The Three Key Areas of Film Accounting

Film Accounting is somewhat of a mystery to outside accountants. There ARE film industry specific practices that separate film accounting from other industries; however, anyone can learn the three key areas rather quickly, and have a lot of fun at the same time.

There are three basic areas to address, preferably in a hands-on workshop:

1.THE FINANCIAL AND ACCOUNTING CONTROL POINTS

6basicfunctions

6 Basic Functions

There are key accounting control points that are standard throughout any film or television production. I have found a workshop environment to be the best way to learn the workflow and processes, pointing out the control points as we go along. There are typical forms, templates and rules followed in film production accounting. You will be able to take home standard templates and forms used throughout the industry every day. Also, flow charts help as a later reference when you start applying what you’ve learned.

2.THE FILM BUDGET AND THE “COST REPORT”

The Film Budget and the Cost Report issued during any film or television production are

the career maker/breakers for any film accountant or producer. You should have an understanding of how to present, read and manipulate both the Film Budget and the Cost Report, something so important to their career as a producer. (The “Cost Report” is the vernacular for Financial Statements in film production. It is confidential at all levels. This workshop may be the only place you’ll be able to learn how to produce it).

3.CASHFLOW REPORTS AND FILM TAX CREDIT ESTIMATION

An emerging producer, or a film accountant, who can prepare a weekly cash-flow schedule from the budget, as well as a reliable estimate of the tax credits expected, is far in advance of other emerging producers in the same pool. A first step is having typical templates commonly used in the industry to create the cashflow schedules and the tax credit estimates.

REAL SITUATIONS

Within these three areas I convey as many real situations as I can, throwing in examples of fraud and how to control it, how the industry is different/similar to other industries, as well as my real experiences with celebrities like Ron Howard, George Clooney, Steve Martin, etc. There are other areas that I get into given time, including how to find work in the film production industry, both as film accountants, and as a services the CPA can perform in the industry.

FILM ACCOUNTING WORKSHOP 101

My next Film Accounting 101 workshop is coming up in Chicago on Oct 22nd and 23rd. Step 3 above is not gone through in detail, but the templates are provided. The curriculum is more designed for those who want to actually work as film accountants. However, the testimonial below from a producer who recently attended reminded me that it is still what many producers want to know about film accounting:

“John Gaskin has an amazing wealth of knowledge that crosses over into various film departments. In his Film Accounting workshop, he outlines the big picture of film financing and production, and then hones in on the detailed accounting procedures. As a producer, the course has given me the confidence to manage larger budgets and communicate with production accountants more thoroughly on different points of financial control. In addition to attending his course, I also read his book “Walk the Talk”, which I’ve recommended to other industry professionals many times. With both formats John breaks down a breadth of complex information in a manner that is clear and digestible.” SR

Come join us at the next workshop. I promise you will NOT be bored!

 

To find out more about the Film Accounting 101 workshop at http://www.filmaccounting.com

Cheers / John

The Georgia State Film Tax Credit – A 7 Step Cycle

The purpose of this article is to introduce Indie Producers, and CPA’s new to film, the workings of film tax incentives in the booming State of Georgia. In most cases Georgia’s documents are very clearly laid out. In this article I have stripped down the full cycle from start of finish into 7 steps, with references to key forms and legislation, with a tip or two thrown in.

Indie Producers need to know this so they can bring some financing to the table when searching for funding. CPA’s need to know this to be able to provide services to their filmmaking clients.

1. The Rate and Type of Tax Credit Offered

Rate of tax credit is a 20% base + 10% if use the Georgia Logo – a no-brainer – of course we will use the Georgia Logo and add it to the credit roll (5 seconds of exposure required). So, 30% is the rate. Reference: Rules of the GA Dept of Economic Development, Chapter 159-1-1.01(1). The type of tax credit is referred to as a “Transferable Tax Credit”; that is, you can sell the tax credit to a Georgia taxpayer who can then apply that tax credit to their state tax liabilities.

2. Estimate the Tax Credit as Part of the Financing

The Tax Credit is the one thing that the Indie Producer can bring to the table as a Producer. This is key and fundamental to BEING a Producer. Essentially all labor qualifies up to $500,000 per person on payroll, as well as all non-labor costs that have a real Georgia address. So, work through your budget estimating at 30%. Reference: Rules of the Dept of Rev., Income Tax Div Chapter 560-7-8-.45(6)(c) and (d) and (f).

