7/23 UPDATE: The official text of the enrolled version of HR 4213 is now available here: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4213enr.txt.pdf
Unfortunately, Section 181 is NOT included. So until further notice, the incentive that meant so much to so many film makers is gone. We are still hopeful that a Congressperson will re-introudce the legislation and will continue to monitor the situation, but for now, the outlook its less than great.
7/22 UPDATE: HR 4213 passed Congress and was signed by President Obama today. However, the text of the law has not been published and it is unclear if the extension of Section 181 was included. If Senator Reid’s amendment replaced HR 4213 in its entirety, Section has not been extended. As always, stay tuned.
7/21 UPDATE: Yesterday, July 20, 2010, the Senate had a Cloture Vote on whether or not to move forward on HR 4213, the Unemployment Bill which includes an extension of 181. The Senate needed a 60-40 vote to move forward and, thankfully, it got it! So, hopefully by the middle of next week (possibly Tuesday), there will be a final vote on HR 4213. Closure is one excruciating step closer.
As most of my film related readers know, I have been doing my best to stay on top of the renewal/extension process of Section 181 (just search my past posts). Unfortunately, over the past several weeks, there is nothing real or solid to report other than the fact that the federal tax incentive for films produced in the United States seems to be lost in legislative oblivion. When HR 4213 passed both the House and the Senate, I thought we were home free. Yet, due to the fact that the incentive was grouped with unemployment benefits (a rather hot topic in politics these days) and other high profile tax credits, Congress debated, modified, an altered HR 4213 so much that it had to go back to committee. Now, more than six months after it officially expired, Section 181 is still stuck in limbo.
Senators who promised a quick resolution and renewal of 181 have all but shut up at this point (see this post for the empty promise from Reid and Baucus). According to the office of the biggest supporters of Section 181 and a Representative who actually introduced legislation to extend 181, Representative Diane Watson, the extension is not any closer to being approved. Officially, the bill, which has passed both the House and the Senate, is back in committee to “work out the differences between the versions of the bill which passed both houses” (according to www.govtrack.us). The question is, when will a government who is struggling to agree to anything finally agree to deal with additional tax incentives or credits?
So what are film makers to do? The film makers we at L4M represent are keeping their books as if Section 181 will eventually be renewed. Yet, to the potential investors, we cannot advise and do not include promises of federal incentives. We continue to work with State offices to capitalize on the best State tax credits while continuing to keep an eye (a sleepy, tired eye) on 181.
Bad news. Section 181 seemsto be cursed. A better explanation is that the extension is linked to a huge political battle over extending unemployment insurance. Washington at its best. Read more here. http://www.opencongress.org/articles/view/1921-Dems-Lose-Big-on-Unemployment-Insurance-Tax-Extenders-Vote.
Originally Published on May 29, 2010
The House voted to pass HR 4213 with some minor revisions and amendments. After passing the House and the Senate earlier this year, Congress could not present the bill to the President until proposed changes (which likely means more pork was added) were debated. Thankfully for film makers, an extension of Section 181 through December 31, 2010 remained as part of the bill without any modification. The extension will permit films that were or are being produced in 2010 to utilize the tax deduction.
Even though it still looks like we are on the right track (which we have been for about 6 months), Congress adjourned for a week long holiday. So the Senate and President will not see this Bill until at least June 7.
Obviously, this extension will be great news for everyone associated with making movies in the United States. To find out more about Section 181 or to figure out how it can help with your film’s money raise, please feel free to contact us at josh@lawyer4musicians or firstname.lastname@example.org. Remember, HR 4213 is not a law yet (not until the President signs it) and this blog does not contain legal advice upon which you may rely. Thanks to all readers who help us stay on top of this and correct any misinformation that is out there.
More than three months after the House passes a version of the Tax Extender Bill of 2009 (HR 4213), the Senate got off its collective rear end and passed a modified and heavily pork filled version of the Bill today. By a vote of 62 to 36 this persistent piece of legislation made it one step closer to becoming law (remember it still needs the President’s signature). Of importance to all of us, the Extender Bill contains a one year extension of Section 181. All film makers and investors may now breathe a collective sigh of relief.
Now that the extension is a whisker away from becoming law, all you film makers can start approaching investors and their confused accountants to tout the extradorinary tax incentive that is Seciton 181. Remember the tax dedcution that 181 offers is against passive income (although there are subtle nuances that allow active investors to take the deduction against active income). Also, musicians, videographers, web casters, 181 can be used for all qualifying films; which is to say it is not just for feature length films.
