Section 181 – US Federal Film Tax Credits

It’s not law yet, but the Senate passed a tax bill that includes an extension of Section 181. The bill retroactively reinstates (for one year) the ability to expense the first $15 million of production costs.

This is good news for filmmakers whose investors who want/need/expect the tax breaks of a same-year tax deduction.

This is very good news for filmmakers – if you would like more info on how the Fed Film Tax Credit works, send me an email and I’m happy to oblige.

Best

John

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About filmproduction
I have worked in the film production industry since 1985, working on over 50 different productions of every size in 6 different countries. My self-published book, "Walk The Talk" is written in an easy to read manner for film students and working professionals who haven't had the chance to learn how to 'Direct the Money'.

30 Responses to Section 181 – US Federal Film Tax Credits

  1. Curtis Rand says:

    Good Morning John,
    Could you please send me a copy on the fed. film tax credits. I would like to reveiw the language of the bill.
    Thank You
    Curtis rand

    • The information that I have (See the quote below) is that it’s an extension, not a revision. As background, the Federal Tax Credit was originally approved in the American Job Creations Act of 2004 – Title 2: Business Tax Incentives, Subtitle E, Section 244 – Allows an election until 2009 to expense qualified film or television production costs up to $15 million ($20 million for costs incurred in certain low-income or distressed areas).

      Then it was governed by the IRS issued Section 181.

      Here is the link to the primary bulletin governing the application of Section 181 for the film tax credit:
      http://www.irs.gov/pub/irs-irbs/irb07-12.pdf

      The information I have on the passing of Section 181 through the Senate is from Lawyers 4 Musicians website, and from the Fimbudgeting blog. Note that 181 is still NOT law. Presumably the two versions will have to be reconciled and then voted on yet again before the bill goes on to the President for signature.

      “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
      extraordinary tax incentive that is Section 181. Remember the tax deduction
      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.”

      I hope that helps you analyze it.

      Best
      John

      • Eileen says:

        Can you give me a status on whether has passed or not currently for 2010-2011? Thank you very much. I’m not even sure how I got on your fantastic info blog and I just hope I can find it again, or if you could email me I’d be most appreciative.

      • Hi, Eileen. Here’s an answer that I made for somebody a couple of weeks ago. Not sure if it was after or before your questions, but here it is below – sorry, Section 181 NOT passed:
        ________________________________
        A number of people had been asking about Scetion 181 – it looked very positive in July but when it went to the Pres for signature it got split up and the incentive for filmmaking is out. Here’s a quote from the “Lawyers 4 Musicians” blog at http://lawyer4musicians.com/?s=section+181 :
        “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. ” – Lawyers 4 Musicians Blog.

        That says it all,

        Best
        John

  2. nick fury says:

    Dear John,

    I’ve heard a great deal about the benefits of Section 181. Which real films do you know of that have successfully used Section 181?

    Thank you,

    Nick

    • Nick, I have just been catching up with what’s been happening with Section 181. It has NOT been extended. Here’s a quote from the “Lawyers 4 Musicians” blog at http://lawyer4musicians.com/?s=section+181 :
      “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. ” – Lawyers 4 Musicians Blog.

      That says it all,

      Best
      John

    • Jamie Taucher says:

      I have heard that last Friday section 181 passed. Can anyone verify this?

      • Yes. I didn’t think the bill had a chance, but it passed, and it passed with the right clauses. The following is an excerpt from Jeff Steele’s Film Closings at http://filmclosings.com/

        “The new tax bill that President Obama recently signed into law will extend the Section 181 film tax credit to the end of 2011. In addition, it can be applied retroactively to all qualifying films produced in 2011 AND 2010!

        The bill allows producers to deduct the cost of qualifying expenditures in the year they occur rather than having to amortize those costs over several years. This is great news for independent filmmakers and their equity backers, who can now offset their equity investment by as much as 50% or more through the combination of state and federal incentives.

        The bill was originally signed into law as part of George W. Bush’s 2004 Jobs Creation Act, but it expired at the end of 2008. Now it has been resurrected as part of the controversial Republican lead tax bill. I don’t think most indie producers had this in mind when the media and Democrats vilified the bill as “tax breaks for America’s richest 2%”. But then again, that’s the same 2% that provides most of the equity that backs indie films.

        The incentive does come with a few strings attached that are by no means insurmountable:

        * Expenditures cannot exceed $15m – this used to be, and may still be, inclusive of all union residuals and deferrals;
        * 75% of the film must be shot/spent inside the US;
        * The incentive only applies to monies spent from US equity investors – you cannot benefit from presale and gap loans;
        * The benefit for television production is capped at 44 episodes.

        It should be noted that if a certain amount of shooting (or a certain percentage of the budget) is filmed in an area that the Census Bureau dubs as “economically distressed”, then the expenditure cap increases to $20m (e.g. pretty much the entire state of Michigan as well as the Gulf Region could be considered distressed). It’s also worth noting that if the residual income from a successful film pushes the “cost” of the film past the $15m (or $20m) expenditure cap, then the benefit can be retroactively disqualified. As such, it is recommended that the expenditures not exceed $12m, to allow for such a buffer. That may sound scary, but it’s actually a good problem to have.”

      • Jeremy Jones says:

        Hi,

        To your reply on Jamie Taucher’s question, can the budget include marketing and distribution costs as long as they don’t exceed the cap??

        Thanks!

