As the Trump plan for returning film and television production activity to the United States
comes into focus, panic gives way to cautious optimism as a “carrot AND stick” approach is
outlined – more scalpel than chainsaw. The plan seeks to provide multi-faceted incentives and tax benefits across a range of production and distribution categories, the combined positive effects of which are impossible to dispute. But it also contains a tariff penalty designed to nullify the value of foreign incentives thereby raising material concerns about application and enforcement as well as effectively “censoring” foreign films in the U.S. market. Here’s a breakdown of each component.

Transferable Federal Tax Credit. The heart of the plan includes a transferable federal
tax credit that can be stacked with state incentives for productions meeting a “cultural
test” similar to that applied in the U.K. This component is fairly basic and easily
understandable to the industry, which is familiar with transferable state tax credits such as
Georgia’s program which pairs investors and businesses with productions to give value
and structure to the credits. Certificated and tradeable credits allow for “collateralization” –

structured production financing – in ways that rebates, refunds and grants can’t match.
In addition, the plan matches-up with concepts employed by other countries (including
Canada, Australia and Spain) which pair federal-level incentives with local or regional
ones. And while the “cultural test” component sounds protectionistic, the reality is that
most other countries include cultural requirements within their incentive offerings. The
plan suggests mirroring the U.K. model, which is widely regarded as being logical and
workable.

Improvements to the expensing provisions of Section 181 of the Revenue Code.
Section 181 has been used for much of the last two decades with ups and downs.
Essentially, it allows production companies to write-off 100% of film production costs in
Yr-1, instead of amortizing those expenses over many years. That allows for deferring tax
liability, though not actually reducing it. Section 181 has a long history of being extended
year-after-year, though sometimes not very smoothly, with the industry sometimes
waiting months (or years) for “extender-bills” to be enacted. There’s a bit more
complexity here in that some companies are using Section 181 is as a permanent tax
reduction – in other words, they are not necessarily reporting taxable gain in subsequent
years as the film is distributed against the Yr-1 loss. There’s surely some Section 181
clean-up that will be needed, but generally speaking it would be of material benefit to the
industry if it became a reliable system that doesn’t expire annually and that works as
intended without room for misapplication.

Allowing production losses to be carried back 5 years. This component involves
reviving the expired benefits from Section 461 of the Internal Revenue Code, which
ended in 2022. The description states that it’s designed to increase interest in production
investment – and that’s probably correct. If an investor can amend prior tax returns to
take losses on production expenditures (remember that Section 181 allows for a full loss
to be recognized in Yr-1), then they can more likely use the full benefit of that deduction
in Yr-1. Essentially, it helps to ensure that the intended 181 benefits can actually be
recognized immediately, as opposed to being realized over multiple future years in the
event that an investor doesn’t have sufficient current year taxable income to be applied
against the Section 181 deduction.

Reducing corporate tax on American production companies. The plan calls for
“reinstituting DPAD” (Domestic Production Activities Deduction). Prior to expiring in
2017, DPAD provided an additional tax deduction for US productions. It was essentially
a 9% deduction against film profits, with some limits. The Trump plan seeks to reinstate
these benefits. It also suggests lowering the tax rate on production companies to 15%,
which may begin to create a bit of a slippery slope. Why should film production qualify
for transferable tax credits? Because that’s the global standard. Why should film
companies have their tax rates lowered to 15% and not other U.S. companies? No good
answer. Presumably, once rates start to be cut for one sector, others will follow until all
U.S. corporate tax rates hit 15%. Perhaps that’s the intent. The DPAD portion of the plan
itself seems logical and appropriate, though.

Creating a tax benefit for theater owners who expand and update. This concept was
enumerated in two different sections of the President’s plan. On the one hand, the plan
calls for making Section 181 and 461 benefits applicable to theater owners. On the other
hand, the plan calls for creating a host of tax credits designed to support infrastructure
investments in theaters. It would seem logical to support theater owners, as they play a
key role in the process for creating demand for, and revenue from, films – so no reason
not to let them enjoy the benefits of expensing their costs on an accelerated basis.
Whether they should be given tax credits for expanding is a whole other question, and it
is addressed below.

