Section 181 – Now Passed With Section 744

I’ve been on the road since Obama passed Section 181 (last Friday 12/21/10). I’m still having trouble adjusting to the fact that it all passed – I was so sure that there wasn’t a chance that I’ve not been following it very closely. Here is an excellent excerpt from The Filmmaker Magazine – see the full article here. Section 181 was just getting known amongst the Indie crowd when it expired. It’s taken so long to get back in place that many of us have stopped looking for it. Now it’s time to get those plans back in gear!

“The new Tax Bill was signed into law by President Obama earlier today. The tax law includes Section 744, which includes language that replaces IRC Section 181′s expiration date of December 31, 2009 with December 31, 2011.

Here is what this means:

1.) Any money spent on qualifying domestic film production* in 2010 now qualifies for the Section 181 tax write-off.
2.) Any money spent on qualifying domestic film production* in 2011 will also qualify for the Section 181 tax write-off.
3.) There is no gap in Section 181 protection…which means all the fear and worry that someone might have begun a project in 2009, somehow didn’t get the financing in place and investors invested in early 2010 can now breathe a sigh of relief.

*Please, remember that a “qualifying domestic film production” can be complicated and requires reading the original section of the IRC. My interpretation is if you shoot a movie, television episode, music video, short film, webisodes, etc. the investors will be able to deduct 100% of their investment in the same fiscal year. Traditionally, investors must deduct their investment over a three-year period. Why is this a big deal? For professional high net worth investors who need deductions in order to defer income Section 181 makes the film industry an excellent income deferral strategy. It makes our industry one of the most attractive for investors who are actively seeking legal income deferral strategies. Coupled with rebates from states it is possible for an investor to make a profit on a motion picture before the film has sold.

A lot of people will talk about how complicated Section 181 is. I personally find it easy to understand.

  • If I shoot 75% of a motion picture inside the US it qualifies.
  • If I shoot a television series then several seasons of episodes will qualify.
  • If I shoot a music video it qualifies.
  • If I shoot a documentary it qualifies.
  • If I shoot a TV commercial, pornographic film, corporate video or infomercial it won’t qualify.
  • Distribution expenses won’t qualify.
  • Development will, assuming it has been financed prior to the December 31st, 2011 deadline.
  • And, because of the grandfathering clause, if I begin production on a movie in 2010 or 2011 but do not complete it until after December 31, 2011 then all of it’s expenses will still qualify for Section 181 even if Section 181 is not renewed in 2012.

Those are the conclusions I have reached with my legal & tax consulting team. Please, consult with your own legal and tax experts. Be skeptical of my interpretations and this email. Verify the details with certified experts you trust.

However, the reason I’m writing this is because Section 181 has largely gone unused by smaller independent films and we’re the ones who can benefit from this most. The studios already use this to minimize risk and accelerate an exit for their investors. Now, every independent filmmaker needs to use this. This can be the turning point for independent film in America. This is how we can be self-reliant.”

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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'.

6 Responses to Section 181 – Now Passed With Section 744

  1. paras says:

    John,

    Thanks so much for this site, I can’t believe I didn’t know about it until just now.

    I have a question about Section 181. I am pitching to a high net worth investor and am excited to tell him about this bill. However, I want to be as clear as possible to him because he has never invested in film before.

    If he invests hypothetically 1 million into a film and is able to deduct the entire investment in 2011, what does that mean he will get back? From what I understand, it depends on what tax category he falls into. However, if he were to ask me, “How much of that deduction can I actually receive back?”, I am not sure what to tell him.

    On top of that, he is already getting 35% of the below the line costs (NY State and City incentives). So, I’m just wanting to make sure I do not deceive him. Do you think this is something only he will understand with him and his accountant?

    I appreciate your information.

    Best – Paras

  2. paras says:

    Also, I read that it is possible to earn a profit before the film is even sold when combined with the city and state tax reliefs. How is that possible?

    • It would only be possible to earn a profit before filming if you had some pre-sales. This possibility is chatted about here and there on the net but never by anyone who has taken the time to research it all.

      For example, I have seen worksheets put together by a Major Studio where they have put their experienced staff on a project of examining every tax relief angle for 6 different States/Provinces in the USA and Canada. They then made one summary page comparing the bottom-line budget for each State/Province (after tax relief). As expected, none of them showed a profit from the various state, city tax reliefs. (Out of interest, the best location for them was Michigan – although I heard they couldn’t get all the crew they wanted and ended up bringing in a number of New York/LA crew which hurt their bottom line).

      To summarize, the purpose of the tax reliefs is that you need to spend money to get some back – i.e. stimulate the economy – for that particular State or Province. So, the State or Province would be committing political suicide if they did otherwise.

      -John

  3. Arlito says:

    Thank for the update, I’m happy to hear about the extention.

    RE: “Development will, assuming it has been financed prior to the December 31st, 2011 deadline.”

    I have been involved in projects that utilized 181 for production costs, but not development. I am currently in the process of raising money to write a script from an optioned literary property, and I’m hoping that I can offer investors the opportunity of using section 181. YOur above mentioned quote talked about development, but do you know if script writing fees are qualifying expenses?

    A

    • Good question. I just got a chance to have a look at the Bulletin that started it all.

      It says that Section 181 can apply, rather than amortization, for “…the cost of acquiring or development of screenplay scripts… for purposes of future development or production …”
      Here’s the quote from the IRS Bulletin No. 2007-12 March 19, 2007 – this is the source document that was recently brought back to life.
      :
      (2) An owner may make an election under
      section 181 despite prior deductions
      claimed for amortization of the cost of acquiring
      or developing screenplays, scripts,
      story outlines, motion picture production
      rights to books and plays, and other similar
      properties for purposes of potential future
      development or production of a production
      under any provision of the Code
      if such costs were incurred before the first
      taxable year in which an election could be
      made under §1.181–2T(a).

      So, I would say that script writing fees would have to be defined in any agreement you have with the investor as “”…the cost of acquiring or development of screenplay scripts…”.

      Please, though, consult the attorneys, CPA’s, etc. who do this kind of thing for a living. Sometimes I’m a little cavalier about these things and someone comes up to me and says, “Haven’t you heard about blah-blah Section which says you need a full moon on a Tuesday?”

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