      • The snap answer is – no. A film budget is a tool to raise financing to produce your film/television project. It’s really a matter of satisfying the financiers who are ponying up the money, or the lenders, etc. They have certain expectations of distribution before you bring the project to them – i.e. that you already have a distributir, pre-sales, etc. Of course, you CAN put whatever you want in the budget; however, the reader will view it as unprofessional.

        Best / John

  3. Jennifer howell says:

    I had a question on how Section 181 works with television productions, do t he productions have to be done in a low income area, I had heard that this was one of the requirements, or are investors still eligible for the deduction as long as the production is done in the US? Also you mentioned passive income, does that mean that only investors can take the deduction or can the actual production company take the deduction also if it is self financing the production?

  4. Barbara Gates CPA/NM Film Accountant says:

    Hello John,
    I am a long time fan first time emailer! If a production company has reported all production costs from inception to the IRS as Assets versus Expenses can they retroactively apply the Section 181 credit via amended returns as well and then of course going forward?

    Thank you so much for sharing your knowledge and time with the Film Industry community.

    Sincerely,
    Barbara Gates, CPA

    • I have been advised that the company needs to elect one way or the other (assets vs expenses) then they need to live with it. I didn’t get a reference circular, though. I’ll ask my freind and let you know.

      • Hello again John,
        By any chance have you spoken with your friend about retroactively applying Sec 181? I am concerned because a very nice producer trying to save money during production was advised by an HR Block rep to decline on the election. The producer now having much more experience at the tail end of producing the movie realizes his mistake in following the direction of this junior tax preparer. Is there anyway he can amend the original return to reflect the election?

        Thanks again, you’re the best!
        barb gates cpa

      • Hi, Barb. A number of people had been asking about Scetion 181 – it looked very positive in July but when it went to the Pres for signature it got split up and the incentive for filmmaking is out. Here’s a quote from the “Lawyers 4 Musicians” blog at http://lawyer4musicians.com/?s=section+181 :
        “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. ” – Lawyers 4 Musicians Blog.

        That says it all,

        Best
        John

  5. Rick Siebold says:

    Can this be retroactively Applied for. Principal photog started befor ’10 but we did not know of it’s existence until recently. Thanks for your help

    • Hi, Rick. I have just been catching up with what’s been happening with Section 181. It has NOT been extended. Here’s a quote from the “Lawyers 4 Musicians” blog at http://lawyer4musicians.com/?s=section+181 :
      “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. ” – Lawyers 4 Musicians Blog.

      That says it all,

      Best
      John

  6. Ben van Bergen says:

    just curious, has this bill been passed now? August 8, 2010? And it does not apply to 2010 if I’m correct? (two versions, 1 for 1 year, 1 for 2)

  7. Domingo Vara says:

    Great info. I shot my feature before 181 was established but final edit, re-titled and professionally packed for distribution on the Internet was completed November 2007. Would 181 apply to my film? I am developing my second feature, can I apply 181 if filming commences December 2010 or Spring of 2011? Can 181 be applied if we shoot in Puerto Rico? Our targeted budget is 5 million. Thank you for your time and information.

    • If you have excellent records and have an LLC that goes back to you personally, or to others, and if you have income from rental properties, then you may have a shot at backward filing of tax returns prior to Dec 31/09 – a lot of “if’s” and a little over my head. If you, or your investors, have had excess rental income that was taxed then it\s worth paying a good accountant to check it out and I can refer you to one in Michigan who is experienced in that area.

      The Section 181 is still languishing somewhere in Congress so it’s still not applicable to 2010.

      Best
      John

  8. Brian says:

    Hey John,

    I was wondering if there’s a cheat sheet of sorts for this tax, so that it’s a bit easier to understand.

    I have just graduated from USC film school, and am looking for investors to create short/feature length films. After reading this, which I understand is not law yet, does it basically mean that investors can give us what they would pay in taxes, and then use that as a write-off?

    So us, the filmmakers, would approach the investors and say whatever you give us (up to 15 million) can be written off as an immediate tax-break?

    Is that correct? Of course, if the president signs it.

    Thanks, you have a great blog.

    • Thx for commenting, Brian. I have just been catching up with what’s been happening with Section 181. It has NOT been extended. Here’s a quote from the “Lawyers 4 Musicians” blog at http://lawyer4musicians.com/?s=section+181 :
      “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. ” – Lawyers 4 Musicians Blog.

      That says it all,

      Best
      John

  9. stew medlin says:

    We have a potential investor in our fledgling film company that wants to invest 200k-his question is -Is this money tax deductable? Thanks-Stew

    • Here’s an answer that I made for somebody a couple of weeks ago. Not sure if it was after or before your questions, but here it is below – sorry, Section 181 NOT passed:
      ________________________________
      A number of people had been asking about Scetion 181 – it looked very positive in July but when it went to the Pres for signature it got split up and the incentive for filmmaking is out. Here’s a quote from the “Lawyers 4 Musicians” blog at http://lawyer4musicians.com/?s=section+181 :
      “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. ” – Lawyers 4 Musicians Blog.

      That says it all,

      Best
      John

  10. Pingback: 2010 in review – 18,000 Visits « Film Production and The Money

  11. GRAINGER HINES says:

    “It’s not law yet, but the Senate passed a tax bill that includes an extension of Section 181. The bill retroactively reinstates (for one year) the ability to expense the first $15 million of production costs.”

    IS THERE ANY CHANCE THIS WILL BE EXTENDED THROUGH 2012?

  12. Chicago Allen says:

    Hello my name iis Chicago Allen, and I would love to know all I can about section 181. I am a young inspiring film maker and would love to know what you know!

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