Compliance10 min readJuly 20, 2026Human verified· September 8, 2026

Qualified spend: what counts for a film incentive

Your incentive rate applies to qualified spend, not your budget. In-state vendor tests, salary caps, loan-out rules and what an auditor will disallow.

Every incentive percentage is applied to a number that is not your budget. It is applied to qualified spend: the subset of your costs the administering agency accepts, under that state's definitions, after an audit.

Texas shows the shape of the gap. The top base rate for film and television is 25%, and it is paid on eligible Texas spend, which means goods and services bought from a vendor with a physical Texas address plus wages paid to Texas residents. Wages paid to anyone who is not a Texas resident are not in the base at all.

The arithmetic of the gap is unforgiving. A production budgeting against a 30% program on $4,000,000 expects $1,200,000. Qualify $3,100,000 instead and the payment is $930,000. The $900,000 that fell out of the base cost $270,000 of financing, which on most independent features is the whole contingency.

The three tests

Almost every disallowance traces back to one of three questions.

Was it spent in the state?

The near-universal test, and the one most often assumed rather than checked. A vendor with a local address and no local operations usually fails it.

Kentucky writes the standard out. A Kentucky vendor has to hold inventory or perform the service in Kentucky in the ordinary course of business and have a physical location in the state with at least one Kentucky resident employee working there on a regular basis. The guidelines then close the obvious door: registering with the Kentucky Secretary of State or appointing a registered agent does not establish a physical location. Payments through a vendor acting as a conduit, waypoint or pass-through do not qualify.

Texas applies the same idea through documentation. The invoice needs a valid Texas address or phone number, pass-through companies and service expenditures are ineligible, internet purchases not made to a Texas vendor are ineligible, and shipping costs are ineligible unless the shipment originated in Texas.

Was it spent on the production?

Development, distribution, marketing and financing costs generally fall outside the base, and so does anything that reads as corporate overhead.

Kentucky's non-qualifying list is explicit: bank, financing and completion bond fees, legal and accounting expenses, the cost of the required certified audit, contingency, script publication and license fees, publicity, distribution and marketing, gifts, wrap parties, alcohol and tobacco, and online purchases. Texas excludes story rights and development costs, clearance and licensing fees, marketing and publicity, distribution and festival costs, and costs the company would incur whether or not the project were in production. New Mexico's definition of a postproduction expenditure specifically excludes advertising, marketing and distribution.

Was it spent inside the eligibility window?

A pre-approval date is not administrative theatre. It is a line, and spend on the wrong side of it is gone.

Ohio is the clearest case. Before a credit certificate is issued, the independent CPA has to certify that every eligible production expenditure was incurred between the date the production was certified and the production complete date. Certification also has to be followed by a start: if production does not begin within ninety days of certification, the director rescinds it.

Washington requires that all production and post financing be secured before you apply, including any gap financing against the forecast incentive itself, and that the production be approved before principal photography begins. Texas accepts an application no earlier than 180 days and no later than five business days before the first day of principal photography.

Where the money falls out

Per-person compensation caps, and what they cap

A cap is only meaningful with its base attached. The bases differ.

Georgia caps by employee, on W-2 salary. Total aggregate payroll is what the production pays employees for work performed in Georgia, and the portion of any single employee's salary above $500,000 for a single production is excluded. Routing the fee through a loan-out does not raise the ceiling: the statute aggregates all payments to an employee and to any entity in which that employee holds a direct or indirect ownership interest.

Kentucky caps above-the-line payroll at $1,000,000 per individual per production, and qualifies above-the-line pay only to the extent it is directly attributable to work performed in Kentucky.

Texas counts only the first $1,000,000 of each Texas resident's wages, and does not count non-resident wages at all.

Washington pays in full on resident cast and crew wages and benefits, but lets in at most $50,000 of any one non-resident's wages, and then only under the non-resident rules below (per episode on an episodic series).

Model the cap that applies, against the base it applies to. A single seven-figure fee against a program that stops at $500,000 of W-2 salary is an entirely predictable disallowance that nobody enjoys discovering after wrap.

Residency rules narrow the base in two different ways

Some states gate the whole incentive on residency. Others pay a lower rate on non-resident labour. Knowing which one you are facing changes the crew plan.

Texas gates. At least 35% of paid crew and 35% of paid cast, including paid extras, must be Texas residents on a film or television project, counted separately, and at least 60% of production days must be completed in Texas. These are program qualifications rather than tiers, so missing one does not shrink the grant proportionally. It means there is no grant.

New Mexico prices instead. The non-resident below-the-line crew credit pays 15% of those wages, against the 25% base for qualifying New Mexico spend, so bringing crew in is a modelled decision rather than a penalty. It is bounded twice over: the non-resident below-the-line wages claimed cannot exceed 15% of the production's total New Mexico below-the-line crew wage budget, and the number of non-resident positions is capped by budget band, at five up to a $2,750,000 New Mexico budget, ten up to $7,500,000, fifteen up to $11,000,000, one more for each additional $10,000,000, and never more than twenty. Producers, directors, screenwriters, cast and production assistants are excluded, as are payments made to a personal services business.

Washington does both. Non-resident compensation earns up to a 15% return, but only if at least 85% of the labour force are Washington residents and the non-resident works at least half the production days. Non-resident above-the-line (writer, director, producer, actor), production assistants, executive assistants and extras are excluded, and qualified non-resident labour does not count toward the minimum in-state spend threshold you have to clear first.

