Film makers, it is time to accept defeat. Section 181 is gone, baby gone. We have tried to report the ups and downs of this seemingly harmless (in that it is overwhelmingly positive and supported by both sides of the aisle) piece of legislation. At times it seemed like the renewal of 181 was a foregone conclusion; in fact at one point, there was a bill introduced that would have made the tax incentive permanent. Call it bad luck, bad timing, or just plain old U S of A politics, but it looks like we are going to be without this powerful tax incentive for the foreseeable future.
According to our source at the IRS (the original author of the section), 181 is not only not going to be extended, but it is not likely to be reintroduced for several months or even years. The last hope for 181 was its inclusion on the most recent Tax Extender Act. Unfortunately, due to major political issues like the Stimulus Package and Health Care, 181 was left on the cutting room floor.
So what can film makers do when making a pitch to potential investors? The best suggestion we have is to rely on the state tax credits. There are still a lot of healthy packages and incentives out there in quite a few states including Michigan, Illinois, and Louisiana. When seeking funds through private placement, language can still be added to the documents highlighting these state tax credits which, when applied for correctly, can lead to real dollars. Those dollars can either be used toward the production budget itself or to immediately pay back your investors.
As always, we stand ready to lend a hand to film makers and offer legal and business advice for those seeking private financing for their projects. Unfortunately, our plan will no longer be able to rely on good ol Section 181 anymore. 😦
Websites that serve as independent fund raisers for artists are not new. Over the past decade several sites using the fan funded model have popped up (some have subsequently disappeared). The sites are natural offspring of some entrepreneurial and creative musicians and film makers realizing that the label/studio system probably is not going to work form them.
The basic premise is that you offer your friends, family and fans (the 3f’s) an opportunity to participate in the creation of your new album or film. In exchange for buying a piece of the project the 3f’s will get extras that the general public will not get. Examples of the extras that participants get are: exclusive tracks, t-shirts, signed copies of vinyls, screenings with the cast and crew, etc.
Some models have tried to take it to the next step and share income with the 3f’s who go from participants to investors when they provide money to a project. Sellaband.com is probably the most well known band investment models (now in bankruptcy, this concept obviously has some issues to figure out still). On the film side of things sites like kickstarter.com and indiegogo.com have had success in getting independent movies with fairly small budgets into production via fan participation.
But what happens when you want to raise more than $5,000 or even $50,000? I guess it depends on how wealthy your 3f’s are. For most of our clients we are trying to raise money in the several hundred thousands or millions for their projects. Their 3f’s are typically not looking to get a t-shirt or dvd out of their participation when they are putting that much money into a project. In most scenarios a participant becomes an investor and will want to see a monetary return on his investment.
Equally as important, the method for raising money with the promise of a financial return on investment follows very strict rules and regulations. When you try to raise significant funds for your project you are essentially selling securities or stock in your product. The Securities and Exchange Commission governs these type of transactions and you must follow their guidelines or risk serious consequences. Unfortunately, the legal fees for setting up an Offering (offering of a financial interest in your project) are high and you definitely cannot create an Offering on your own (even if you find an example on line). Oftentimes, musicians and film makers must go to their 3f’s just to get the money to pay for the Offering.
So with all of these barriers why to musicians and film makers go through the trouble? Several reasons. First, the old days of being discovered are over. The quantity of product is simply too high and the methods for finding talent are too vast. A&R departments are decimated and studio budgets are tighter than ever. Risks are averted on all levels. It is now a necessity for the independent to truly be independent and make their own way in the industry. Further, most musicians and film makers feel that if they get their first project produced and into commerce, the sky is the limit. This sentiment is justifiable. Film makers who are able to get a movie made and actually distributed immediately create a brand for themselves and their production company. It is far easier to sell the second feature as compared to the first. Same for musicians. A musician who has released countless EP’s and singles may not be interesting to an investor until she produces and distributes a full length album.
So as the annoying saying goes, you have to spend money to make money. Whether it is strictly as a participant structure or through an Offering, a lot of work, time and money goes into the process.
I am interested to hear from those of you have used this method; whether it is through a website or on your own door to door fund raising effort. Here are some of my friends who are using the participant method. Check out and if you like them, PARTICIPATE!
Film maker Carey Bruce and Road’s End Films are producing Forests of Mystery and using Kickstarter.com:
Talented Singer/Songwriter Levi Weaver has funded his own projects through 3f participation. Check him out here:
The hangover from SXSW has subsided and deals are actually getting done in the world of both music and film. There are several hot topics which are been written, blogged, tweeted and plain old talked about in the music and film industry. Over the next several entries we will try to explore several of those topics.
