Silver Linings (The Power of Tax Incentives)

Even in this grim economy, every cloud has its silver lining, including the film industry. During a Film Specific podcast, Suzanne Lyons brought up a wonderful point; if you buy into the conversation of scarcity, your actions will be directly correlated to that mindset, and it will show with investors. How can you attract investors when you paint a bleak picture of an over-saturated market, where nothing is selling?

The truth is, films are still selling; distributors are simply being more selective in their acquisitions, and the bar has been raised for filmmakers to produce original, creative work (Kevin touched on this in his last post.)

More importantly, now is a better time than ever to invest in film. With amazing federal tax rebates and incentives such as Section 181, you can guarantee investors recovery of their money, regardless of distribution, of 50-77 cents on every dollar. Josh Kaplan, a business lawyer at Stahl Cowen uses this example, "If a tax payer is in the thirty-five percent (35%) tax bracket and a qualifying film is shot in Michigan which has a tax credit of up to forty-two percent (42%), an investor will be eligible to recapture seventy seven percent (77%) of his or her investment in a qualifying production."

If you aren't familiar with Section 181, I've assembled some quick facts below to give you an idea of what it entails, as finding information about the bill on the internet seems to be somewhat difficult.

Section 181

• Section 181 is a federal tax incentive designed to combat runaway film and television production.

• This is a significant Federal tax incentive that allows producers of qualifying productions to take an immediate tax deduction for the full or partial costs of a production in the year the cost is incurred (as opposed to having to spread or amortize those costs over a period of years beginning after the film goes to market).

• Section 181, which was first enacted by Congress in 2004, was extended and modified as part of the financial rescue package passed by Congress and enacted into law on October 3, 2008. It was extended for one year for qualified productions that begin the first day of principal photography before January 1, 2010.

• Under H.R. 4213, The American Workers, State, and Business Relief Act of 2010, Section 181 is amended by extending it until December 31, 2010’.

• HR 3931 seeks to extend Section 181 until the end of 2011. (Referred to committee)

• HR 2720 goes well beyond a 2 year extension and looks to make Section 181 a permanent tax incentive for qualified films. (Referred to committee)

• In the case of a film co-produced by multiple investors, the deduction for qualifying expenditures must be allocated among the owners of the film in a manner that reasonably reflects each owner’s proportionate investment and economic interest in the film.

• The proposal applies to the first $15 million in production costs for qualifying film or television productions.

• To qualify, at least 75% of the total compensation expended on the production must be for services performed in the United States.

• There is no specific form to fill out. The IRS temporary regulations require that you declare in a separate statement that you are electing to utilize Section 181. The legislative history also states that: “deducting qualifying costs on the appropriate tax return shall constitute a valid election.” Therefore, deducting the production costs (that would otherwise be capitalized) on your tax return will qualify as electing to take advantage of this incentive.

• If production expenditures are incurred in more than one year, the immediate tax deduction will be taken in more than one year.

• Section 181 refers to “the taxpayer” who makes the election and takes the deduction. The temporary regulations provide that only the owner of the film or television production may elect to deduct production costs under section 181.

• Producers should consult with their professional tax advisor's on any issues related to this new Federal tax incentive.

- Mike