More on Section 181

A student from New York had some very good questions about how to apply Section 181. I thought that I would share her questions, and my answers.

____________________________________________

QUESTION:
There are two things I would like to buildup my knowledge on:
  1. I would definitely like to learn more details on how to actually “pass-through tax credits” to our investor group; as opposed to getting a check from the state and signing it over to our investor.
  2. Also, getting the particulars on how Sec. 181 tax benefit actually gets to the investor; how do they claim it on their taxes.
Finally, if it falls within your purview … understanding the difference between:
  1. Title Holder, LLC
  2. Production Co. LLC
and which one, if at all, does the investor belong to?
__________________________________________________
ANSWER:1. State Refundable Tax Credit: What I have seen in the past is a “Notice of Direction of Payment” letter. It can be simple, or it can be complicated, but the concept is that the State Authority (which is issuing the tax credit) is directed to send the check directly to the investor. (I am attaching an example – it’s only for training purposes and may not work in your State, but it gives you an idea of how it works – I have sent it out once but the refundable check was still sent directly to the Production Company; however, the Bank was satisfied at the time).

2. Section 181 Tax: How does the tax benefits get to the lender. The DGC and IFTA got together and wrote a publication on Section 181. The link to it is:  http://ww.film.ca.gov/res/docs/pdf/Section-181-12-4-08.pdf
The Q and A says:
“Q: What tax form do I need to fill out to get the incentive?
A: Currently, there is no specific form to fill out. The IRS temporary regulations require that you declare in a separate statement that you are electing to utilize Section 181. The legislative history also states that: “deducting qualifying costs on the appropriate tax return shall constitute a valid election.” Therefore, deducting the production costs (that would otherwise be capitalized) on your tax return will qualify as electing to take advantage of this incentive.”
3. Investor Ownership Under Section 181 – the investor belongs to the Production LLC. The investor under Section 181 needs to be an owner of the Production Company in the same proportion as his investment to total investment. It’s better stated in the link above as:
“In the case of a film co-produced by multiple investors, the deduction for qualifying expenditures must be allocated among the owners of the film in a manner that reasonably reflects each owner’s proportionate investment and economic interest in the film.”
I hope that helps.
_____________________________________________________
See my other blogs on Section 181.
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'.

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