CEO, Media Society
In 2004, the American Jobs Creation Act enacted Section 181, which marked a “potential” change to traditional film financing methods. Section 181 was recently extended at the end of 2014, and now applies to projects that began principal photography before the end of 2014. Any projects that began film rolling after the end of 2014 must wait until the end of 2015 to see if the tax act will be retroactively enacted and to see if their projects will qualify for the deductions. The irony behind this act is that its intention is to encourage film production in the United States by offering tax incentives. Although the act has been retroactively reinstated annually the last few years as part of the Fiscal Cliff bill, there is no security that the act will be retroactively passed again the following year, thus not adequately providing a tax incentive for future productions.
The deduction is a complete write-off for compensation of services rendered by actors, production personnel, directors and producers (whether employees or independent contractors) relating to motion pictures shot at least a 75 percent in the United States; the write-off has a cut-off at 15 million dollars, or 20 million dollars for certain low-income or distressed communities. Furthermore, there is no minimum production cost.
Any film cost, regardless of the films destination (including TV pilots and 44 TV episodes, DVD, short films, music videos, and feature films set for theatrical release), qualifies. Any film cost, regardless of when the costs were incurred, as long as principal photography began during the qualifying dates discussed above, also qualifies. There is also no requirement for the motion picture to be distributed or even completed.
Under Section 181, an investor can deduct their film investment from their passive income earned that same year invested, and if actively involved in the production, the investor may also deduct their investment from their active income earned that same year invested. Investors can be an individual or a business. The film’s corporation must issue K-1’s to investors in order for investors to take advantage of the tax act’s deductions. The act allows the current deduction of all cost by the taxpayer if the film is, as mentioned, perceived to be a qualified motion picture and ready for principal photography.
However, since the deduction of all costs must be identified as normal income the following year, when the requirement are not met anymore, only the owner of a qualifying motion picture who pays the costs of the film and must capitalize on those costs can take advantage and deduct 100 percent of film costs made that year regardless of who is actually producing the film piece. The tax rebates for money spent on a film within a particular state can be combined with Section 181 to reduce an investor’s risk even further. Investors would receive the deduction on their federal taxes equal to their film investment combined with any incentives provided by individual states, including those credits before the production begins.
— Wade Bradley is the Founder and CEO of Media Society, a provider of end-to-end managed-risk investment strategies for the entertainment industry, serving high-net-worth individuals, wealth managers and institutions.