The term “Runaway Production” for the film industry was coined under the American Job Creation Act of 2004 with the enactment of Internal Revenue Code Section 181. Section 181 is one of the many tax “extenders” whose renewal is currently being debated by Congress. The entertainment industry, like many others, did not want to pay the high cost of labor and taxes in the United States. Canada and many other countries took advantage of this and successfully lured American film and television productions onto their soil, taking an abundance of production dollars away from the United States. Section 181 was created to bring production back to the U.S. by offering tax incentives for investors in independent film and television productions produced in the United States.
Under this Code Section, taxpayers who are engaged in filmmaking may elect to expense the cost of qualified film and television productions instead of capitalizing those costs for productions between October 22, 2004 and December 31, 2011. There is a dollar limitation of $15,000,000, but in certain areas there is a higher dollar limitation of $20,000,000.
In order for a production to be qualified and eligible for expensing these costs, 75% of the total compensation must be qualified compensation. “Qualified compensation” is compensation for services performed in the United States by actors, production personnel, directors, and producers. In the case of television series, each episode is treated as a separate production and only the first 44 episodes of such series may be taken into account.
For example, if a taxpayer makes a film that is a qualified film production and the production finished before December 31, 2011, the taxpayer would be allowed to expense the costs. Even if the film will debut in 2012 or later, if the production finished in 2011, the taxpayer can still elect to expense these costs.
Investor Highlights of Section 181 Tax Deduction:
- 100% of costs are deductible in the year incurred
- 75% of compensation for specified services must be for work performed in the U.S.
- $15 to $20 million dollar budget cap
- No minimum film production budget cost
- TV pilots, TV episodes (up to 44), short films, music videos and feature films all qualify
- Can be used to offset active income or passive income
- Individuals and businessesare eligible
- Retroactive
- No timetable for film distribution or film completion
Investors can take advantage if the motion picture’s entity is a pass through entity (whereby income flows through to investors’ tax returns.)
Many states offer similar benefits and smaller production companies are encouraged to seek out tax friendly locations. As noted above, at this time, the benefit of this deduction expired as of December 31, 2011, but Section 181 is expected to be extended as it is included in the upcoming budget proposals.
Should you have any questions related to how you or your investment can take advantage of this benefit, please contact your Marcum Tax Advisor.
