This is part of a series of book excerpts from The Independent Filmmaker’s Law and Business Guide: Financing, Shooting, and Distributing Independent and Digital Films
designed to introduce filmmakers and others interested in creating content on the legal issues involved in the filmmaking process.
The most important business obligations are the duties of the film company to its investors and employees. Unless the film company fulfills these obligations successfully, the film cannot be successfully made and distributed—and the company risks violating state and federal law. The filmmaker must, therefore, pay close attention to the following duties.
The financial accounting of a motion picture is extremely detailed, complex, and vital. It is not a coincidence that Michael Eisner became the CEO of Disney by learning the business in the accounting department. Many other studio heads were lawyers earlier in their careers. A film company should plan to assign accounting and internal auditing functions to someone early in the development of the film company. While not a glamorous role, a good production accountant can help ensure that the film company will have the funds necessary to pay salaries, rent equipment when needed, and still edit the film.
Often, participants in an independent filmmaking project agree to be paid from the film’s profits. For this arrangement to work, profit participants must have confidence that there will be profits to share in if the film becomes a success. This requires that the film’s costs be carefully itemized and reported.
The most critical phase in filmmaking accounting is the first step: budgeting. The production budget provides a blueprint for the structure of the film company and the film project. It allows the filmmaker to identify the scope of the project, calculate the magnitude of the financial resources needed, schedule receipts and payments, and prepare for the long-term obligations that might arise if the film is not a financial success. For unions such as the Screen Actors Guild (SAG) and the Directors Guild of America (DGA), the film’s budget also determines the film company’s eligibility to utilize the unions’ reduced-pay-scale contracts. The filmmakers must submit a budget to the unions, and each union will scrutinize its assumptions before agreeing to allow union members to work for the film company under the terms of a low-budget contract.
Often, filmmakers will also create a business plan that anticipates each phase of the film project from financing to distribution, and assesses factors such as the market conditions for the film and the likelihood of profitability. That business plan will help map out the road ahead for the benefit of potential investors and more cautious creative participants who demand a realistic chance of success before they commit to a project. It is much more important to filmmakers who hope to develop further projects rather than those who are shooting and distributing a single film. If the filmmaker elects to create a business plan, it must be accurate and realistic.
Just as important as preparing a budget is keeping careful records of financial transactions. Record keeping serves two distinct goals. First, it provides the documentary proof of the production’s expenses, which is essential to calculating tax liability and compliance with contractual obligations to the unions and to determining the film company’s profits. Since many participants’ payments are based on the profit of the film company, failure to document expenses will lower the break-even point at which the profit participants must be paid. In addition, some financing options may require documentation to prove that the specific expenses were actually incurred.
Second, record keeping allows the filmmaker to monitor the costs of ongoing expenses like set construction. If 14 days into a 21-day shoot the film company has already spent 90 percent of its set construction budget, the filmmaker will have to make some choices. Perhaps most of the money was spent on a single set that has been used throughout filming. Then the remaining 10 percent of the budget should be satisfactory. If, however, the set construction costs are generally the same for each day of filming, then the filmmaker can expect to run as much as 40 percent over budget on set construction. Knowing this, the filmmaker can choose to scale back on set construction, increase the set construction budget by reducing other costs, or plan to increase the production expense. Without the advance knowledge, the filmmaker could find himself without funds in a checking account, suddenly shut down in the middle of production. A good accountant may not improve the film, but she certainly will improve the chances of completing the film.
The budget is the road map for which the accountant must serve as vigilant navigator. When money begins to flow, the danger always exists that it may be misspent. Misspent funds refers to money stolen, personal purchases improperly attributed to the production company, and expenses attributed to the wrong budget line. In the heat of principal photography, dozens of individuals may be authorized to start purchasing supplies. It is wasteful for three different production assistants to each buy bottles of glue. It is criminal for one of those production assistants to buy an extra bottle of glue for his own supplies and charge it to the production. The film company must be attentive and efficient so that a culture of lax accounting does not encourage the volunteers and independent contractors to take advantage of the film’s limited resources.
For accounting purposes, misspent funds do not include failed creative choices, such as purchasing a wedding dress for a scene that is later rewritten to take place in a dance club. While that may be a regrettable expenditure, the money purchased the intended costume and the balance sheet reflects the value of the dress even if the finished film does not. Filmmakers must be conscientious, but accountability should be a tool in support of the artistic goal rather than an obstacle.
Whenever someone other than a sole proprietor is handling the film company’s payments, a specific system of accountability must be established. The nature of the system depends on the size of the project and the number of individuals authorized to spend company money. A film company can authorize its scene designer to buy materials as necessary, as long as the expense remains within the agreed budget. The key is that for each expenditure a receipt is obtained, and each receipt is attributed to a particular budget line. As payments are made, the receipts are tabulated. This helps to guarantee that the designer has actually spent the money on set materials and allows the business manager to compare the expenditures to the approved budget.
The ability to maintain careful accounting becomes most difficult near the end of principal photography. As the tension mounts to finish filming on schedule, the frenetic pace often encourages frenzied choices. Late hours result in crumpled receipts piling up in ashtrays. After the frenzy, the receipts are flattened and submitted for reimbursement. The delay in submission allows the expenses to balloon, possibly eliminating the funds left for postproduction. Particularly on low-budget films, money is tight. Even a few bad choices at the end of principal photography can derail the project.
The final aspect of accounting relates to the obligations to report income and pay taxes. Unless the filmmaker operates a sole proprietorship, the film company must report income or losses. That information is used to pay taxes, either directly by the corporation or indirectly by the participants in a partnership or LLC. Movies are unique assets subject to illogical and highly manipulable accounting rules. It is generally accepted that a film company will either speed up the depreciation of the film to generate business losses and reduce tax liability, or slow the depreciation down by predicting long-lasting revenue from the movie, which increases the value of film as an asset on the books of the company.
Although the guerrilla filmmaker may pay little heed to the accounting possibilities, investors and financiers will. The successful film company should engage the services of a qualified accountant who can help the company establish a strategy to deal with the tax and reporting obligations for the project.
One additional note of caution: the tax reporting for a marginally successful film may continue for years, and in some cases, the tax forms will outlast the prints of the film itself. When creating the film company, the filmmaker must be prepared to accept this obligation to continue to collect fees and provide tax reports.
* Jon Garon is admitted in New Hampshire, California and Minnesota.
Adapted from The Independent Filmmaker’s Law and Business Guide: Financing, Shooting, and Distributing Independent and Digital Films, A Capella Books (2d Ed. 2009) (reprinted with permission). Jon Garon is professor of law, Hamline University School of Law; of counsel, Gallagher, Callahan & Gartrell.