Tax Deduction for Film Investors

A January 6th, 2011 article in the Hollywood Reporter discusses the extension of a provision of the tax code that allows investors to take a deduction for money invested in movies. This section of the US Tax Code (Section 181) now permits a 100% deduction for the first $15 million of the cost of films and television series that commence principal photography prior to 2012.

NOTE: This is not a tax credit - but a deduction. Which begs the question: What's a film tax deduction and how can it help a taxpayer?

In this case, a tax deduction for film investors means... If you're an investor who isn't actively involved in production decisions, you can "write off" your share of the investment (within certain limits) against all your passive income. This means that, in certain situations, an investor can subtract the amount they put into your film from all their income from real estate investments, oil and gas investments, film investments, etc. A deduction reduces income, so a taxpayer would "deduct" the amount they've invested in your film from all their passive income (e.g., if X invests $5,000 in your film and X's income from oil wells was $50,000, X will report only $45,000 in passive income - reducing his income tax liability).

While some investors will have lots of passive income, not every investor in motion pictures will be earning money from "trade or business activities in which you do not materially participate." (That's how the IRS defines "passive income.")

Since apparently only investors with offsetting passive income will benefit, and a deduction only reduces taxable income (it's a deduction - not a tax credit - so an investor with lots of passive income still stands to lose 80% of their investment in a qualifying film if their passive income is taxed at 20%), today's blogpost may not matter to most filmmakers and their investors. But independent filmmakers with high net-worth investors should consider alerting them to this provision of the tax code.

Please note, I am not a tax expert and this post appears only for informational purposes. For tax advice, investors should consult their own professionals and filmmakers should always consult their own tax advisors.

UPDATE FEBRUARY 4TH, 2013: Filmmaker tax incentives have been renewed for 2013.