March 2010 By Jon M. Garon*
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.
For guerrilla and digital filmmakers, nonprofit grants often go unnoticed. Many nonprofit organizations are willing to participate in independent film projects. Some invest in film as an art form regardless of content, while others support particular projects because they are interested in promoting the message of the filmmaker—this is particularly true for documentary film.
Another selling point of nonprofit investment in independent filmmaking is that the donors’ return on investment is guaranteed. Given the number of independent films that never recoup any of the investors’ principal, shrewd supporters may prefer the more general benefit provided by a charitable tax deduction than the unlikely chance that they will see an equivalent return on their investment. Moreover, the tax deduction occurs at the time of the donation, so the return is immediate and without risk. For first-time filmmakers, particularly documentary filmmakers, charitable support is a very legitimate way to enter the business.
For the filmmaker himself, a further benefit is the level of appreciation afforded by the sponsors. Nonprofits often recognize that most of the work done on an independent film is essentially volunteer time, donated to complete a worthwhile project. As a result, they may offer the filmmaker wide latitude and a great deal of respect.
A limitation on nonprofit fundraising is that the money is often quite modest. The donors may also lack any sophistication regarding the project, unlike sources connected with the film industry. When funds become available from industry sources, they may often lead to other opportunities to promote the film or to valuable connections essential to the casting or production of the project.
1. Sources for Nonprofit Film Financing
Organizations that provide resources to filmmakers include the Sundance Documentary Fund, assisting the development of documentaries on social issues; the Fund for Jewish Documentary Filmmaking, focusing on Jewish history and culture; the National Black Programming Consortium, focusing on films emanating from African American communities; the Astraea National Lesbian Action Foundation, addressing issues in the lesbian community; and many geographic programs, such as the New York State Council on the Arts, the Minnesota Independent Film Fund, the Pacific Pioneer Film Fund, and the Texas Filmmakers Production Fund.
The Paul Robeson Fund is typical of the documentary funding model. Grants ranging from $2,000 to $15,000 are provided for documentaries dealing with relevant social issues. Filmmakers must complete grant applications that detail the project and provide samples of their prior work.
In many other cases, a nonprofit organization may not specifically be looking to finance a film project, but rather to provide funds for community outreach, training, or other goals. If the film being developed pro-motes those goals, the film project may become a valuable investment for the organization.
2. Fiscal Sponsorships
Nonprofit organizations may raise money from private donors or from grant organizations to fund those who support their exempt charitable purpose. As charitable organizations, they do not pay federal income tax, and they allow their donors to receive a charitable deduction against personal tax obligations. These charities are often referred to by their IRS tax designation, as 501(c)(3) organizations.
A few 501(c)(3) organizations have the development of noncommercial film and video as their charitable purpose. Organizations such as the Independent Film Project (IFP), Film Arts, and others accept donor funds to promote film projects. Under the typical fiscal agency relationship, a filmmaker applies for fiscal sponsorship by providing information on the film project, the filmmakers, the budget, and the distribution strategy. If approved by the fiscal agent, that charity serves as the entity that receives the donations. The charity then provides the donated fees to the filmmaker. The fiscal agent typically charges a 5 to 10 percent fee for its services.
The filmmaker is responsible for careful financial accounting and for compliance with all applicable tax laws. For example, the donor cannot be given any financial interest in the film, because this would transform the charitable gift into a for-profit investment. Donors can be given tokens of appreciation, but if these gifts have any significant monetary value, then the donor must be informed of the value of the gift, and the donor must deduct that value from the value of the donation listed on her tax returns.
3. Partnership Projects and Agenda-Based Films
Fiscal sponsorships are not limited to arts organizations. Any 501(c)(3) organization may elect to serve as a film’s fiscal agent, provided the film meets its charitable purpose. For example, a charity dedicated to promoting the elimination of a particular rare disease may find that a documentary highlighting the devastating consequences of the disease would help promote awareness and encourage pharmaceutical research to find a cure. A filmmaker hoping to make such a documentary could enter into a relationship with that charity by which it served as the project’s fiscal agent.
The filmmaker would be responsible for attracting new donations to the charity earmarked for the documentary, and the charity would be responsible for assuring that the tax and reporting obligations were fully met. The agreement should provide for the filmmaker’s salary, whether paid up front or deferred, and also stipulate that any donations in excess of the production and distribution costs be retained by the charity. The charity may charge a small fee to cover the expenses it incurs. The filmmaker retains the ownership of the film and its copyright, and all revenue from the film.
Even without becoming a fiscal agent, a nonprofit may serve as a conduit for additional funds donated by supporters of the film project. For example, if a church were willing to sponsor a production based on the life of one of its former pastors, the church would probably provide a modest grant toward the production costs (and perhaps provide the use of the church without charge as a shooting location). In addition, the church could collect funds for the film project from other donors. So long as the payments were consistent with the charitable purpose of the organization, a nonprofit could choose to use its resources to underwrite the film project.
4. Accounting and Accountability of Nonprofit Film Financing
As mentioned above, the fiscal agent is responsible for ensuring that the film project’s fundraising meets its tax obligations. If the fiscal agent is a film arts charity, it will likely have little or no control over the content of the film. (Non-arts charities are likely to participate as fiscal agents only in those situations where the charity and filmmaker have agreed in general terms about the content.) To meet IRS regulations, however, the fiscal agent must have a legal right to control the project, to assure that the funds are used in a manner consistent with the agreed-upon budget and that financial record keeping and reporting occurs properly. Charities with ongoing fiscal agency programs will have operational guidelines that the filmmaker must agree to follow. The filmmaker remains responsible for any liabilities of the production.
The film company does not itself become a 501(c)(3) charity. Instead, it should receive an annual tax form from the fiscal agent identifying the funds donated to it. Since the amount should be offset by the costs of production, there should be no taxes owed on these payments. If the film company is a sole proprietorship, however, and the budget includes the filmmaker’s salary, then this will constitute personal income to the filmmaker.
* 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.