What do you do when projects are successful and the money pours in?
When artists find themselves suddently successful it often is challenging to handle it all and know how much must be set aside for taxes. Many filmmakers misunderstand tax code to think their royalty payments will be taxed as royalties and reported on Schedule E. This is not the case. Royalties for artistic work you created yourself is reported on Schedule C as self employment, and subject to a 15.3% self-employment tax in addition to income taxes. But taxes due on this income can also be reduced by amounts invested in your business. Therefore careful planning and investment in the year income is received, or before, can help to minimize the tax impact.
If I don't make a profit are the losses deductible?
Amounts spent creating films or building your filmmaking career can be deductible against income on Schedule C, or create a Net Operating Loss to carry over to future years. However, this won't give you a refund without having paid taxes in as withholding, and if you don't have current income you may wish to defer some income forward to years where you have business income through longer periods depreciation of assets such as cameras or computers, or amortizing certain start-up costs.
How do you package films so that investors are protected?
The big Hollywood production companies structure their projects so that every film is a separate Nevada LLC. This is the necessary way to go if you want to do bigger budget films, as the LLC protects the individual investors from liability related to copyright infringements or an injury on set, and allows investors to not be saddled with California tax as Nevada has no state tax for businesses or individuals. But for many small filmmakers this is impractical as the costs of maintaining this structure is $1,000 per year in state filing costs plus nearly another $1,000 in tax return preparation fees. Therefore it depends what level you are at if this is a practical strategy to follow.
What about film credits?
Film credits in various states can be a method larger indie producers raise a portion of their budget, as these credits can in most cases be resold to other businesses to raise funds. But this is a big dollar game. Generally you have to spend at least $1 million in film production costs in the state or area that offers the credit in order to qualify. This limits you to using a certain amount of local hires that can make it challenging to meet both budgets and deadlines so it is a tradeoff.