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.