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New Tax Bill Extends Section 181 Federal Film Tax Credit

by Jeff Steele

The new tax bill that President Obama recently signed into law will extend the Section 181 film tax credit to the end of 2011.  In addition, it can be applied retroactively to all qualifying films produced in 2011 AND 2010!

The bill allows producers to deduct the cost of qualifying expenditures in the year they occur rather than having to amortize those costs over several years.  This is great news for independent filmmakers and their equity backers, who can now offset their equity investment by as much as 50% or more through the combination of state and federal incentives.

The bill was originally signed into law as part of George W. Bush’s 2004 Jobs Creation Act, but it expired at the end of 2008.  Now it has been resurrected as part of the controversial Republican lead tax bill.  I don’t think most indie producers had this in mind when the media and Democrats vilified the bill as “tax breaks for America’s richest 2%”.  But then again, that’s the same 2% that provides most of the equity that backs indie films.

The incentive does come with a few strings attached that are by no means insurmountable:

  • Expenditures cannot exceed are limited to the first $15m of production costs – inclusive of all union residuals and deferrals;
  • 75% of the film must be shot/spent inside the US;
  • The incentive only applies to monies spent from US equity investors – you cannot benefit from presale and gap loans;
  • The benefit for television production is capped at 44 episodes.

It should be noted that if a certain amount of shooting (or a certain percentage of the budget) is filmed in an area that the Census Bureau dubs as “economically distressed”, then the expenditure cap increases to $20m (e.g. pretty much the entire state of Michigan as well as the Gulf Region could be considered distressed).  It’s also worth noting that if the residual income from a successful film pushes the “cost” of the film past the $15m (or $20m) expenditure cap, then the benefit can be retroactively disqualified.  As such, it is recommended that the expenditures not exceed $12m, to allow for such a buffer.  That may sound scary, but it’s actually a good problem to have.

It will be interesting to see if Warren Goz’s Grand Army Entertainment will resurface with their Section 181 monetization scheme, which was the only known way to convert the benefit to cash for the production (netting about 10% of budget).  Speaking from experience, it was extremely complicated and costly, and required about 50 bank lawyers to close it.

This is a desperately needed benefit arriving at a critical time in independent film finance.  While overall business is good for premium independent projects with budgets over $20m, financing has been extremely difficult to come by for low budget indie filmmakers, who have the most to gain because their films are often financed almost entirely by one are a few equity investors, all of whom can share in the benefit.

27 Responses leave one →
  1. Shawn permalink
    December 19, 2010

    Yay! Now, I have what I need to finish my film on the 9/11 first responders not getting any extended health coverage! Sweet.

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    • Scott Hillman permalink
      December 19, 2010

      be sure to thank George Bush and John Boehmer in the credits!

      ——

      Oh Republicans. This is not directly related to movies but i bet at least 75% of the credits they fought tooth and nail for are got are going to democrats. They never quite grasp that while a lot of upper middle class rich people are republicans most very rich people find them abhorent.

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  2. December 19, 2010

    Finally. Great news indeed for indie filmmakers!

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  3. Pierre Lapointe permalink
    December 19, 2010

    Jeff,

    I was under the impression that the incentive was applicable to productions with qualifying expenditures of up to $15M ($20M in distressed areas) regardless of budget, a change I believe that was made in 2008, but this may have reverted. I’ve been trying to get confirmation, but haven’t been able to just yet – might have to read the IRC.

    Bottom line; Indie filmmakers need to take advantage of the incentive but should discuss with their accountants and lawyers prior to making claims to any investors.

    To your knowledge, is this something investors have been waiting for? Will they start coming out of the woodwork (one can hope) now that [a portion of] their investment can be recouped?

    Still , great news for filmmakers!

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    • Jeff Steele permalink
      December 19, 2010

      Pierre, I believe you are correct; I have tweaked the verbiage accordingly, thanks for spotting it.

      Producers and investors must get proper accounting advise on claiming this credit. In fact, producers should include Section 181 in the Reps & Warranties with their investors.

      Unfortunately, I don’t think HNI’s are lining up to take advantage of this benefit; the press has ignored it and film is not high on high on most people’s must invest list. As with the initial Section 181 in 1984, it took a couple years to get investors on board, mostly due to inconsistent regulations, as well as an inability of most indie producers to properly convey the benefits to potential investors, since this is not cash that is used to finance the budget, nor is it part of the waterfall. It’s something slightly more esoteric, but also something that somebody with a large overall tax liability would understand and appreciate the value of. If done properly, and carefully, it could be included in the film’s finance plan

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    • December 19, 2010

      So does this mean there is no cap on expenditures?

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      • Pierre Lapointe permalink
        December 20, 2010

        up to $15M ($20M in distressed areas).

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  4. Cotty Chubb permalink
    December 19, 2010

    Golly, if only they’d raised the tax rates on those HNIs instead of cutting them, then the tax benefits would be even more useful!

    If you’re paying 15% (or less) on your hedge fund income, sheltering that income from tax isn’t so meaningful as it would be if you were paying 39.5%.

    Nothing’s perfect, eh?

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  5. December 19, 2010

    Am I correct in reading that the section 181 tax credit will once again expire at the end of 2011?

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    • Jeff Steele permalink
      December 20, 2010

      Yes, it currently expires at the end of 2011.

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  6. December 19, 2010

    Jeff, when you say the money must come from U.S. equity investors, are you referring to U.S. citizens, or companies with legal foundation in the U.S.?
    I am currently dealing with equity investors from Canada and Australia that have legit U.S. companies.