A new contributor to L4M, Mr. Eric Malnar will update everyone on the public performance royalties debate that is garnering attention from the House, Senate, White House and musicians all over the world. We will also explore what is a standard 360 deal these days and continue to share our experience of working with musicians (both label musicians and independents) in the ever changing industry.
On the film front; just when I thought it was safe to celebrate the passage of Section 181…President Obama seems to have lost the legislation somewhere between health care reform and his next pack of Camels. We are still waiting for his signature on H.R. 4213 and eager film makers are anticipating the one year extension that should have come on January 1, 2010. In other film news, state tax incentives are ever changing so we will try to keep you up to date on the best places to film. Plus, we will walk the newbie film maker through the process of raising funds for an independent movie by explaining all of the paper work (stupid lawyers) that is necessary before you can even accept a check from your mom.
SHAMELESS SELF PROMOTION OF THE WEEK:
One thing I take a lot of pride in is introducing talented people to other talented people. As a lawyer for creative people, I am able to make introductions to some gifted artists which then results in some pretty cool stuff. I always tell my clients to view us as a resource; whether it is introducing managers to artists, labels to artists, licensing companies to advertisers or musicians to other musicians, our clients end up with the same contacts and connections as we have.
Possibly the best example is this song. Our clients, Database, French Horn Rebellion and Hey Champ collaborated to bring you a Remix of Beaches and Friends. The song is doing great on a worldwide level. Enjoy:
As predicted, Section 181 is back on the front burner now that the House passed a Health Care reform bill. HR 3931 and HR 2720 have made their way from introduction to Congress as Bills to the House Ways and Means Committee.
HR 3931 seeks to extend 181 until the end of 2011. HR 2720 goes well beyond a 2 year extension and looks to make 181 a permanent tax incentive for qualified films.
Obviously the Bills will have to move swiftly to make it to a vote before the end of the year, but this is great news for those film makers who were not quite ready to start a production in 2009.
HR 2720 is simple and straight forward (not part of a large extender Bill (yet)). Here is the text:
To amend the Internal Revenue Code of 1986 to make permanent the election to treat the cost of qualified film and television productions as an expense which is not chargeable to capital account.
SECTION 1. EXPENSING OF QUALIFIED FILM AND TELEVISION PRODUCTION COSTS MADE PERMANENT.
HR 3931 is also quite straight forward:
To amend the Internal Revenue Code of 1986 to extend for 2 years the election to treat the cost of a qualified film or television production as an expense which is not chargeable to a capital account.
SECTION 1. EXTENSION OF TREATMENT OF CERTAIN QUALIFIED FILM AND TELEVISION PRODUCTIONS.
(a) In General- Subsection (f) of section 181 of the Internal Revenue Code of 1986 is amended by striking ‘December 31, 2009’ and inserting ‘December 31, 2011’.
(b) Effective Date- The amendment made by this section shall apply to qualified film and television productions commencing after December 31, 2009.
Follow the success (hopefully) of the Bill here and on http://www.govtrack.us/congress/bill.xpd?bill=h111-2720 and http://www.govtrack.us/congress/bill.xpd?bill=h111-3931
Music readers, this bill applies to you. Money spent on a qualified music video (even internet productions) can qualify for the tax incentive under 181. Search my site for other articles about Section 181.
As the deadline for Section 181 quickly approaches, I have received a bunch of questions related to “grandfathering”. The statute itself does not provide a bright line answer, so I went to the source, the IRS.
According to one of the authors of the film incentive, in order to grandfather under Section 181 and have your film qualify even if you do not complete it until next year, you simply need one true day of principal photography. One full day with a director, lighting, cast, etc. should do the trick. If you have that one day and your film qualifies under the other requirements of 181, you will still be able to utilize the incentive.
This is great news for those film makers out there that are just about ready to start shooting and have not quite completed their money raise for a film. If the incentive is not renewed (it is set to expire at the end of this year), a film that qualifies in 2009, will still be able to offer the incentive to investors who invest in 2010.
In other 181 news, it appears that the section may have found its way onto a couple of extender bills. According to the IRS, there may be a couple of bills out there that include an extension f the incentive; one for 2 years and one which would make it permanent. Again, this is just speculation, but rumors in Washington D.C. sometimes come true.
I have begun to work with film makers on their private placement offerings or addendum to their offerings to include an opinion on this grandfathering issue. If you are interested, please feel free to contact me at email@example.com.
*As with all my posts, this post is for information purposes only and does not constitute legal advice. I am not your lawyer and you may not rely on the content of this website as though I am your lawyer.
As most independent film makers know, Section 181 is set to expire on January 1, 2010. The tax incentive has been an incredible tool for US film makers attempting to lure investors and their money offering deductions against passive (and in some cases active) income. First introduced as part of the American Jobs Creation Act in 2004, the incentive was first set to expire on December 31, 2008. The stimulus bill or the American Recovery and Reinvestment Act breathed new life into Section 181, albeit only for a year.
