Public Accountants and Film Accounting and Auditing

The various State and Provincial Film Tax Incentives have increased interest from public accountants (CPA’s and CA’s) in seminars and workshops in the area of film accounting within the film industry. Most of the Film Tax Incentive boards have a clause in their legislation that the auditor needs to be locally licensed, then it inevitably carries on with a broad statement that the auditor must be familiar with the film industry practices and standards.

What are the opportunities for Public Accountants?

Tax Incentive Administrator – Once the local governing body gets some experience they almost always start to see that the same public accountants who are helping the independent film producer prepare the initial application prior to production is the same public accountant who is doing the audit. Out of this gray area usually rises the need for a Tax Incentive Administrator. Someone who can track the application from beginning to end, stays in touch with the productions costs to ensure everything is being booked properly (in film production you can’t take this for granted) and then follows through on the final application for the tax incentive with the State. Once this administrative “post” has some experience they get on a first name basis with the appropriate people in key positions along the way (film commissions, bonding companies, banks, brokers if the that particula area has Transferable Tax Credits,etc) and their reputation will lead to many such contracts. For most productions over $3Mil a fair fee is about $20,000 to $25,000.

Public Auditor – This is a no-brainer, but how do you get assigned as the auditor? Who do you pitch? In the early stages you pitch the producers and the tax credit administrators (noted above), as well as the bonding companies, the financiers, etc. Who they are, exactly, is a matter of networking. In the film business, there just isn’t an easy way to find such people without being “involved” in the ‘biz. You’re limited by your imagination.

Tax Accountant/Consultant – Film Producers are usually congenitally unable to do tax returns, tax remittances, workers compensation registration and returns, quasi legal work like options agreements, etc etc. These are areas that a trusted CPA/CA/Enrolled Agent/CGA/etc could up-sell their services.

How Does a Public Accountant Get Familiar With Film Accounting Practices?

The only way I know is to attend one of my workshops.  I am registered with the State of New York and the State of Florida as a “Licensed” sponsor – at least for the workshop entitled, “Film Accounting and Auditing”. Continuing Education in Canada also recognizes my workshops as “Qualified Hours” in Ontario. All of my workshops are designed to qualify as CPE under California, Michigan, Louisiana type rules. (Unfortunately, some States want the instructor to pay for a license and a review – like New York and Florida – so I only paid for the one course in those States).

See my web site at http://www.talkfilm.biz for the agenda and the when/where for a workshop near you. I have done workshops in Los Angeles, Detroit, Florida and New York. The next one is in Louisiana on Sun May 23rd/10.

Regards to all,

John Gaskin

Veteran of 45 film and television productions of all sizes in 5 different countries. See IMDb for credits.

Link with me on LinkedIn to see announcements of workshop events.

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About filmproduction
I have worked in the film production industry since 1985, working on over 50 different productions of every size in 6 different countries. My self-published book, "Walk The Talk" is written in an easy to read manner for film students and working professionals who haven't had the chance to learn how to 'Direct the Money'.

2 Responses to Public Accountants and Film Accounting and Auditing

  1. Nancy says:

    John,
    I am a CPA who is volunteering to help a local independent film maker apply for tax exempt status and to set up the accounting for her non-profit film production, etc. organization. I have approx. 20 years non-profit accounting experience – the last five at the CFO level. When she started talking about an umbrella company with several other companies underneath it, it boggled my mind. In an attempt to figure it all out, I found your website plus some other info on the web. I have now purchased your book. So far, I’ve just scanned it but the accounting format, while different from what I’m used to, looks pretty straight forward. I can adapt my prior knowledge to it easily. I will need to form a bit of a hybrid so that it fits within non-profit concepts as well. This is doable. I already have the templates in my head. I’m also thinking of taking your on-line course. (Are you approved for CPE credit in Washington State?) What I really don’t have my head around yet is the “Shell” company concept. Does the on-line course cover that? I know I saw it in one of your course outlines. Is there any other direction, or do you have any other suggestions for me during this set-up period? I’d love to attend your seminar, but don’t want to put out the bucks for travel since I’m doing this pro-bono.
    Nancy

    • Hi, Nancy. Thx for commenting.
      I will be doing a series of webinars soon. If you haven’t already, stay connected through LinkedIn or Facebook – or here on my Blog there’s a place to sign-up for weekly notices.