    Also, what do you mean by not being able to benefit from pre-sale and gap loans?

    Anyway, this is indeed good news, and thanks for the heads-up.

    By the way, I did note YouTube’s announcement about original programming. You called it.

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    • Pierre Lapointe permalink
      December 20, 2010

      “Also, what do you mean by not being able to benefit from pre-sale and gap loans?”

      The incentive is applicable only to the equity portion of the financing. If your $3.5M financing plan calls for $1M pre-sales, $2M equity and $0.5M gap and of course your production meets all the requirements, then only the $2M equity investment is applicable to the incentive.

      My understanding is that this is not really a filmmaking incentive per se, but rather a tax shelter type scheme for investors to offset their eventual losses when they invest in films. In other words, an investor’s overall tax liability is reduced by a certain percentage of the amount of money they invested in one or more films.

      Jeff, correct me if I’m wrong here.

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      • Jeff Steele permalink
        December 21, 2010

        Pierre, you are correct. In simplest terms it gives your equity investor an accelerated deduction, so that they can write off the entire investment in their first year, as opposed to amortizing it over several years. This can be very enticing for investors who have large tax liabilities that they need to offset.

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  7. December 23, 2010

    Man. I have my work cut-out for me. I was going to New Orleans for New Years and now I’ll have it full of business meetings.

    Thanks to all for the great comments and article!

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  8. December 24, 2010

    Great article and right on time. I’m trying to close a deal with an investor. Where can the standard application be found?

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    • Jeff Steele permalink
      January 12, 2011

      You’ll need to discuss that with your tax adviser, and your investor’s tax team.

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  9. Everton Scott permalink
    December 27, 2010

    I think there are two more very important terms that were missed. (correct me if i’m wrong.)

    The investor has to qualify as an active investor. He cannot be a limited partner or simply be purchasing your securities.

    And the deduction has to be against passive income.

    If you happen to meet steve jobs and he tells you he’ll give you a ten million dollar equity slug. You may have no benefit from 181.

    Steve is very wealthy and makes a pretty penny from his work but that is active income.

    He may not have enough of an income from his investment portfolio to offset any significant tax liability. So even if he makes a $10M salary, receives $90M in stock from apple that year and takes in 1M from stocks he sold. He may only have saved 350,000 in tax liabilities.

    But even if he did have a liability that got him the full 3.5M benefit, you still might have a compliance issue.

    Any IRS agent would be skeptical that Jobs was an active participant while he was doing his job at Apple. And reading the script, telling you he loved it, showing up on the set for a day, while talking to you occasionally on the phone, will not cut it.

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    • Pierre Lapointe permalink
      January 2, 2011

      Everton, I just read the specifics and I don’t see any language stating the investor must be actively involved in the project.

      Here’s the general definition of the election:

      “A taxpayer may elect to treat the cost of any qualified film or television production as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction.”

      Also, it would appear that members of “controlled groups” (i.e. corporations and/or chains of corporations) are allowed as well as partnerships and S Corporations.

      So, I’m wondering if this is more applicable to a filmmaker investing his own money into a film and being able to write it off that same year than it does to a multi-million dollar investment by an HNI.

      Many filmmakers are ecstatic by this legislation; are they getting something I’m not? I admit I got caught up in the excitement of the moment, but the more I look into this, the more I wonder what the big deal is? Call me cautious, I’m still looking for the silver lining.

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      • Jeff Steele permalink
        January 12, 2011

        In the initial legislation, it was a deduction against passive income, which was great for the Oil & Gas crowd and other such royalty earners.

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  10. Jason permalink
    December 30, 2010

    Where do I find the proper forms for the tax deduction?

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    • Jeff Steele permalink
      January 12, 2011

      See your tax adviser.

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  11. John Porter permalink
    January 13, 2011

    Hi Jeff, I see Pierre made this important point already, but you may want to change your first starred bullet point under a few strings attached section to properly reflect that the $15 million cap applies to the first $15 million of production costs no matter the size of the production budget and keeping track of union residuals and other deferrals such as participations is no longer necessary (unless total production costs are below the $15 million threshold and these post-release costs can be utilized to up the immediate writeoff). This important change was made in 2008 when the law was initially extended through 2009. I believe this will help folks who read the article but don’t bother with the numerous comments.

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  12. Nick permalink
    January 14, 2011

    Jeff-

    I’ve got an American project that will be shooting 90% in Italy, does that mean my American equity investors can’t take a single write off against their passive income? Thanks.

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    • Jeff Steele permalink
      January 16, 2011

      I’m not a CPA, but their are still amortization and business expense deductions to be had.

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  13. Cornell Christianson permalink
    January 21, 2011

    Jeff,
    Are you saying that Everton’s comment above is wrong, that the early legislation allowed for deductions against passive income only but that is no longer true with current legislation? That deductions are now allowable against both passive and active income?

    Please also respond to the contradiction between Everton and Pierre above. Everton says the investor has to be active in the production, can’t just be a limited partner. Pierre says he sees no such language in the current legislation. This is a crucial point. We can’t be telling investors they will get this deduction only to learn later they had to be active and involved in the production.

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  14. July 31, 2012

    Dear Jeff –

    I am a Cape Town based indie film producer who’s a USA citizen. I want my US investors to benefit from the tax incentives in South Africa and in the USA.

    Is the USA tax incentive extended to 2012 & 2013 by any chance? If so, can the USA investor benefit from the incentive if they shoot films in Cape Town?

    Cheers!

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    • Jeff Steele permalink
      August 18, 2012

      The Section 181 incentive was not extended. R.I.P.

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