Q: What are the key changes
to Section 181 – The “Runaway Production”
Federal tax incentive?
A: Section 181, which
was first enacted by Congress in 2004, was
extended as part of the financial
rescue package recently renewed by Congress and
enacted into law on December 17, 2010. It was
extended for one year for qualified productions
by December 31, 2011. Importantly,
it was also significantly modified so that the
first $15 million ($20 million in the case of
productions in certain low-income and eligible
areas of the country) of film and television may
be immediately written-off for tax purposes.
This now makes the incentive available for film
and television productions of all sizes, small
or large. In addition, the new rules are
retroactive for all productions commencing after
December 31, 2007.
When do productions need to
commence to qualify for the new
incentive?
The incentive, which is
ongoing since 2004, has now been broadened to
include qualified productions commencing after
December 31, 2007, and before January 1,
2012.
Can the immediate
write-offs be taken in more than one
year?
Yes, if an
election is made to use the incentive, the
immediate deduction takes place in the year the
expenditure is incurred. Therefore, if
production expenditures are incurred in more
than one year, the immediate tax deduction will
be taken in more than one year.
When, where, and how does
the “election” to immediately deduct the
qualifying expenditures apply?
The election is
to be made on the tax return for the taxable
year in which the production costs are first
incurred. The election must be made by the due
date (including extensions of time) of such
return.
What tax form do I need to
fill out to get the
incentive?
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.
Does it apply to all
productions (e.g., big budget
productions)?
Yes, as
mentioned above, the immediate write-off
provision now applies to the first $15 million
(or $20 million in low income or distressed
areas) of costs for all productions regardless
of the aggregate cost of the project.
What is the real benefit of
this incentive?
This is a
significant Federal tax incentive that allows
producers of qualifying productions to take an
immediate tax deduction for the full or partial
costs of a production in the year the cost is
incurred (as opposed to having to spread or
amortize those costs over a period of years
beginning after the film goes to
market).
How do I determine if it is
beneficial to my production?
Since the
new incentive is elective, producers can run
numbers with or without the new incentive and
determine whether or not to elect to immediately
expense the production costs in the first
year(s).
Is the incentive
transferable?
No. However, depending
on the investment structure you choose, multiple
parties may be able to properly allocate costs
that could be immediately expensed.
What happens in the case of
a co-production or a film financed by multiple
investors?
The $15 million
($20 million) threshold refers to the qualifying
film. The benefits of the provision must be
allocated among the owners of a film in a manner
that reasonably reflects each owner’s
proportionate investment in and economic
interest in the film.
In order to qualify for the
higher ($20 million) deduction, what does it
mean to require that a “significant” amount of
the expenditures be incurred in an eligible
area?
The IRS
temporary regulations outlined two alternative
tests to determine if the “significantly
occurred” requirement is met. One test is based
upon production costs and establishes a 20%
threshold for the test. It compares production
costs incurred in first-unit principal
photography that takes place in a designated
area to all productions costs incurred in
first-unit principal photography. This does not
include preproduction, editing and
post-production costs. The second test is based
upon the number of days of principal
photography. If at least 50% of the total days
of principal photography take place in the
designated area, the production will be deemed
to satisfy the significantly occurred test.
How will other practical
issues related to this broadened incentive be
determined?
Like other tax issues,
producers should consult with their professional
tax advisors on any issues related to this new
Federal tax incentive. In light of the new
legislation, the Treasury and IRS may revise
their temporary regulations, which may come in
the form of Notices and Regulations. A number of
groups that worked on this important legislative
change are expected to continue working with the
Treasury Department and the IRS to ensure the
incentive fulfills its objective and provides
the industry with meaningful tax relief.
Are there other Federal tax
incentives that may be valuable to film
productions?
Yes, all US based
productions continue to have other potential
incentives including a 6% tax deduction from
gross revenues for U.S. film and television
production activities (Section 199). Producers
should consult with their professional tax
advisors for other tax incentives that may be
available.