So what is the plan for the film incentive?
Great question. I’ve done all the research that one man can do and I still do not have an answer. According to a source at the IRS who is an expert on the film incentive sections (181 and 199), he would not be surprised if an extension was slipped into a bill much like it was in 2008. However, he has no real basis for that opinion and urged me to just keep watching the government’s proposed bills for updates.
The committee that is in charge of introducing tax incentives is the Ways and Means Committee. I spoke to one of their tax lawyers to get her perspective. Not surprisingly, she 35, 55, 61 told me that their entire attention was on health care reform. She mentioned that if a health care reform bill was presented in the next month or two, they would probably turn their attention to tax incentive bills that are set to expire. However, she also cautioned me that, due to the economy, proposals for reducing the overall tax collected by the government are not exactly in favor.
Bottom line, there is no answer to report yet. Continue to check here, your local film office and government websites for updates. Call your representative and keep on them.
If you are planning on beginning filming in early 2010, all I can say is try to start in December. If you begin filming in 2009, you may qualify for the incentive even if you do not complete filming until 2010.
I would wager that not many film makers and musicians have the ability to quote tax law to business partners or potential investors. Understandable as most lawyers cannot do it either. However, if you are a film maker or music video producer, Internal Revenue Code Section 181 is the tax section to know, remember and love.
I have written articles and blog posts on the benefits of Section 181. (Here they are again for your perusal: Why Don’t Use It? and the Joys of Section 181). As with most of the tax code, Section 181 is not crystal clear and its drafting style leaves much to be desired. Consequently, the articles I have written and others out there in the blogosphere have sparked a lot of conversation and questions.
So in an effort to help out my readers and try to answer some questions, I went right to the source, the IRS. Out of respect to the nice and informative IRS representative that I spoke with, I am not going to reveal his/her contact info (the IRS gets enough enraged callers on a daily basis). However, rest assured that this rep is THE person in all of the IRS to talk to regarding both Section 181 and Section 199 as they relate to investments in film and the available tax credits.
The first question I asked is one that has been posed to me on several occasions: Will Section 181 be renewed at the end of 2009? The IRS answer (ALL QUOTES ARE PARAPHRASES OF OUR CONVERSATION): “We have no solid answer one way or the other; BUT, with all the stimulus packages out there and the states extending their own tax incentives, we would not be surprised if Section 181 was renewed again.” The IRS pointed to the end of the year scramble last year to get Section 181 renewed for 2009. Chances are the renewal will again be packaged with other legislation and presented to Congress near the end of the year.
Keep this in mind if you are planning to begin filming or production at the end of 2009; as long as you start principal photography and have a comprehensive budget in 2009, the credit will apply to the entire production even if it carries over to 2010. I would not recommend that you procrastinate until December 31, 2009 to start shooting, but a good fact to keep in mind.
The next question I had was another common question asked by readers: How “active” does an investor have to be to take a Section 181 tax credit against active income? The IRS answer: “It depends.” There is no cut and dry rule as to the extent that an investor must be active in the production of a film. The analysis will be fact based; common sense will apply. If you have an investor who comes on set once to puff out his chest and eat Craft Services, he likely will not qualify as an active participant under Section 181. If you simply give an investor a title like Co-Executive Producer, but she never even read the script and lives in Nova Scotia, she will not qualify as an active participant. If however, you keep your investor involved in the production and he actually has the ability to provide feedback and advice, he may qualify as an active participant in the production.
Finally, I asked the IRS: Does it matter if an entity invests in a film and applies of the credit? The IRS answer: “No.” If done correctly and with the aide of a competent accountant, an entity (limited liability company, corporation, trust, partnership) can invest in a film project and apply for the credit.
Keep in mind, an investor must actually need Section 181 for it to make sense. If there is a year where a passive (non-active) investor does not have any passive income coming in (which is probably the norm these days), the tax credit does no good. Think of it this way, if you have $0 in tax liabilities for 2008 and you invested $50,000 that year, the IRS is not going to simply write you a check for the $50,000 you invested in the film. You must actually OWE money to take the deduction.
If you are looking for more help in the area, there are some other great posts out there. Check out “Minimizing Investor Risks Through Film Subsidies” by Justin Evans.
Remember of course, that you should ALWAYS consult an attorney and accountant before offering investment opportunities to potential investors. The law in this area is confusing (obviously), so hire an expert to help you on the way.
SHAMELESS SELF-PROMOTION OF THE WEEK:
The folks over at Bandit Productions, specifically Nelson Colon II have dropped a really cool project with Freebass 808. Check it out here: http://battalionarmour.com/moonbass/