Providing tax credits for construction and building of production infrastructure and
theaters, as well as job training throughout the industry. There are countless
infrastructure and job training incentives that exist throughout the United States. It would
seem logical to incentivize studios to expand their U.S. holdings, as many of the new
studios and soundstages in recent years have been built overseas. This matches up with
the Administration’s plan to bring American manufacturing back. It also seems intuitive
to incentivize job training and the hiring of trained U.S. personnel. But should movie
theaters also be incentivized? There are currently unused theaters in abundance
throughout the country. What theater owners need is more content and more people
buying tickets, but that’s not necessarily a function of making more films in the U.S. It’s
more a function of whether people would rather watch movies at all (vs. short form
content) and whether they prefer to watch movies at home or on their mobile devices,
instead of in theaters. Perhaps this is one element that’s best left to the free market.

Applying a 120% tariff to films that choose to shoot outside the U.S. There are SO
MANY unanswered questions here, but the one thing the plan does clarify is that the
tariff would be applied to the value of any foreign tax incentives that the production
receives. So, if the U.K. grants $1 million in incentives to a film that “could have” been
produced in the U.S., the film’s owners will need to pay $1.2 million to the U.S.
government in order to release it domestically, essentially cancelling the value of all
foreign incentives – and then some. Exceptions will be made for countries with coproduction treaties with the U.S.

Where to begin?

Won’t other countries retaliate, thereby nullifying the value of the US incentives and
making it impossible for US productions to be released overseas – where most of their
revenue comes from? That would be the likely next shoe to drop. The Cannes film
festival starts next week. It’s one of the largest markets for independently produced films
throughout the year. Will distributors who descend on Cannes from around the world be
buying films this year with looming tariff threats? Probably not.

How will the tariff be enforced? Films don’t clear customs like goods do. They can be
streamed online from anywhere in the world. Who pays the tariff when a 12-year-old in
Cleveland streams the Mission Impossible: The Final Reckoning (shot in multiple
countries)? The kid? The London-based streaming platform?

How do you determine what films “could have been made in the U.S.”? Couldn’t any
film have be made in the U.S.?

Will this be the end of the “foreign film” genre forever? Maybe.

Is this just a tool to gain leverage to create co-production treaties with other countries?
Probably.

How long is the tariff specter going to be looming and who in their right mind is going to
start production anywhere, including in the U.S., without clarity? That’s the kind of thing
that gets studio execs fired and puts independents and distributors out of business.

Creating rules by which streamers and producers must divvy up ownership of
content. This part of the proposal focuses on the FINSYN Rule which historically
prohibited broadcasters from owning the shows they aired (until the mid-1990s). The
proposition now being that the streaming platforms take “draconian” advantage of
producers and require that they own the IP. The plan attempts to set rates and license
terms for streamer ownership. This seems squarely within the realm of the private sector.
If the streamers have leverage, they will use it. Should the federal government tell them
that they need to pay more for content or give away ownership? That seems a bit, well,
Un-American.

Urging California to make improvements to its own tax incentive program. The final
element of the Administration plan is to chastise California for failing to make certain
improvements to its own tax incentive. The plan suggests that the California plan needs
more funding, that the credits should be freely transferable, that they should apply to a
broader range of project costs (such as actors) and that the state should permit Section
181 deductions like the federal government. In reality, a federal tax incentive will support
filming throughout the U.S., and where productions choose to shoot in the U.S. will be
driven by the individual state programs. The states with the best programs will receive
the most activity and economic impact. The federal government need not be concerned
with whether the best state is California or Georgia, or any other.

From a practical standpoint, a few reasonable predictions can be offered. First, the production industry is about to grind to a halt – again (after previously grinding to a halt during both the 2023 strikes and Covid) and it’s going to hurt everyone – including at-home American consumers who are going to be very upset about not having anything “new to watch”. Second, the incentive and tax-focused portions will likely sail through bi-partisan legislation (the major film states are both blue and red). It will be important that the industry sends forth the right negotiators to Washington. Unlike the use of A.I. and wages and residuals compensation (the subjects of the recent guild strikes), these are not “creative” matters. The group should include studio execs, independent producers, lending banks, finance attorneys, film investors, and tax credit specialists.

About Fallbrook: Fallbrook Film Finance, LLC, Fallbrook Tax Credit Consulting, LLC and
Fallbrook Tax Credits, LLC are divisions of Fallbrook Financial Services, LLC, one of the
largest tax incentive specialty finance companies in the US. Fallbrook works with all of the
major studios, hundreds of independent production companies, 90% of the North American film lending banks, and numerous Fortune 500 companies who purchase tax credits. Fallbrook tracks and advises on 41 domestic incentive programs and a variety of international incentives. For more information, visit https://fallbrookfinancialservices.com/film-production/ or contact Will French (Senior Managing Director – Film & Television Finance) at wfrench@fallbrookfinance.com.