New Tax Bill Extends Section 181 Federal Film Tax Credit
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.