I have written about Section 181 and the tax benefits it gives to film makers and music video producers in the past. Well, I did it again. It continues to amaze me that more people in the entertainment industry are simply not aware of this tax break. It is an amazing way to save money and give your investors some peace of mind. Here is an article that is going to published this month by firm.
American film makers and savvy investors received a bailout of their own recently. H.R. 6049, the Renewable Energy and Job Creation Tax Act of 2008 (“Act”) recently passed the House of Representatives and then became law by passing the Senate with a 93-2 vote. Buried deep within the Act is an extension of Subsection (f) of Internal Revenue Code Section 181 (“Section 181”). The Act calls for the one year extension of Section 181 from December 31, 2008 to December 31, 2009. For the select few that were already aware of the benefits of Section 181, this is good news (great news if it passes the Senate). However, for most Americans, they have no idea what Section 181 is and how they could potentially benefit from it.
Section 181 was Congress’ reaction to what had come to be known as Runaway Productions. A Runaway Production was a movie or television show that was typically produced by Americans and filmed in the United States which left the to be produced and filmed on foreign soil. Hollywood, like many American industries, had grown tired of the high cost of labor and taxes in the United States. Canada and other countries, identifying the potential financial benefit, took advantage and successfully lured American film and television production to their soil.
The government’s reaction was to include Section 181 within the American Jobs Creation Act of 2004. Section 181 offers tax incentives for investors in independent film and television productions. An investor may deduct the money which is invested in a film or television production and actually spent or utilized by the production from his or her passive income earned in the same year. If the investor is also actively involved in the operation or direction of the production, he or she may deduct the amount of his or her investment from all income earned in the same year. Productions with budgets between o $1 and $15,000,000 (up to $20,000,000 if produced in a defined low-income location) which have at least seventy-five percent 75% of its production completed within the United States qualify under Section 181.
Investors can be either individuals or businesses. In order to comply with Section 181, an investor will need to complete the required IRS filings along with their normal tax forms. A qualified accountant and attorney are always a good idea when trying to decipher and utilize the benefits of Section 181.
Not wanting to be left out, several states got in on the tax incentive game. States such as Michigan, New Mexico and even Illinois appreciated the value of attracting Hollywood productions to their state and the boom to their local economies. State film offices are great resources for investors and film makers alike in determining what incentives are available.
Tax rebates and incentives for money spent on film or television production within a particular state combined with the benefits of Section 181 allow an investor to greatly minimize his or her risk on what would ordinarily be a somewhat risky investment. For example, if a tax payer is in the thirty-five percent (35%) tax bracket and a qualifying film is shot in Michigan which has a tax credit of up to forty-two percent (42%), an investor will be eligible to recapture seventy seven percent (77%) of her investment in a qualifying production. This recapture is realized before the film is even released and/or makes its first dollar. In today’s economy this type of investment assurance is hard to come by.
We will continue to monitor the Act and issue additional updates as they become available. For any questions related to Section 181 or private equity placements for film or television production please contact us at jkaplan@stahlcowen.com.
Oliver knows all about Section 181, do you?
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