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.
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.
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:
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