Thanks to recent hikes by the federal government and the state of California, the highest marginal tax rate for individuals in Los Angeles and New York is now a whopping 55 percent with all the complex add-on taxes, phase-ins and phase-outs. So for Hollywood, it is worth thinking about creative strategies to reduce taxes, not just personally but for film and television companies — especially since there are some fairly simple ways to save money. Here, five suggestions:
1. USE OVERSEAS INCOME CREATIVELY
The first (and easiest) is with a little-known subsidy for export activities called a “Domestic International Sales Corporation,” which lets film companies save almost 50 percent of their federal taxes (subject to a maximum tax savings of about $2 million a year) on income from outside the States attributable to films produced in the U.S. These days, more than 70 percent of worldwide box office comes from overseas, so this deduction is a no-brainer.
It works for any film company that is a “pass-through” entity for tax purposes (such as an Llc. or S corporation) and that has net income from sources outside the U.S. from the sale, rental or licensing of films or TV shows. This benefit even applies to sales companies for which all the activity is in the States, subject to some procedural requirements.
2. DEFER INTERNATIONAL PROFITS
For companies such as film production or a sales business that have offshore activities, it also is possible to defer all taxes indefinitely by using techniques that have now become well publicized because of their use by such companies as Google and Apple. All that is needed is a foreign corporation with trade or business activities offshore, and as long as the company avoids certain hurdles (known as the Subpart F rules), no tax is owed until the profits are brought back to the U.S. as dividends, allowing tax-free reinvestment for growing companies. Even when dividends are paid, if they are structured properly, the federal tax rate can be reduced by almost half, resulting in a permanent benefit.
3. TAKE ADVANTAGE OF U.S. SHOOTS
More tax savings are provided by Section 199 of the tax code, which provides for an exclusion of 9 percent of worldwide net income attributable to films and TV shows if at least 50 percent of the total production pay is for U.S.-based services. That’s a specific benefit tied to making movies in America (with a cap on the exclusion equal to 50 percent of the total wages paid by the film company during the tax year). Even better, it’s a federal subsidy, irrespective of any additional tax incentive that an individual state might provide.
4. UTILIZE THE 2013 WRITE-OFF
In addition, for films and television shows that begin shooting in the U.S. in 2013, Section 181 permits a 100 percent write-off for the first $15 million of the cost, regardless of whether the product is destined for theatrical, television or Netflix and regardless of whether the expenses were incurred after 2013 (as long as the shoot starts in 2013).
5. ENJOY THE GOLDEN STATE’S BREAK
While California generally is a high tax state, it actually is a tax haven for film companies, which is why most of the studios are based in Los Angeles. In particular, for C corporations and non-California residents, California only taxes income that is “attributable” to California, and income from the licensing of films is allocated to the place where the movie is watched, not to the location where production or sales activity occurs.
That means that even if a film studio produces a film in California and licenses it from an office in Los Angeles, the studio’s net income will be allocated to California based only on the ratio of the income from California consumers compared to worldwide. Given that California is less than 5 percent of the worldwide market for films, less than 5 percent of the film company’s income is subject to tax in California.
So a quintuple-whammy can be achieved by producing films or TV shows in the U.S., since the film company will qualify for (1) using a DISC, (2) deferring some taxable profits, (3) the Section 199 exclusion, (4) the Section 181 deduction and (5) almost an exemption from state taxes if it is based in California.
Add state tax credits on top of that, and it’s a Hollywood tea party!
Schuyler Moore is a partner at Stroock & Stroock & Lavan in Los Angeles and is the author of Taxation of the Entertainment Industry.
Hollywood’s Contribution to the U.S. Economy
U.S. federal and state taxes generated by the entertainment industry.
Total wages supported by film and television (including “indirect” jobs like caterers, florists and lumber suppliers.)
Jobs in core film and television businesses (plus 400,000 jobs in “related” businesses that distribute movies and TV.)
Average salary of workers in the entertainment industry, 74 percent higher than the U.S. average.
Value of U.S. film and television exports.