Note that the project will not qualify for the tax credits if it is not fully funded/financed anyway, so estimating the tax credit is a crucial first step to arranging the financing. See Reference: Rules of the GA Dept of Economic Development Chapter 159-1-1.04(3)

3. Applying for Certification to be a “Qualified Project”

See the application form by clicking here. It is pretty straight forward. It’s interesting to note that the application does not require a budget, but it does require a script. Also, the application cannot be made prior to 90 days of principal photography – so, you really should have all of your ducks in a row by then, down to the key cast and crew. Reference: Rules of the GA Dept of Economic Development Chapter 159-1-1.04(1)

4. “Qualified Production Expenses” Gathered in the “Georgia Expenditure Form”

See the Georgia Expenditure Form by clicking here. You would get these costs from the production’s Final Cost Report. Note: The film accountant would need to have a good understanding of what qualified as an expense and be tracking those costs within the general ledger. The State of California publishes a great document called Expenditure Tracking Tips. Download it by clicking here. It’s very useful.

5. Claiming the Tax Credit from the State

See the Film Tax Credit Form by clicking here. You need to file this completed form attached to the original certification received in #1 above, along with the production company’s Georgia income tax return. Reference: Rules of the Dept of Rev., Income Tax Div Chapter 560-7-8-.45(8)(a). Per 560-7-8-.45(8)(b)2 the State has 120 days to review the credit and make a determination. The better the presentation, the faster the review – thus, the recommendations on the Georgia site to use a CPA even though it isn’t mandatory. (BTW I know an experienced Georgia CPA who is quick and excellent if you need one – not me; honestly, it’s not something I like doing).

 6. Selling the Tax Credit (“Letter of Eligibility”)

Once the review is successful the state will issue a “Letter of Eligibility”. Reference: Rules of the Dept of Rev., Income Tax Div Chapter 560-7-8-.45(8)(b)(3). You can now market this letter to the highest bidder. It’s best to use a broker here – again, I have a reliable acquaintance experienced in brokering these Letters of Eligibility. The goal is to sell the tax credit for more than 85% of its value to a Georgia taxpayer who has state tax liabilities. Note that the tax credit can be sold in multiple pieces to different taxpayers; however, the credits cannot be re-sold. Reference: Rules of the Dept of Rev., Income Tax Div Chapter 560-7-8-.45(11)(b).

7. File Notice of Credit Transfer

You’re not quite finished yet. Now you need to file a Notice of Tax Credit Transfer (Form IT Trans) with both the Dept of Economic Development and the Dept of Revenue within 30 days of each sale of the film tax credit. Reference: Rules of the Dept of Rev., Income Tax Div Chapter 560-7-8-.45(11)(d).

Wheww. Now you’re done! If you need help working your way through any part of the above, please send me a comment.

Cheers.

-John

See http://www.filmaccounting.com for my most recent workshops.

What Producers Want To Know About Film Accounting

Over the past few years I have been delivering workshops on Film Accounting to Women In Film and Television to maximum attendance and rave reviews from the attendees. I say this, not to brag (well, maybe a little), but more to emphasize that we covered topics which emerging producers want to know more about.

There were three areas that we covered over 3 days which resonated with all attendees:

1.THE FINANCIAL AND ACCOUNTING CONTROL POINTS

The students drilled utilizing the typical forms and rules used in film production accounting, getting a reality on how they, as producers, can control the costs on their own productions. Students went home with templates and forms, including the typical form flow charts of all basic film accounting processes.

2.A WORKING UNDERSTANDING OF THE FILM BUDGET AND THE “COST REPORT”

The Cost Report issued during any film or television production is the career maker/breaker for any producer. The student is left with an understanding of how to present, read and manipulate the Cost Report, something so important to their career as a producer.

3.A WORKING UNDERSTANDING OF CASHFLOW REPORTS AND FILM TAX CREDIT ESTIMATION

An emerging producer who can prepare a weekly cash-flow schedule from the budget, as well as a reliable estimate of the tax credits expected, is far in advance of other emerging producers in the same pool. Students received cash-flow templates, and various tax credit estimating templates as well.