      During development the independent film company sets up any development costs as Inventory on their balance sheet. This could include proportional allocation of general costs like trips to Cannes, to AFM, to film festivals, etc., as well as direct costs like options paid for exclusive rights paid to a writer, etc. It’s wise to put some, or all, of the development cost for each project in the Film Budget for the project you’re in the midst of raising finaces for. That way, if the project gets financed, you can get those development costs paid back. If the project never gets financed, a common problem for independent prodcuers, then the inventory of costs can be written off. As you can imagine, the write-offs are big in times of net ervenues and very little in times of net loss. It’s also wise to put a fair salary for the independent film producer in the film budget, because it’s always a long-shot if the independent prodcuer, as an equity investor, will ever actually get to see any cash after release.

      At about the same time that the the project is getting financed – that is, the investors for a particular project have committed and the cash to do the film/tv production is finalized, a shell company is formed with the single purpose of producing that particular project. The shell company concept is common with film and television productions. It’s often referred to as the “Prod Co”, i.e. Production Company. It doesn’t have revenues, only funding (equity or loans) and costs. Any assets bought or built during the production (wardrobe, cars, etc.) are not booked to a Balance Sheet account, but rather are booked as a cost and then in post the assets are sold and the proceeds are credited towards the costs. At the end of the post-production period there should only be an empty bank account, the funding and the cost of the film/tv production.

      This makes the Prod Co a clean statement of what used to be called the “Negative Cost” – so many productions are shot in digital now that it’s a fading term, but the concept is still the same. The costs are easily audited for any State Tax Incentive, as well as for any investor’s audit purposes. This statement of costs is universally referred to as “THE Cost Report”. (I often wish we had an industry specific term for it, because the term “Cost Report” is synonymous with just about any business.)

      The Prod Co as a separate entity keeps things clean from a legal “Rights” standpoint. The Prod Co owns the rights to the creative work – i.e. has had the rights assigned to it – provided, of course, that the writer, director, cast. site locations, all signed the proper release and transfer of rights documents – this is not as big a deal as the lawyers would like you to believe, but it’s still important and you need to have those doc’s signed and to hand when selling the final product.

      The Prod Co also helps to keep things straight from a legal “Organization” standpoint. The various ownership structures, and various positions of loans to be repaid, can all get pretty confusing, but having it under one Prod Co entity at least narrows the confusion to one entity. (As a note, I see that many of the Prod Co’s now are LLC’s, which probably means that the taxable gains/losses can go straight back to the individual investor for the US Federal Tax Credit under Scetion 181 – it may also help foreign investors – anybody who has a comment, or can enlighten further, please ‘pitch-in’.)

      Way down the road, after the film/tv project has been sold (and re-sold, dvd, etc) there may be, hopefully, something left for the Prod Co’s equity shareholders – after distribution costs, salesman’s commissions, SAG/WGA/DGA residuals, bank loans, etc. The Prod Co should be in receipt of those cash revenues, and the equity participants can finally get their hands on that cash. This is where the infamous “Back End Points” comes in so handy.

      In summary, the Prod Co is created when the financing is in place to make a particular production. It’s the Prod Co that makes the deals with the bank for loans, with the bonding company, with the WGA/ DGA/ SAG, with the investors, etc. It’s also the Prod Co which makes the sales deals, distribution, broadcast, dvd, etc. So, it needs to be designed with the best tax advantages in mind for the equity participants, in the hope that some cash will actually be arriving in the Prod Co’s bank account sometime in the future.

      I hope that helps. It’s a pretty decent rundown, so i think I’ll post it as a blog as well.

      Best
      John

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