Tagged: Film Tax Incentives

Film Tax Credits: Yes They Still Exist

A few years back it appeared as though every state in our fine Union was scrambling to get some sort of tax incentive or tax credit on its books.  The “Runaway Production” (film productions moving to Canada or beyond to save on production budgets) panic that spread across the nation caused state government officials to introduce and fast-track a wide variety of new legislation.  The calm after the storm has left a rather muddied landscape with certain states eliminating their programs while some continue to thrive, albeit under the radar.

Most of the existing state film tax incentives require all aspects of production of a film or television production to take place within the state borders.  Depending on how much is spent, how it is spent and the type of production, certain states provide incentives that can result in tremendous savings or “free” returns on investment (depending on your viewpoint).  

A great chart of the remaining state tax incentives and the applicable requirements can be found HERE.

Coupling the various state tax incentives with the mysterious but enticing Federal Tax Incentive, Section 181 (which still exists) and you can potentially see upward of 50% of your overall investment returned in the form of credits and write-offs.  

If your film or television production qualifies for one of these programs you can use it as a great way to entice investors.  We don’t have to tell you how hard it is to get financing for independent film projects.  Not only do you have to convince people that your film is the one that will succeed, but you have to scare the pants off them by telling them all of the risks and ways they may lose their investment through your investment documents (PPM/Offering).  Throwing a few pages in these documents describing the various tax credits and incentives offered by the federal and state governments can be just the thing to get an investor off the fence and into your film production.  

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Section 181: Dead as the Dodo bird.

181 has gone the way of the Dodo Bird

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. 😦

Will Section 181 be Renewed?

Does Charles Rangle know if 181 will be renewed?

Does Charles Rangle know if 181 will be renewed?

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.

Section 181 Update: Know It, Remember It and Love It

Can the IRS actually HELP you?

Can the IRS actually HELP you?

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/

Check out MoonBass

Check out MoonBass

Movies and Music, Still Possible Money Makers

From indie to major (bucks)

From indie to major (bucks)

How depressing is the economy?  For musicians and industry professionals who make a living off of musicians, times are as sad as a Cure ballad.  Not a day goes by without a record label, distribution company, or music marketing company shutting its doors.  Up front advances are a thing of the past.  Traditional record deals are dead (which is not a bad thing) and it is getting harder and harder to find corporate sponsors to shell out five to six figure licensing fees.

What is a rocker to do?  Go see a movie (naturally).  Two industries tend to be recession proof in the US:  Movies and Booze.  People like to escape and what better way to do that then going to a movie or a bar and forgetting about the bonus that is not on its way or the third job you just took on to afford gas money for the band’s van.  If you can find a brew n’ view in your town, no doubt it is packed with soused movie goers on a nightly basis.

Unless you have a distillery in your basement, the likely alternative may be to invest in movies.  Granted the majority of my audience may not be at the stage in his/her life where they are even thinking of making an investment.  However, for those lucky few readers out there, this is the time to invest in movies.  State and federal tax incentives limit the potential risk by up to 70% in some cases.

Think I’m nutso?  Think movies are riskier then investing in a hedge fund run by some dude named Ernie Nadoff?  If so, then read this:  SCENE STEALER:  SUDDENLY, HOLLYWOOD SEEMS A CONSERVATIVE INVESTMENT.  See, the New York Times agrees with me too.

Movies that cost between 1 and 7 million are constantly making money.  Think of the different revenue streams:  box office, product-tie-in/placement, dvd sales, merchandise sales, on-demand sales, on-line (itunes/amazon/netflix) sales, etc.  So even those low-budget craptastic voyages about a third rate dance squad can turn a profit.

What about the musicians?  Think licensing!   While the low budget movies that are made today do not have huge budgets for music, they still need music.  Enter the independent artist looking to get his band’s music out to a wider population.  Most indi flix will give little to no money up front but will give a back end participation to the artist, meaning that the band will earn money based on the sale of the soundtrack.  An added bonus is the distribution that the movie’s soundtrack gives to a musician without any distribution rights.  Think of Juno or Garden State; staples of most hipster kids’ ipods.  Several of the artists on those soundtracks did not have distribution but were able to rake in money when the movie and the soundtrack took off (via physical and digital sales).

41_various-artists_garden-state-soundtrack

Another One Bites the Dust: Down Goes Pinnacle Distribution

Is the music business closing shop for good?

Is the music business closing shop for good?

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.  

Way to Go Rod!

Way to Go Rod!

 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.