REAL SITUATIONS

Within these three areas I conveyed as many real situations as I could, throwing in examples of fraud and how to control it, examples of “Back-End” deals and how to sweeten them, examples of bank loan interest and how it works, etc.

FILM ACCOUNTING WORKSHOP 101

My Film Accounting 101 workshop coming up in NYC next month and GA in Jan/15 does not cover the Step 3 above – the curriculum is more designed for those who want to actually work as film accountants. However, the testimonial below from a producer who recently attended reminded me that it is still what many producers want to know about film accounting:

“John Gaskin has an amazing wealth of knowledge that crosses over into various film departments. In his Film Accounting workshop, he outlines the big picture of film financing and production, and then hones in on the detailed accounting procedures. As a producer, the course has given me the confidence to manage larger budgets and communicate with production accountants more thoroughly on different points of financial control. In addition to attending his course, I also read his book “Walk the Talk”, which I’ve recommended to other industry professionals many times. With both formats John breaks down a breadth of complex information in a manner that is clear and digestible.” SR

To all you emerging producers, find out more about the Film Accounting 101 workshop at http://www.filmaccounting.com

Cheers / John

State Film Tax Incentives and Culture

BACKGROUND

The earliest instances of film tax incentives had the purpose of retaining and nurturing culture. Canada is a good example. The film tax incentives began in Canada to nurture “Canadian Content”. It was meant as a way to guard against the encroachment of American culture into the Canadian society. The concept of “French Canadian Culture” has certainly taken root with the film tax incentives; the English-speaking centers of Toronto and Vancouver, and even downtown Montreal, embrace the infusion of American cash while learning and matching the American skills of filmmaking – well, that’s part of their culture, isn’t it?

WHAT CULTURAL ADVANTAGES?

Culture is what the people are doing; how the people are communicating and living life. Does the action of producing television and film in a State boost the local pride, infuse the community with a way to communicate, provide a skill that can be identified? YUP! Look closely at Louisiana and Georgia. I have visited New Orleans and Atlanta as part of my film accounting workshops, and I see a group of people who are downright proud of their participation in filmmaking. Personal pride always pays dividends.

WHERE FILM TAX INCENTIVES HAVE FAILED

Those States that have failed to maintain a film tax incentive, have failed to recognize the local cultural pride and development. The State was looking at cash-in and cash-out on a short-term basis, without a second look at the cultural advantages and how that pays off.

PRODUCE YOUR FILM, IN A TAX INCENTIVE LOCATION, WITH CULTURE IN MIND

A good example is the making of “Whole Nine Yards” in Montreal. The film was being produced in Montreal because of the film tax incentives there, and because it could double as a European city. During prep Bruce Willis decided to let the location BE Montreal, with French accents, Canadian money, and mayonnaise on a hamburger – it was not only produced more inexpensively, but the film went on to gross $106 Million worldwide. It’s an example of boosting the local culture while still making profits – and please take note – the film would not have been produced there without a film tax incentive.

HARD FACTS

Yes, the hard facts are that a State usually gets about 8% of the employees tax, plus 8% of the cast and non-local crew, then the State pays 25% tax incentives to the production company. However, there is also an infusion of millions of dollars into the local economy for purchases, rentals and facilities that would not otherwise be there. The win that tips the scales is the spirit of winning that is granted to the local culture.

If you want to find out more about developing your film, the skills of a film accountant, or just interested in the business of media, visit http://www.filmaccounting.com/filmbusiness.htm .

Cheers / John

The New CPA and the Film Industry

INTRODUCTION

The new CPA is fully aware of expanding markets and breaking the mold of tradition. The outbreak of videos used to promote CPA firms is witness to an interest in reaching new public. As a result, there is a growing interest in the business of filmmaking. Where are the film companies? What sort of audit services do they need? What are the film accounting principles and practices unique to the industry?

THE MAJORS AND THE INDEPENDENTS:

The film industry is generally viewed as Hollywood in America. It’s true that Hollywood drives a big part of the machine, but over the past several years the production of feature films and television programming has branched out dramatically.

There are three primary divisions of the industry:

1. The “Majors”: the Majors both produce and distribute a substantial amount of their own products. They are generally defined as “The Big Six”: Sony Pictures (Columbia), Disney, Warner Bros, Universal/NBC, Paramount, and 20th Century Fox.

