Clock is Ticking on IRS Section 181 Film Tax Incentive!
What Is Section 181?
Section 181, first enacted by Congress in 2004, and blogged about here, was extended and modified on October 3, 2008. 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.). It applies to “qualified productions” that begin the first day of principal photography before January 1, 2010. Deducting the production costs that would otherwise be capitalized up to for the first $15 Million (or up to $20 Million in low income/distressed areas) on your tax return will qualify as electing to take advantage of this incentive.
How Does Section 181 Work?
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. Producers or active financial participants in qualifying film and television productions may elect to immediately deduct the cost of qualifying film expenditures in the year the expenditure occurs.
The $15 million ($20 million) threshold refers to the applicable film. The deduction must be allocated among the owners/investors 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 $20 Million deduction, the IRS outlined two alternative tests. One test, based upon production costs and setting a twenty percent (20%) threshold, 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, requires that at least 50% of the total days of principal photography occur in the designated area.
How Can I Take advantage of Section 181 before it Expires on January 1, 2010?
To qualify, productions need to commence before January 1, 2010. The deduction applies 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.
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 US Treasury and IRS may revise their temporary regulations, which may come in the form of Notices and Regulations.
- 100% passive income deductions under the IRS Section 181 for both individuals and corporate tax payers
- Potential for additional 20%-30% in State Tax Credits (depending on state)
- Productions need to commence before January 1, 2010.