Lights, camera, CPA action!

By Chip Knighton

If you were in the right place at the right time over the past few years, you might have seen Claire Danes or Daniel Day-Lewis in costume in the streets of downtown Richmond or Ashley Judd plying her trade in scenic Wise County. Less than a year ago, Ruth Negga was nominated for an Academy Award for work she did all over central Virginia in Loving. But did you know that accountants play a role in bringing a piece of Hollywood to Virginia?

Since 2012, Virginia has ramped up its use of tax credits and other incentives to lure film productions to the Commonwealth. The Virginia Motion Picture Tax Credit Fund provides refundable tax credits to qualified productions, while the Motion Picture Opportunity Fund provides grants, to the tune of more than $6 million in tax credits given out in fiscal 2017. The credit, originally scheduled to sunset at the end of 2018, is now available through Jan. 1, 2022, creating a great opportunity to provide what Virginia Film Office (VFO) Director Andy Edmunds says can be a boon to a region.

“When a production comes to a region or a state, they’re like super tourists with a payroll,” he said. “They do everything that tourists do, but they also hire people and do everything from buying paper clips to renting helicopters.”

Virginia is far from the only state to offer tax incentives for film production. Louisiana started the trend in 2001 in response to the rise of the film industry in Canada, and more than 40 states currently offer some form of tax incentives or credits. Film Production Capital, a tax credit brokerage company specializing in state tax incentives for film and other arts, rates Virginia a two-star state (out of five), with only Georgia and Kentucky earning five-star ratings, largely because of a lack of a cap on credits awarded.

“Canada had successfully attracted productions outside of California,” said John Bails, executive vice president of Film Production Capital. “States looked at that and said if they can convince them to go to British Columbia and Toronto and places like that, it’s probably not that far off to get them to go to Georgia or Louisiana.”

Even California, the traditional home of American filmmaking, has jumped into the fray in response to so-called “runaway” productions fleeing the state for Canada or other states. That program, aimed at protecting workers and infrastructure based in the state, limits which productions can take advantage of the credit and specifically targets series that had left Hollywood.

Virginia currently offers a refundable tax credit of 15 percent (20 percent for productions filming in economically distressed areas), with the potential of an additional credit of 10 to 20 percent of total Virginia resident aggregate payroll, depending on how much money is spent. Productions can claim a further 10 percent of total aggregate payroll for Virginia residents who are employed as actors or crew members for the first time. Productions that receive the credit must spend at least $250,000 and make an effort to have 50 percent of filming take place in Virginia.

The exemptions go beyond that. Productions that require actors or crew members to stay in Virginia hotels or motels for 90 consecutive days aren’t required to pay lodging taxes after that point, with the amount already paid credited back to the bill. Most Virginia localities exempt productions from those taxes after stays of 30 consecutive days.

Companies submit a proposed budget, at which point the VFO reviews it and sets aside tax credits for the production, with the credits and grants actually awarded after the production’s documents are reviewed. That’s where CPAs enter the picture (from stage left?) — making sure the production companies are living up to their end of the bargain. Richmond firm Garner, Adams & Associates is one of the CPA firms in Virginia working on the film production credit, and VSCPA member George Garner, CPA, the firm’s managing director, is responsible for this attest engagement.

“Technically, it is an Agreed-Upon Procedures engagement,” he said. “The film office has a list of procedures that have to be followed, and the work is the work of the film production company. We’re verifying and making sure that they meet the criteria set up by the film office.”

Garner, Adams & Associates typically performs accounting, tax, review and CFO services for individuals and businesses. Stacy Cooper, an enrolled agent who works with Garner on the firm’s film production work, says that sifting through a production’s payroll expenses is the most time-consuming part of any film production engagement.

“If the film is shooting inside and outside of Virginia, any specific reports that show what days were shot in Virginia versus out of Virginia will factor into the credit or grant calculations,” she said. “That tends to be the hardest part of it — trying to tear apart payroll reports to get the relevant information for the Virginia film office criteria and making sure they get what they’re entitled to, but nothing more and nothing less. Depending on who they have do their payroll, it may or may not be an easy report for them to run.”

“We’re testing that they are complying with these procedures,” Garner said, “which are broken down into the areas of the production qualification procedures, the cost review procedures and the calculation of the credit.”

In total, Virginia spent about $43 million on film incentives from fiscal 2012–2016. The Virginia Joint Legislative Audit and Review Commission (JLARC) estimated that 95 percent of productions would not have filmed in Virginia without those incentives.

The picture JLARC painted wasn’t completely rosy. The agency estimated that the film industry has returned about 20 cents for every dollar it received in tax credit and 30 cents for every dollar in grants over a study period from 2012–2016. Edmunds accepts those numbers, but pointed out that it’s difficult to capture the full picture of what the film industry can offer the state.

“The challenge of the JLARC report is that it looked at film production through the lens of traditional manufacturing, and it’s not traditional manufacturing,” he said. “No one is going to plan a vacation to visit a coat-hanger factory.”

He assessed the tax credits as a money loser on tax revenue, but said the increased exposure brings the money back in increased tourism.

“They assigned it a dollar value, but didn’t include that in their equation by which they compared the industry to traditional manufacturing,” he said. “The conclusion on the front page is that compared to traditional manufacturing, it’s not as much of a return. We’re all about making it more efficient and we look forward to working with JLARC to implement that. But the fact remains that the data that’s in that report shows that the value that was in the tourism piece that they recognize and they celebrate was not used in the calculation on which the conclusions were drawn.”

