Doc U Recap: The Business Side of Documentary Filmmaking
With tax deadlines just around the corner, we were sure that our documentary filmmaking community had a lot of questions about the business behind their art. On Wednesday, March 21, we invited everyone in the Los Angeles area to join us at the Cinefamily for an informed discussion on the business behind documentary filmmaking. Everyone came with burning questions they hoped to have answered: What are the various options available to filmmakers to be set up in the business of making documentaries? What business model works best for you and your filmmaking? How can you decide? And what are the implications come tax time?
Chris Perez (Associate, Donaldson + Callif), Jeffrey Schwarz (President & CEO, Automat Pictures), Lee Storey (Smile 'Til It Hurts: The Up with People Story, and Michael Garelick (CEO / President, Garelick Business Management Inc.) fielded all these questions and more from moderator Lisa Leeman (One Lucky Elephant, Crazy Wisdom: The Life and Times of Chogyam Trungaand) and the eager members of the audience.
As many of these issues were details never before considered by some emerging and first-time filmmakers, there were questions from the audience throughout the panel for clarification. Chris Perez started off the panel by talking about the importance of forming a limited liability company (LLC) to separate one's personal finances from the funds dedicated to (and hopefully coming in!) from a film project. The importance of this, Perez stated, is the need to "create a distance between ourselves and our projects." It's also important to have a good reason for setting up an LLC. The worst thing would be to have the IRS come in and say, "This LLC is a sham, there's nothing behind it!"
Perez and the panel spoke to how LLCs require fewer corporate formalities than other business structures, for example an S-corp or other corporation. Let's say you go into business with a partner: you decide to contribute $10,000, and your friend wants to kick in $40,000, but upfront you make the agreement that you will do 90% of the work. With an LLC, you can create the flexible business model the way that you feel is appropriate, making the whole endeavor much less corporate.
Lee Storey probably had the most personal moments of the evening when she told her story about making her first documentary feature Smile 'Til It Hurts: The Up With People Story. Before diving headfirst into filmmaking, Storey had been a practicing attorney in the area of water rights, which shouldn't have been any sort of deterrent against her passion: to make a film inspired by her late husband, who she learned was a part of the Up with People movement before they got married. Apparently, she was wrong: the IRS said that "attorneys can not also be filmmakers." After working for five years on her project, the IRS began trying to claim that her endeavor in filmmaking was more of a "hobby" than a viable career or money-making endeavor.
Tax accountant Michael Garelick spoke about his own ideas on whether or not to start an LLC. Did you know that LLCs have an added gross tax that no one talks about. To exist in the state of California, your annual license under the LLC is $800. Michael concluded by stating that LLCs are dangerous because—especially in California—you can get sued for anything.
In Lee's case, she believes she did all the right things—set up an LLC, kept her personal and business funds separate, kept meticulous records, pitched at film festivals, and secured sales agents and eventual foreign distribution. But when Storey admitted to enjoying certain aspects of being a doc filmmaker, the IRS took issue and labeled her project a hobby, calling into question the business deductions related to making her doc. Even more disturbing is that when Storey went to trial in February of last year to argue her case, the U.S. Tax Court in Arizona raised broader implications for documentary filmmakers, i.e. if at its heart the primary purpose of documentary filmmaking is to "educate and expose," can it ever really be considered a profit-making endeavor by the IRS?
When Lee finally went to trail with her case, the IDA, Film Independent, Women Make Films and others including Academy Award-winning directors joined with the law firm Donaldson & Callif. Donaldson filed an amicus brief on her behalf, strongly encouraging the judge to recognize that documentary filmmaking is indeed undertaken as a profit making venture. Storey's case stands out, not only for the tremendous significance the judge's ruling will have for documentary filmmaking as a whole, but because Lee's experience could be that of any filmmaker's: she set out to do "all the right things" when producing her doc. She knew to ask questions; she hired accountants, CPAs, and her own attorneys; she formed Storeyvision LLC and even secured a bank loan, collateralized against the anticipated future profits of the film. Even after all that, the IRS still wants to call it a hobby. The takeaway here? Check your business structure and strategy against the Nine Ways Independent Filmmakers Can Fight the IRS. And make sure to be seen and photographed with your Docu Vest as a testament to your desire to sell your film!
In the end, the four panelists reminded everyone that the IRS does have the right to audit you at any time. Keep your documents in order, your business and personal accounts separate, and the phone number of a good accountant handy just in case!
It seemed like everyone in the audience had many questions after the panelists were done speaking. People wanted clarification on whether grant funds are taxed as income (they are), whether or not to have a business plan ahead of time (the answer: most definitely YES), and how to prove that your project, endeavor, or film is for-profit when the weak economy has shrunk license fees and made the tough doc sales market, even tougher!
After a night that left most of our heads spinning, we want to thank all of our panelists, our moderator Lisa Leeman, and all of the people who showed up to ask their questions and share their experiences for their participation in this event. The IDA makes available to you the following resources to help answer any of your questions about the business behind documentary filmmaking.
The American Bar Association's Legal Guide to Independent Filmmaking
Michael C. Donaldson & Lisa A Calliff
Clearance & Copyright, 3rd Edition
Michael C. Donaldson
Michael C. Donaldson