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Michigan Business Tax

Fi37. What amount of finance fees and interest qualifies for film production credit, and how is it calculated?

To qualify for film production credit, finance fees and interest must be “direct production expenditures” as that term is defined in statute, FAQs and other issued guidance.  FAQs #Fi1 and #Fi12 provide some general guidance concerning “direct production expenditures” and interest.

Finance fees and interest must satisfy four “direct production expenditure” criteria to qualify for film production credit.  They must be i) made in this state, ii) not a qualified personnel expenditure, iii) directly attributable to the production or distribution of a “qualified production, and iv) subject to taxation in this state. 

Finance fee and interest expenditures are made in this state if they meet the criteria identified in FAQs and other issued guidance.  Finance fees and interest by their nature are not qualified personnel expenditures.  Finance fees and interest received for loan services performed in Michigan are subject to taxation in this state.

In addition to the fact that finance fees and interest expenditures that qualify for film production credit must be related to “development, preproduction, production, or postproduction” activity, two general calculation principles are applicable.  Because finance fees and interest are generally expenses predicated upon the time value of money, and because the expenditures must also be made in this state, the qualifying activity to which the finance fees and interest relate must take place in Michigan.  Finance fees and interest not related to the time during which an otherwise qualifying activity that is being financed takes place in Michigan will not qualify for film production credit.

  • Calculation principle #1:  Finance fees are prepaid interest and are treated as interest for purposes of this FAQ.  Finance fee and interest expenses recorded in the production company’s accounting records in accordance with generally accepted accounting principles qualify for credit.  The eligible portion of the accrued and paid interest and fees begins the later of the date of the loan disbursement or when the production activity starts  in Michigan and ends when the request for a post production certificate is submitted to the Film Office or the date the loan is paid, whichever is sooner.

If a production is only partially financed through loans with third party financiers, loan finance fees and interest relate to Michigan activity only in a proportional manner.  In other words, funds from loans are not used first to finance Michigan activity any more than self financed funds are.

  • Calculation principle #2:  Properly recorded finance fee and interest expense can be allocated to Michigan on a prorated basis to the extent Michigan expenditures relate to total expenditures for the production.  Estimates of future expenditures to arrive at total expenditures will be acceptable provided they are reasonable and based upon sound estimating principles.

Like other direct production expenditures, only finance fees and interest that have been accrued and paid will qualify for film production credit.  Calculation of qualifying finance fees and interest will generally start with finance fees and interest that have been expensed in the accounting records of the production company in accordance with generally accepted accounting principles (“GAAP”).

Qualifying “direct production expenditure” finance fees and interest should be calculated using the following formula prescribed by the State:

FORMULA: 

Booked Finance Fee and Interest Expense   x   Spend Ratio   

  • Booked Finance Fee and  Interest Expense” are finance fees and interest expensed in the accounting records of the production company in conformance with generally accepted accounting principles through the date the request for post production certificate was made
  • Spend Ratio” is the ratio of Michigan spend to total projected production spend (both net of finance fee and interest expenditures)

SCENARIO #1:

  1. Loan documents signed and loan disbursed on May 15th
    • $1,000,000 principal
    • 6% APR
    • 2 year term
  2. Agreement approved on May 15th
  3. Michigan production activity began on June 1st
  4. Request for post production certificate made on September 15 with a total spend of $2,000,000 and Michigan spend of $1,000,000
  5. Booked Finance Fee and Interest Expense June 1st through September 15th included in request for post production certificate in the amount of $ $17,589     ($1,000,000 x 6% x 107/365) (note:  30 days in June + 31 days in July + 31 days in August + 15 days in September =  107 days)

Qualifying Finance Fee and Interest Calculation:

$17,589 x ($1,000,000/$2,000,000) = $8,794

SCENARIO #2 (PREPAID INTEREST):

  1. Loan documents signed and loan disbursed on May 15th
    • $1,000,000 principal
    • 6% APR
    • 2 year term
  2. Agreement approved on May 15th
  3. Michigan activity began on June 1st
  4. Request for post production certificate made on September 15 with a total spend of $2,000,000 and Michigan spend of $1,000,000
  5. $120,000 interest for the full 2 year loan term prepaid on May 15th ($1,000,000 x 6% x 730/365) booked as a prepaid interest expense asset
  6. Booked Finance Fee and Interest Expense (by accounting entries reducing the prepaid interest account)    June 1st through September 15th included in request for post production certificate in the amount of $17,589 ($1,000,000 x 6% x 107/365)

(note:   30 days in June + 31 days in July + 31 days in August + 15 days in September = 107 days)

Qualifying Finance Fee and Interest Calculation:

$17,589 x $1,000,000/$2,000,000 = $8,794

SCENARIO #3 (FINANCE FEES)

  1. Loan documents signed and loan disbursed on May 15th
    • $1,000,000 principal
    • 6% APR
    • 2 year term
    • $6,000 finance fees paid at closing and amortized over the term of the loan

2.   Agreement approved on May 15th

  1. Michigan activity began on June 1st
  2. Request for post production certificate made on September 15 with a total spend of $2,000,000 and Michigan spend of $1,000,000
  3. Interest expense through September 15th included in request for post production certificate in the amount of $17,589 ($1,000,000 x 6% x 107/365)

(note:   30 days in June + 31 days in July + 31 days in August + 15 days in September =  107 days)

  1. Finance fee expense through September 15th included in request for post production certificate in the amount of $ 879 ($6,000 x [107/730])

Qualifying Finance Fee and Interest Calculation:

($17,859+ $879) x $1,000,000/$2,000,000 = $9,369