In the News

How California’s Brand Spanking New Tax Credit Program Actually Works

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(Or: Why the State Might Pay for Half Your Movie)

Peter Law Group
Date: January 23, 2026
Audience: Entertainment and media lawyers, in-house legal teams, production executives, business affairs professionals, and compliance leads

Let’s be honest: “tax credit” isn’t the sexiest phrase in the film business. It’s not the stuff of dream sequences or final acts. It sounds like something your line producer whispers between bites of breakfast burrito while spreadsheet tabs multiply like rabbits. But behind all the eye-glazing legalese is one of the most powerful tools a producer can wield—and thanks to California’s newly expanded program under AB 1138, that tool just got a major upgrade.

Whether you’re a producer trying to keep your shoot on the West Coast, an entertainment lawyer trying to explain this to an actor’s business manager, or just someone wondering how California went from tax collector to patron of the arts, this is for you.

Let’s break it down in plain English.

So What Exactly Is a Tax Credit?

A tax credit is a dollar-for-dollar reduction in what you owe to the state. If your production company owes California $1 million in taxes and you have a $1 million credit, the state says, “We’re good here”—and your tax bill is effectively zero.

If your company doesn’t owe that much—or anything at all—California will still write you a check for 90% of the unused credit over a few years. That’s called a partially refundable tax credit. It’s not a grant or a loan. It’s not theoretical. It’s real money that goes back into your budget.

That’s why studios care. It’s why Netflix might shoot in Fresno instead of fleeing to Atlanta. And it’s why lawyers like me have to explain, patiently and repeatedly, that no, this doesn’t mean your cousin’s short film about sentient cupcakes automatically gets state funding.

Enter AB 1138: California’s New-and-Improved Offer

AB 1138 is California’s way of saying, “We know we’ve been a little clingy with the rules lately. So here’s $750 million a year to show we still care.”

Under this expanded Film and Television Tax Credit program, California has boosted the credit rate, widened the eligibility criteria, and made the process a lot more appealing to productions that might otherwise shoot in another state—or country.

Here’s what changed:

  • The total annual pool of available credits more than doubled—from $330 million to $750 million.

  • The base tax credit is now up to 35% of qualified expenditures, up from 20–25% in the old program.

  • An additional 5% bonus is available for filming outside the “studio zone” (that 30-mile L.A. radius).

  • A single production can now claim credits on up to $120 million of expenses, a $20 million increase.

  • More project types qualify: animated shows, unscripted competitions, short-format series, and more.

The goal is simple: keep productions in California, spread them across the state, and create jobs.

Let’s Do Some Math

Let’s start with the basics. A tax credit is not a rebate check. It’s not a grant. It’s also not a coupon for “one free scene in San Francisco.”

A tax credit is a dollar-for-dollar reduction of what you owe in state taxes. If your company owes $1 million in California taxes and you have a $1 million credit… guess what? You owe nothing. The credit “pays” your bill for you. And if your production doesn’t owe that much in taxes (or any taxes at all)?

Under AB 1138, California will refund 90% of the unused portion to you in cash, paid out over a few years. That’s called a refundable tax credit, and it’s the part of this story where most producers’ eyes light up.

Suppose you’re producing a streaming thriller series. You plan to spend $20 million on qualified production costs—that means below-the-line expenses like crew wages, set construction, equipment rentals, and location fees. Not star salaries. Not story rights. Just the nuts and bolts of production.

Under the old program (say, 25%), your production would get a $5 million tax credit. Under AB 1138’s expanded rules, the same $20 million spend earns you a $7 million credit at 35%. That’s an extra $2 million in your budget.

Now imagine you move the shoot out of L.A. to San Luis Obispo, Bakersfield, or anywhere else beyond the studio zone. That extra 5% bonus bumps your credit to 40%. Now your $20 million spend earns an $8 million tax credit—$3 million more than you would have earned under the old system.

If your company doesn’t owe $8 million in California taxes? You still get a 90% refund of the unused portion—$5.4 million in cold, hard cash, paid out over a few years. This is real budget relief, not just a line on a spreadsheet.

Why Does the State Do This?

Short answer: jobs.

When you shoot a film or series in California, you’re not just employing actors and directors. You’re hiring carpenters, electricians, drivers, medics, caterers, makeup artists, and 100 other roles. You’re renting equipment, building sets, paying location fees, and buying enough burritos to keep a small city running. All of that generates local tax revenue and stimulates the economy.

The state gets this. The tax credit isn’t a gift—it’s an investment that returns more in economic impact than it costs to administer.

Why It Matters Now

In the last decade, California’s share of major film and television production has been under siege. States like Georgia, New Mexico, and New York offer massive, often uncapped incentives. Canada, the U.K., and Australia dangle favorable exchange rates and aggressive rebates.

So California had to do something—and AB 1138 is it.

This law finally brings California back into the fight. The higher credit rate and refundability make it feasible for smaller productions to stay local, and more cost-effective for larger studios to keep their flagship shows in Hollywood. And with the out-of-zone bonus, it may actually push some productions to explore the rest of the state.

What This Means for Producers and Lawyers

For producers, it’s a game changer. You can now realistically plan your budget around a 35–40% offset. That’s huge for your financing model. It reduces the amount you need to raise up front and can make a tough project financially viable.

For entertainment lawyers, this means three things:

  • You’re now going to be asked to explain this program constantly.

  • You’ll be drafting credit allocation clauses into more production and finance agreements.

  • You’ll occasionally have to talk a client out of spending their entire refund on a drone shot that requires six permits and a helicopter.

For talent reps, it also means a new kind of leverage: if a production is saving millions in tax credits, maybe there’s room in the budget for a better trailer or a back-end bump. And you can bet those conversations are already happening.

The Bottom Line

AB 1138 is California’s big, flashy move to keep the entertainment industry anchored on its home turf. It’s practical, it’s competitive, and—for once—it’s a government program that actually makes life easier for productions.

Sure, there are forms to fill out. There’s an application process, oversight, and rules about how you spend the money. But at the end of the day, this isn’t just a legal footnote. It’s a financial cornerstone.

If you’re filming in California in 2025 or beyond, you need to know this program inside and out. And if you’re still thinking about shooting elsewhere, just remember: California may not be the cheapest date—but now, at least, it picks up part of the tab.

And in this business? That’s a plot twist worth sticking around for.

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