We at L4M routinely work with film makers in planning and drafting their film investment documents. Now with the help from our intrepid Senators, we can once again add language to these documents regarding Section 181 (and State tax credits) that make film investment a bit more attractive.
Now that 181 has passed, stay tuned for other development in film and music law. Thanks for reading and for all of your input.
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/
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 email@example.com.
Last week the world economic situation claimed another victim in the music world. Pinnacle Distribution, one of the biggest British independent music distributors, declared bankruptcy (known as administration in the UK). The ramifications of another large physical (CD’s and vinyl) distributor going out of business will have a wide reaching effect.
Distributors work with independent labels to distribute hard copies of a label’s catalog out to the stores and the public. The labels wait for delivery of payment from the distributors based on the number of units sold. If a distributor goes under, the labels, and the musicians who are signed to labels, stand in line with every other client/creditor of the distributor waiting to get paid. Usually the result is not enough money to go around. A label may end up taking pennies on the dollar for what is owed rather than taking nothing at all.
It’s a true domino effect. Simplified example: Jimmy usually buys $100 bucks per year in cd’s for holiday gifts. This year Jimmy got laid off and is no longer buying cd’s for his buddies. The store (Best Buy/Target or the last remaining record shop) where Jimmy used to buy cd’s notices that a lot of its customers are like Jimmy and does not order as many cd’s as it did in the past. The distributor who distributes Jimmy’s favorite bands’ music orders the same number of cd’s as it did last year from the manufacturer, but cannot sell as many units. The distributor cannot pay the manufacturer nor can it pay the labels who provide the distributor with its product. The label cannot sell as many of its artists’ cd’s nor can it distribute its cd’s worldwide. The label who is chiefly dependent on record sales to make cash, cannot continue to market or advertise its artists. And finally, you, the artist who survives on royalties from record sales does not get paid.
Major downer. Sorry. At first glance it appears that the sole reason for the chain reaction which is not-so-eloquently described above is the crumbling world economy. However, if you have been paying attention to the music industry and reading this blog, you already know that is not the only reason. The underlying reason for the crumbling music industry is rise of digital music as a true industry standard for music sales. The cd doesn’t make sense any more. It is a “loss leader” for most bands and distributors alike. The overhead involved in manufacturing, shipping, returns and fees make it almost impossible for an independent label or the artists on that label to make any real money from physical cd sales.
Yes the economy is scary. Yes music sales as a whole are not great. But, today there is no reason for a creative independent label or artist to be shackled to the dying distribution system. Using digital distribution companies, releasing digital only albums, striking exclusive deals with non-music websites or stores are just some of the out-of-the-box methods for musicians to make money. New and unique methods for delivery are popping up everyday. Bands can provide fans with exclusive content on its website or through a fan portal or by selling thumb drives with its music preloaded on it.
As the old industry infrastructure continues to crumble, independent labels and artist must move quickly to avoid being swept under by the collapsing giant. It is truly time to think independently, meet with other creative people and think of methods on your own to get your music to the masses. Most musicians are creative. Successful musicians realize that their non-musical-team which they choose to work with must be creative as well.
SHAMELESS SELF PROMOTION OF THE WEEK: The State of Illinois (?)
My adopted state government of Illinois finally got something right. Recently it passed Senate Bill 1981 which increased the state film tax incentive in Illinois from 20% to 30% and also includes a tax credit of 15% for the using labor on a film production from poverty stricken areas. The prvious bill was set to disappear on January 1, 2009 is now extended for an undetermined amount of time. Independent film makers in the music, movie and television industry should all be happy. Now the trick is trying to explain the tax incentives to a potential investor.
DISCLAIMER: THIS BLOG WAS ORIGINALLY POSTED ON DECEMBER 8, 2008. HOT ROD DID NOT GET ARRESTED UNTIL DECEMBER 9, 2008. THE AUTHOR HEREBY RECANTS ANY AND ALL APPLAUSE OR PRAISE DIRECTED AT THE SOON TO BE “FORMER” GOVERNOR OF ILLINOIS.
There is something that our benevolent government enacted entitled the American Jobs Creation Act of 2004 (see: http://www.irs.gov/pub/irs-regs/11540305.pdf for text of the important section of the AJCA). Section 181 of the act is all that a musician, a film maker, a video producer or a really rich person with too much in the way of “passive income” should worry about.