2. The “Mini-Majors”: There are always companies that are striving to join the Big Six – such as Lionsgate, Dreamworks and The Weinstein Company. There is also the example of MGM, which has fallen from a Major status to a Mini-Major status.

3. The Independents (“Indies”): The status of “Indie” is a general umbrella of all other film and television production companies. The Indies often approach the Majors and Mini-Majors to land distribution deals, or some form of financing/participation of their projects (usually referred to as “Pick-Ups”.) Successful Indies often make distribution deals with, or even bought outright by, one of the majors or mini-majors. For example, Tyler Perry Studios, an Independent based out of Georgia, has a great deal with Lionsgate, who in turn, has distribution deals with the Majors.

ALL OF THESE DIVISIONS REQUIRE AUDITS FOR FILM TAX INCENTIVES:

Almost all of the States that offer film tax incentives require some form of audit BY A STATE LICENSED CPA. So, regardless of the relationship of the production company, big or small or in-between, every film or television production requires your services as an auditor in your State (the only exception that comes to me right now is New York State).

REQUIREMENTS:

The legislation which requires the State licensed CPA very often has the following quote taken from the State of Connecticut (almost exactly the same wording exists for California, Louisiana, Michigan, etc):

“… the auditor must have sufficient knowledge of accounting principles and practices generally recognized in the film, television, commercial and digital media industry.“

The State of Connecticut was at a loss as to how to address this conundrum (i.e. the auditor must have exposure, but has never had exposure before). So, the State administrator, Ed Ruggerio, requires that only those CPA’s who have done my course, “Film Accounting and Auditing” are permitted to be listed on the State web site as qualified auditors for State Film Tax Credits. As much as I was honored by this acknowledgement, it was hard for me to break off my commitments, travel to Connecticut, and deliver a live workshop.

FILM ACCOUNTING PRINCIPLES AND PRACTICES:

As a result, I have taken much time and effort to break the live workshop into four online self-study courses which are AICPA compliant for CPE. I have taken the material and broken it into the following categories:

Film Accounting and Auditing – 1. An Overview, 2. The Basics, 3. Intermediate/Supervisory Level and 4. Advanced – Film Tax Incentives.

I have worked in the film industry for almost 30 years, in 6 different countries, on every size of film and television production. As a result, I have made every effort to keep the courses from being pedantic or ponderous. From the testimonials I can say that it has been worth the effort.

To find out more visit: http://www.filmaccounting.com/filmaccounting-cpe.htm

Cheers / John

Section 181 – Example Applications From the IRS

John-FilmTapeI just came across this IRS publication – it’s 9 pages long with fairly small print -but toward the bottom the IRS gives examples. I’ve never seen this before, so I wanted to share it.

Here’s the link to the whole IRS Bulletin 2011-47,TD9551: http://www.irs.gov/irb/2011-47_IRB/ar08.html

I’ve copy/pasted the examples, which are fairly easy to read. I hope this helps all you emerging producers to get your financing (if you’re new to this blog I have a couple of easy to read demonstrations of how Sec 181 works – dig around):

Ҥ1.181-5 Examples.

The following examples illustrate the application of §§1.181-1 through 1.181-4:

Example 1. X, a corporation that uses an accrual method of accounting and files Federal income tax returns on a calendar-year basis, is a producer of films. X is the owner (within the meaning of §1.181-1(a)(2)) of film ABC. X incurs production costs in year 1, but does not commence principal photography for film ABC until year 2. In year 1, X reasonably expects, based on all of the facts and circumstances, that film ABC will be set for production and will be a qualified film or television production. Provided that X satisfies all other requirements of §§1.181-1 through 1.181-4 and §1.181-6, X may deduct in year 1 the production costs for film ABC that X incurred in year 1.

Example 2. The facts are the same as in Example 1. In year 2, X begins, but does not complete, principal photography for film ABC. Most of the scenes that X films in year 2 are shot outside the United States and, as of December 31, year 2, less than 75 percent of the total compensation paid for film ABC is qualified compensation. Nevertheless, X still reasonably expects, based on all of the facts and circumstances, that film ABC will be a qualified film or television production. Provided that X satisfies all other requirements of §§1.181-1 through 1.181-4 and §1.181-6, X may deduct in year 2 the production costs for film ABC that X incurred in year 2.

