January 2nd, 2013 The Hollywood Reporter covered the Fiscal Cliff negotiations from a uniquely show business angle: Reporting on the last-minute extension of the IRS Section 181 production tax credits first allowed by the Bush administration in 2004.
"As extended through 2013, the credit allows deduction of production costs up to $15 million and as much as $20 million for shoots that occur in sites that meet the bill’s criteria for an economically disadvantaged area."
The deduction "offers a particular benefit to television producers, since the deduction applies to each episode of a series. The bill, which has been extended several times since 2004, provides “that each episode of such series shall be treated as a separate production,” up to a maximum of 44 episodes."
"All 2012 films and television projects can qualify if the accounting is done right and the accountant makes the election in the first tax return for the film," [Chicago-based entertainment lawyer Hal "Corky" Kessler, who urged Congress to pass the tax incentives nine years ago] said. "It was a New Year's gift from Congress.""
""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)," according to the DGA & IFTA."
What does all this mean?
As I've previously explained on this blog, if you're an investor/owner 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.
As always, the information contained on this blog is provided for informational purposes only, and should not be construed as legal advice. Readers should seek their own legal (and other professional) advice.