A number of countries have enacted incentive programs to attract U.S. film productions as a means of creating local jobs. Those incentive programs are typically designed to lower the cost of producing a film or television production. Canada accomplishes this through a tax credit that is paid to producers based on the cost of hiring Canadian workers. The UK, Germany and other countries accomplish this by permitting the immediate write-off of film production costs which attracts investors tempted by the tax savings that can be realized through large deductions. Through either approach, it is possible to reduce the costs of production by approximately 7% to 15%.

Beginning with the American Jobs Creations Act of 2004, governments are encouraging film and television production in the United States in response to an aggressive effort by other nations to steal U.S. jobs by luring away U.S. produced film and television productions. 

Section 181 relates to how investors can now take their investment as a total loss when the money is spent, and therefore get relief from their taxes in the year or years that their investment in the film is spent.  Other portions of the Act allow taxpayers to (a) calculate income forecast amortizations based on gross, not net, income; and (b) exclude a portion of taxable income attributable to audio-visual works produced in the United States.  

Also, section 199 states that when revenue is returned from a qualified investment, the taxpayer/investor would receive a slight discount for each year the investment is returned instead of paying taxes on 100% of the revenue. This is discussed further below.

Section 181

Section 181 essentially states that any taxpayer in the United States (individual, company, or a pass-through organisation like a LLC corporation or a sub S corporation) that invests in a qualifying film or TV project whose budget is less than $15,000,000 for film and $15,000,000 per episode for television (with a cap of 44 episodes including the pilot production), can take a 100% loss against their income in the year or years the money in spent.  There is no floor-it could be a $1000 movie, a $10,000 movie, or a $500,000 movie.  It just can’t be greater than 15 million. 

So, U.S. taxpayers can elect, for any “qualifying film and television productions,” to immediately expense certain production expenditures up to $15 million in lieu of capitalising the cost and recovering it through depreciation.  This would be in contrast to current law, where the cost of producing the film is usually recovered over a period of several years.  This ability to immediately deduct costs from income will serve as a means of attracting investment capital into production where a portion of the tax benefits will flow through to reduce the cost of the production.

The one exception is that the budget could go up to $20,000,000 if a certain amount (estimated to be more than 50%) of expenses in the budget are spent in a low income or depressed area.  If all these qualifying matters are met and if the film or TV project is not sexually explicit, and 75% of the wages in the budget are performed and paid in the United States, the taxpayers who invest can take 100% loss against their income in the year or years the money is spent.   Any production of a motion picture film or videotape is deemed to be a “qualified film or television production” if 75% of the total compensation is for services performed in the U.S. by actors, directors, producers, and other relevant production personnel. The term “compensation” does not include participations and residuals.

Production Costs

Production Costs under the Act (for both the amount of the deduction and the production cost limit) are the amounts that, absent Section 181, are required to be capitalised under Section 263A.  The cost of acquiring a production, obtaining financing and completion guarantees, and participations and residuals are considered production costs.  Distribution costs are specifically excluded. 

If the film is made over two years, (i.e., starting in December and finishing in the following year) then the investment spent in the first year can be written off for the same year and the portion of the investment spent in year two can be written off in the second year.  Section 181 expires and sunsets, at the end of 2008 unless it is extended.  Production costs incurred after the expiration of this period may still be deducted if the principal photography commences before the deadline.

Passive Loss vs. Ordinary Loss 

Section 181 has created confusion in the industry among filmmakers, producers, accountants and attorneys.  Specifically, it does not state whether the loss is an ordinary loss against income or whether it is a passive loss to be written off only against passive income.  All of the indicators in the legislative intent and history behind this Section and all that has happened since the Act was enacted, have indicated that the loss is an ordinary loss and thereby can substantially reduce or even wipe out the investor’s tax liability in the year or years the money has been spent.

For example, if an investor had a liability of $100,000 in tax and the shooting was completed in the year the investor needed the write off, the investor can get the full $100,000 if the $100,000 was spent in 2006 and if the investor is a 35% income tax bracket payer.  The net result is that the $100,000.00 can be written off against ordinary income and would be a $35,000.00 tax credit against actual taxes paid.  However, the investor can not carry forward the loss to subsequent tax years.  If the investor has a greater credit than tax liability, then the investor forfeits the difference.  So, it can be a benefit in some cases if the film is shot over two years.

State vs. Federal

You can use the federal tax benefits in conjunction with State benefits. They are not mutually exclusive, but rather are mutually inclusive. You can pick a State that has state incentives and get benefits from that State as well as the federal tax benefits.  For example, some States (Illinois, New Mexico, etc.) passed legislation providing that a production company that spends money in that State gets a 20% tax credit on all money spent on production in the State.  So, one would get both Federal and state benefits. Tax credits may be handled in different ways depending on the jurisdiction, so further research should be conducted on the various different State laws.  The thing that a filmmaker needs to do is to pick out those States that best fits the climate of their movie and then determine what the incentives are.

Section 199

Section 199 is the income section and it is called the manufacturing section of the Act.  Film Production has been defined as a manufacturer but television is not.  Section 199 does not apply to television.  This section states that any manufacturer (Film Production) can have some tax relief on money returned to the investor in the amount of a 9 % reduction.

So, for every $1.00 returned on an investment in a movie after 100% has been written off, the investor will only be taxed on .91 cents.  This benefit is separate from the other investment benefits.

While film production is not necessarily for everyone, investments in this area can provide an interesting and enjoyable experience, far different from standard private deal investments.

Under IRS circular 230, attorneys and accountants cannot give general tax advice without a disclaimer that simply says that you should not rely on what is stated, and you must check with your own tax advisors for the full information.