Example 3. The facts are the same as in Example 2. In year 3, X continues, but does not complete, production of film ABC. Due to changes in the expected production costs of film ABC, X no longer expects film ABC to qualify under section 181. X files a statement with its return for year 3 identifying the film and stating that X revokes its election under section 181. X includes in income in year 3 the deductions claimed in year 1 and in year 2 as provided for in §1.181-4(a)(3). X has successfully revoked its election pursuant to §1.181-2(d).”

Section 181 – Passed for 2013 – How it Works For Financing

The “Fiscal Cliff” bill passage which occurred in the early hours of New Years Day (2013) contains an extension of the IRS code Section 181 (Deductions for Qualified Film & Television Production Costs) through the end of 2013.

In an earlier blog I gave a very layman’s explanation of how Section 181 works for you as a producer trying to raise financing – i.e. pitching those who have the right kind of “passive income” to use Section 181 for a tax write off.

You can see the blog here: https://filmproduction.wordpress.com/2011/01/06/pitching-section-181-rough-outline-of-how-it-works/

The DGA and the IFTA put together a good brochure – you can see it at this link http://www.film.ca.gov/res/docs/pdf/Section-181-12-4-08.pdf

I have had several requests about this, so I know a lot of you are looking forward to making use of it in your pitching to prospective financiers.

Good luck!

Cheers / John

Auditing State Film Tax Credits

I met with the State of Connecticut’s tax credit administrator, Ed Riggerio, before Christmas. Connecticut had a problem – to find a course which satisfied the following quote in the legislation:

“… the auditor must have sufficient knowledge of accounting principles and practices generally recognized in the film, television, commercial and digital media industry” (Note: this language is common to all State film tax credit regulations).

I have designed a course which references the AICPA’s (American Institute of Certified Public Accountants) auditing statement on “Understanding the Entity Addressed”. The AICPA refers to this as SAS 109 (Statements on Auditing Standards #109). The AICPA also has a statement on Fraud Risk Assessment (SAS 99) where it’s necessary to identify where management has the ability to override controls. I have also referenced SAS 99 into the course.

The course is not structured around SAS 109 and 99. Rather, the course has it’s own layout, but points that are relevant to SAS 109 anmd 99 are brought up and discussed.

In order to understand the Film Industry you really need to understand the Film Producer, the Film Accountant, the Film Budget and the Film Cost Report.

The Independent Film Producer, by necessity, is someone who doesn’t take to “rules” very well – if he/she was a rule-follower they wouldn’t be in the ‘Biz. For someone who is steeped in Standards the Film Producer may seem like a renegade, so lots of examples need to be interwoven into the course.

The Film Accountant is not an “accountant”, as known and thought of by CPA’s. The Film Accountant is a film industry professional who has apprenticed in the film production industry as an assistant accountant until he/she knows every nuance of the money-flows within any film or television production, and how to account for those money flows. The thought processes of a Film Accountant are quite different from a CPA. A Film Accountant is a cross between a Unit Production Manager and a strong bookkeeper. Since the CPA is trying to understand and assess the risks of “material misstatement” the CPA must understand the Film Accountant.

The Film Budget is viewed a lot like a financial/legal document in the Film Industry. It’s the document that the film producer has sweated over for months, if not years, to get the financing together for the film production. It is the foundation of bank loans, contracts made with key cast and crew and is on the lips of every experienced department head approached to work on the production. It sets the bar for the director, the cast and crew. The Film Budget leads the way – … was it based on lies? … was it based on mis-information? … is the account structure appropriate? … was it badly massaged from an earlier budget for different locations? … etc. A Film Budget that misrepresents itself can significantly raise the risk of misstatements all along the line thereafter.

The Film Production Cost Report is what the CPA will be auditing. It is the final “financial statement” of the film production and is a financial representation of the film itself. In the film industry, reading a Cost Report is like reading a report card on the producer and director. It tells the tone of “management” and sets the risk levels the SAS’s are so adamant in discovering.

The course is a one-day course, scheduled for January 29, 2011 in Hartford CT. It solves Ed’s problem. Hopefully other States will look for the same solution.

See http://www.talkfilm.biz/filmworkshops2.htm for more details.

-John

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