Runaway Productions & IRS Code Section 181 – Deduction for Qualified Film and Television Production Costs

As a response to what are know as “Runaway Productions,” in 2004 Congress enacted “The American Job Creations Act” amending the Internal Revenue Code of 1986 (the “Code”) by adding Section 181. “Runaway Productions” are film or television productions that move their production activities outside of the United States largely for economic reasons. This occurs because producers tend to film in the location where they can minimize production costs through tax incentives and cheaper labor.

Section 181

Section 181 represents the federal government’s recognition of this fact by passing tax income tax incentives for investors in independent film and television projects. Section 181 permits a 100% write-off for the cost of certain audio-visual works, regardless of what media they are destined for (e.g., theatrical, television, DVD, etc.).

Deadline Extension

On October 27, 2009, California Rep. Diane Watson announced her introduction of H.R.3939 which would extend expensing provisions for qualifying film and television productions. H.R. 3939 requests an extension of IRS Code Section 181 until 2011. The current extension expires on December 31, 2009.

From her press release:

“H.R. 3939 requests an extension of the amendment to Title 26 of IRS Code Section 181. This amendment permits the owner of a qualified film or television production to elect to deduct production costs in the year the costs are paid or incurred in lieu of capitalizing the costs and recovering them through depreciation allowances if the aggregate costs do not exceed $15 million for each qualifying production ($20 million if a significant amount of the production costs are incurred in certain designated areas). A film or television production is a qualified film or television production if 75 percent of the total compensation of the production is compensation for services performed in the United States by actors, directors, producers, and other relevant production personnel (the 75 percent test). The deduction under section 181 is allowed for the cost of producing qualified film and television productions for which principal photography begins after October 22, 2004, and before January 1, 2009. Production costs incurred before or after this period may be deducted so long as principal photography commences during the period.”