) Keep Good Records Throughout the Process
Though the application can be a confusing process, it’s also actually the easiest component of the Tax Credit. The true benefit for the production comes from being able to claim the Tax Credit and then either use it or transfer it. Because those particular steps may take place months and even years after the application was submitted, the importance of keeping good records cannot be overstated.

Filmmakers should document where all goods and services came from, as well as where they wound up. Did vendors have a physical presence in Illinois? Were Illinois sales or use taxes being paid in the process? All of these components will directly impact the financial benefit received from the Tax Credit after the production is completed.
Furthermore, filmmakers should document their attempts to include diverse members of the community – whether minorities, women, or the disabled.

After the production has been completed, the filmmakers will need to engage a pre-approved independent third-party CPA. That individual will then submit the necessary paperwork to claim the credit. Because unused Tax Credit can be carried forward for up to 5 years, documentation can be crucial for remembering the necessary details.

As you can see, the Tax Credit can provide significant benefits for filming in Illinois. To make the most of this incentive, however, you must plan ahead. A lack of preparation might make you miss out on the full possibilities of the Tax Credit, while thinking ahead can help you maximize your return on investment.

Article by Ilya Zlatkin


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