Loan-out payments

The most common single cause of a large disallowance, and structurally avoidable.

Georgia makes the point plainly. The production company or its payroll service provider must withhold Georgia income tax on all payments to loan-out companies for services performed in Georgia; the loan-out has to register through the Georgia Tax Center for a withholding account and hand over its federal and Georgia withholding identification numbers; and a payment to a loan-out is a qualified production expenditure only where those withholding obligations have been met. Miss it and the payment does not qualify. Not reduced, not disputed, not qualified.

Kentucky requires a loan-out entity to be registered and in good standing with the Kentucky Secretary of State. In Ohio the independent CPA has to certify that loan-out talent contractors are registered with the Ohio Secretary of State to do business in Ohio. New Mexico requires non-resident performing artists to be paid through a super loan-out that pays gross receipts tax and withholds New Mexico income tax at the maximum rate.

The fix is a pre-production task, not an accounting task: collect loan-out entity details during onboarding, confirm registration in every state you are shooting in, and set withholding correctly in payroll from the first cheque. It costs an afternoon before the shoot and six figures after it.

Rentals, purchases and per diem

Equipment rented from an in-state vendor usually qualifies; the same equipment rented out of state and shipped in usually does not, even when it is used entirely in state. Kentucky lists expenditures made to vendors located outside Kentucky as non-qualifying. New Mexico does the same for out-of-state vendors. Texas requires a Texas vendor and disallows shipping that did not originate there.

Purchases that hold value after wrap get treated differently from rentals. Texas treats any single item bought for $1,000 or more as an asset: it is eligible only with an explanation of demolition, holdover or resale, and where the item is resold, only the difference between the purchase and resale price is eligible.

Per diem is one of the least consistent lines across programs. Texas allows it when it is paid to a valid Texas resident and backed by signed per diem sheets. New Mexico allows it for residents and non-resident performing artists only, and excludes it from the non-resident below-the-line crew credit entirely.

Fringes follow the wage

Payroll taxes and fringes on qualifying wages generally qualify, and fringes on non-qualifying wages generally do not.

In Texas, gross wages, taxes and fringes are eligible for valid Texas residents; only employer-paid taxes and fringes count, employee-paid taxes and payroll deductions do not, and benefits paid for an employee's dependents are not eligible. New Mexico allows non-resident below-the-line crew wages into the credit but not their benefits or per diem. Georgia keeps reimbursed expenses, per diems and employer-paid benefits and taxes out of total aggregate payroll unless they appear as wages on the W-2.

The practical consequence is a systems question, and it lands before the first payroll runs rather than during the audit: your payroll reporting has to be sliceable along exactly the lines the program draws.

The audit is the actual deliverable

Most programs make an audit the mechanism by which your claim becomes money, and the scope is wider than producers expect.

Ohio requires an independent CPA to examine production, postproduction and advertising and promotion expenditures and certify four separate things: that the costs are eligible production expenditures, that the goods and services were purchased and performed or consumed in Ohio, that the loan-out talent contractors are registered in Ohio, and that everything was incurred inside the certification window. The CPA reviews every contract and expense item of $1,000 or more, and no less than half of those under $1,000. Kentucky requires a certified audit completed within 180 days of the completion of production in the state. In Georgia, every project certified by the Department of Economic Development on or after 1 January 2023 must apply for and receive an audit before the credit is claimed or used in any manner.

An auditor works from documentation, not from intent. For every qualifying dollar they will want the invoice, the proof of payment, the vendor's in-state status, and the connection to the production. Texas states all four as conditions and lists the failures that follow from missing any of them: quotes submitted instead of invoices, invoices missing vendor information or a date, missing proof of payment, expenses paid by an entity other than the applicant.

Which means the real determinant of your incentive is not how carefully you read the statute. It is whether production accounting was set up to produce audit-ready documentation from day one:

A chart of accounts that tags qualification status at entry, not in reconciliation
Vendor onboarding that captures in-state status before the first purchase order
Loan-out registration and withholding confirmed before the first payment
Residency documentation collected as crew are hired, not chased afterwards
Receipts and proof of payment filed against the invoice, continuously

None of that is difficult. All of it is close to impossible to reconstruct six months after wrap, which is exactly when most productions attempt it.

STAY CURRENT

Get the qualified spend brief.

A short, practical note when the rules that decide your qualified spend change: vendor tests, salary caps, loan-out registration, audit scope. Nothing else.

Do not pad the application either

The gap cuts both ways. Ohio computes the credit at 30% of the lesser of the budgeted eligible expenditures stated in the application and the actual eligible expenditures certified by the CPA. An optimistic application does not buy you headroom, and an overrun earns nothing. The number you file is a ceiling as well as a claim.

A planning number until you have a real one

Until the state's actual rules have been run against your actual budget, our planning assumption is that qualified spend lands somewhere around 70–90% of total budget for a production shooting predominantly in one state. It sits lower if you carry significant above-the-line, use substantial out-of-state vendors, or shoot across multiple jurisdictions.

Use the low end. An incentive estimate that comes in high is not a pleasant surprise; it is a financing gap that has already been spent.

Getting this right is most of what we do. Talk to us before the chart of accounts is locked, not after.