Edmunds noted Georgia’s burgeoning film industry as a success story for tax incentives, citing the state’s transferrable tax credit that can be sold at 85 cents on the dollar to anyone who has tax liability in the state. Georgia also doesn’t cap its tax credit program, allowing it to lure major film productions such as the Marvel superhero movies and spurring production of the state-of-the-art Pinewood Studios outside Atlanta. Georgia awarded an average of more than $200 million a year in film tax credits from 2014–2016, with the productions spending more than $2 billion in the state and employing more than 25,000 people in 2016.

Edmunds cited a Georgia production as an example of how film production can have ripple effects on a state or community. Senoia, the Atlanta suburb that hosts Riverwood Studios and AMC’s The Walking Dead, had a 40 percent downtown storefront occupancy rate when the show began filming in 2010. The occupancy rate has grown to 100 percent in the last eight years.

With its capped credit, Virginia can’t compete with Georgia and other traditional film hotbeds like California and New York. To compensate, Edmunds targets smaller productions like Loving and Big Stone Gap, the film that brought Judd to the eponymous town in Southwest Virginia.

“You’re not going to attract a whole lot of volume when you’re capping your program funding where only one small film can take advantage of it,” Bails said. “They don’t know how much funding year to year they’re going to have, and for independents that plan one or two years out, they don’t have the luxury of guessing whether Virginia’s going to have money.”

One example of a successful television partnership is AMC’s Turn: Washington’s Spies, a Revolutionary War-era drama filmed in Richmond, Williamsburg, Yorktown and Petersburg. The VFO cut a unique deal with AMC that called for the channel to film and air 200 Virginia tourism commercials.

The first three seasons of Turn, which wrapped up its four-season run last April, occupy the second, third and fourth spots on the list of productions which spent the most money in Virginia, trailing only Lincoln, the 2012 Steven Spielberg movie nominated for Best Picture at the Academy Awards. That production spent more than $32 million in the Commonwealth and earned Day-Lewis his third Oscar as Best Actor for his portrayal of President Abraham Lincoln.

While $32 million is a large number, it pales in comparison to the nearly $74 million Turn spent when producing its first three seasons. That kind of consistent spending is why Edmunds looks to bring television production to the Commonwealth.

“We want to target series television for the unique jobs it creates year after year,” he said. “It’s almost a factory when you have a television show.”

Virginia’s move to a more sustainable model has been echoed nationwide as states move away from what had been a period of explosive growth in tax incentives.

“That’s kind of how it was in the run-up to the financial crisis,” Bails said. “States were saying, ‘I’ve got a 30 percent credit, I’ve got a 40 percent credit, I’ve got a 50 percent credit.’ Now you’re seeing, ‘We can consistently provide this every year’ versus ‘We have to check our funding for next year.’ It’s a sustainability and survival competition rather than a ramping-up competition.”

The shows filmed in Virginia share a common thread — they’re historical in nature, as is Loving, which tells the story of a Caroline County couple who were the plaintiffs in Loving v. Virginia, the Supreme Court case that invalidated laws prohibiting interracial marriage. The two biggest film production grants the VFO has awarded were outlays of $2.8 million for the two seasons of Mercy Street, a Civil War drama that filmed in Petersburg and Richmond and aired on PBS from 2016–2017. Virginia is a natural choice for those kinds of productions, with its rich Colonial history and wealth of historical sites. 

Attracting productions to film those stories at those sites can have ancillary benefits — Edmunds cites the example of Mount Vernon, President George Washington’s house outside Alexandria, which initially didn’t want to be involved with the National Treasure movies with Nicolas Cage, but has run a popular tour based on the movies for the past 11 years.

Proximity to Washington, D.C., is another plus for the Commonwealth, and Richmond and Alexandria can serve as stand-ins for the nation’s capital. That’s a big reason why Danes was in Richmond last year filming scenes for Showtime’s spy thriller Homeland. And Virginia’s topography means that a film crew can get historical sites, beaches and mountains in relatively short order.

“It’s projects that have a logistical reason to film there in the first place,” Bails said. “Maybe they’re filming outside of D.C. It’s more of a windfall than it is an actual incentive to go to Virginia versus some other place.”

The VFO also works with localities to incentivize filming, often through the use of municipally owned assets that can serve as temporary local production offices. State agencies also enter the mix in that way, providing unused assets for production. Edmunds said that 22 different state agencies had a role in the production of Lincoln.

“We get really creative with what we’ll provide in the location fee so the budget will work,” he said. “In lieu of a check, we’ll provide these things to help the bottom line, and we feel we do those things better than any other state.”

Add in the extra tax break for hiring Virginia residents, which rises even more if they’re working in film production for the first time, and it’s a lot to keep track of. Cooper is used to chasing down disparate employees in various facets of the film industry who return to their home state when production is done, and she says open, reliable communications are the biggest key to getting the information she needs.

But beyond that, she welcomes her film production work as a palate cleanser and a window into a world most people only see on screens and read about in magazines.

“The most interesting thing about it is just the industry itself,” she said. “You’re sitting here doing tax returns and accounting, and it’s really a nice shift in perspective whenever you get to look at some of these different arenas. That, to me, is more interesting — getting to talk to and actually be a part of the film office and how they run their operations. 

“It’s not your business-suit-and-tie kind of clientele. When you’re dealing with numbers all day, you have to be more logical. These people are very creative and artistic and just a nice change of pace.”