H.R. 2029 EXTENSION OF SECTION 181,
Treatment of Certain Qualified Film and Television Productions December 23, 2015
The Consolidated Appropriations Act, 2016 (H.R. 2029), signed into law on December 18, 2015,
amends Internal Revenue Code § 181 for the fifth time since its 2004 enactment.
Of chief interest to film and television producers is the effective period. The incentive is now retroactively effective for films that commenced production in 2015,
and is now available for films commencing production in 2016.
If you are an individual Investor, Private Equity Firm, Hedge Fund, HNW Investor, Asset Manager, Fund Of Fund, or Regional Company and are looking for a high-yield, absolute-return alternative investment that also can generate substantial Federal and State Tax Incentives, Credits, Cash Rebates, while at the same time be part of a structured film finance opportunity that can offer an absolute return of 50-100% on capital before revenues, offer long-term multiple exit strategies, and liquidity options, then continue reading.
The American Jobs Creation Act Of 2004 and the 2004 enactment of Section 181, marked an unprecedented change in U.S. policy toward the phenomenon known as "Runaway
Production" for the film industry. Hollywood, like many American industries, had grown tired of the high cost of labor and taxes in the United States. Canada and other countries identified the potential financial benefit and took advantage by successfully luring American film and television production onto their soil, taking enormous amounts of production dollars with them. The government’s reaction was to include Section 181 within the American Jobs Creation Act of 2004. Section 181 offers tax incentives for investors in independent film and television productions produced within the United States. Currently, Section 181 falls under the The “Protecting Americans from Tax Hikes” act (December 16, 2015) under Sec. 169, which expires December 31, 2016.
You’ve heard of farming subsidies. A few years back savvy film lobbyists created subsidies for the film industry. As they outlined the dangers of runaway film production to Canada, Eastern Europe and Australia, Congress passed legislation that resulted in Section 181 of the IRS Tax Code.
Put simply, Section 181 states that investment in a motion picture shot in the US is 100% tax deductable for the investor in the same year invested.
Under Section 181 an investor may deduct the money which is invested in a film or television production from his or her passive income earned in the same year. If the investor is actively involved in the operation of the production, he or she may deduct the amount of investment from all active income earned in the same year. Productions with budgets below $15,000,000 (up to $20,000,000) which have at least seventy-five percent 75% of its production completed within the United States qualify under Section 181. Investors can be either individuals or businesses.
Here are some Investor broad strokes for the Section 181 Tax Deduction:
-100% of the motion picture costs are deductible in the same year of investment.
- 75% of the motion picture must be shot in the US to qualify for Section 181.
- There is a 15 to 20 million dollar budget cap.
- There is no minimum film production budget cost.
- TV pilots, TV episodes (up to 44), short films, music videos and feature films all qualify for Section 181.
- Section 181 can be applied to active income or passive income.
- Investors can be either individuals or businesses.
- Section 181 is retroactive.
- There is no expectation for film distribution or film completion.
- The motion picture’s corporation issues Schedule K-1’s to the investors so they can take advantage of Section 181.
Tax rebates and incentives for money spent on film or television production within a particular state combined with the benefits of Section 181 allow an investor (working with cooperative film producers) to greatly minimize his or her risk on what would ordinarily be considered a risky investment. For example, if a tax payer is in the thirty-five percent (35%) tax bracket and a qualifying film is shot in Georgia which has a tax credit up to forty percent (30%), an investor will be eligible to recapture conceptually sixty five percent (65%) of their investment in a qualifying production. This recapture can berealized before the film is released and/or makes its first dollar. In today’s economy this type of investment assurance is hard to come by.
In addition to the Section 181 tax deduction, the motion picture can be filmed in a state with rebates or transferrable tax credits. If the film Producers elect to do so, they can pass this subsidy onto our investors upon release of the rebate. As an example, if a $1,000,00.00 movie shoots in Georgia and spends every penny in the state, the state of Georgia will issue a (20% + 10%) 30% tax rebate, worth approximately $300,000.00, that can be sold for a little less than face value. That check can then passed onto to the investors. This is a considerable risk minimization for the Investor.
With state film incentives alone, the investor is only risking 70 cents (average) on the dollar if the project is produced in any number of U.S. film incentive states. There are many states in the United States that have some type of tax credit or rebate plan. Here is a current List of State Film Incentives with updated information provided by Entertainment Partners.
Combine Section 181 federal tax break with a state film tax rebate.
By coupling the two together you can reduce an investor’s risk by 50-75%. Think about that. It does depend on how much the investor earns annually, how much they’ve invested in the movie and where the movie will be produced…but, it is possible that an investor could invest in a motion picture…and risk nothing. Conservatively, the risk could be 50% of your investment. That means for investing $1,000,000 you are assured to recoup $500,000 in tax deductions and rebates. Depending on the math and the possible film pre-sales to foreign territories, Investors could recoup 100% of their investment before the film is distributed.
Here is an example. The movie needs 2,000,000. Investor X wants to invest 1,000,000 into the film. Their annual income is 5,000,000 and they have 10M in assets. Their annual taxes are approximately 1.75 M (35% tax bracket) and they have absolutely no tax write-offs to take advantage of. If they invest $1,000,000 they’ll be risking $650,000.00 investment in the motion picture, and will have saved themselves approximately $350,000 in federal income taxes. So, that means the investor is risking 65 cents on the dollar. But, wait! The movie is going to shoot in the state of Georgia. Georgia will give you a 30% rebate for above and below the line. So, you shoot in Georgia and spend $1,000,000 in the state. That means they’ll grant you a 30% tax rebate on your gross spend, minus tax broker fees. That’s around $300,000. This rebate can then go to the investors. Investor X will now be getting approximately $650,000 in tax deductions and rebates from the Federal Government and the State for their $1,000,000 investment in the motion picture. Under this scenario, Investor X's actual is approximately 35 cents on the dollar. And the upside is the investor could receive distributor minimum guarantees (5-20%) and will receive revenues from world-wide distribution sales and licenses of the motion picture prior to release. Additionally, 9% of the future gross revenues from each Section 181 qualified project is non-taxable under Section 199.
In order to optimize this opportunity and be successful, interested investors should contact qualified film producers with their interest.
A qualified accountant and/or attorney are always a good idea when utilizing the benefits of Section 181.
We are happy to speak with serious or curious investors and work with you to maximize investment dollars to produce commercially viable motion pictures that will profit in the marketplace. For questions related to Section 181 or equity investment for film and television production please contact Joseph Barmettler email@example.com or call from our contact page.
LINKS - SECTION 181/169
The “Protecting Americans from Tax Hikes” act (.pdf) (now section 169) (December 16, 2015)
Internal Revenue Bulletin for Section 181 (.pdf) (1/14/2013) (pg 5/273)Section 181 published IRS tax code regulation (.pdf file): (2007)
Section 181 published IRS Example Scenarios (.pdf file): (2007)
IRS Tax Code Link for Section 181 (3/19/2007)
Notice Of Proposed Rulemaking (2011-2012)
American Taxpayer Relief Act of 2012 (1/1/2013 pdf file) Sec. 317