Section 181 is back!

Zak Forsman

Zak Forsman

Major Contributor
from Justin Evans (used to post here as Prodigi)

Dear Film Professionals -

Section 181 has finally been renewed! The new Tax Bill was signed into law by President Obama earlier today. The tax law includes Section 744, which includes language that replaces IRS Section 181's expiration date of December 31, 2009 with December 31, 2011.

http://democrats.senate.gov/pdfs/MAT10785.pdf

Here is what this means:

1.) Any money spent on qualifying domestic film production* in 2010 now qualifies for the Section 181 tax write-off.
2.) Any money spent on qualifying domestic film production* in 2011 will also qualify for the Section 181 tax write-off.
3.) There is no gap in Section 181 protection...which means all the fear and worry that someone might have begun a project in 2009, somehow didn't get the financing in place and investors invested in early 2010 can now breath a sigh of relief.

*Please, remember that a "qualifying domestic film production" can be complicated and requires reading the original section of the IRC. My interpretation is if you shoot a movie, television episode, music video, short film, webisode, etc. the investors will be able to deduct 100% of their investment in the same fiscal year. Traditionally, investors must deduct there investment over a three year period. Why is this a big deal? For professional high networth investors who need deductions in order to defer income Section 181 makes the film industry an excellent income deferral strategy. It makes our industry one of the most attractive for investors who are actively seeking legal income deferral strategies. Coupled with rebates from states it is possible for an investor to make a profit on a motion picture before the film has sold.

A lot of people will talk about how complicated Section 181 is. I personally find it easy to understand. If I shoot 75% of a motion picture inside the US it qualifies. If I shoot a television series then several seasons of episodes will qualify. If I shoot a music video it qualifies. If I shoot a documentary it qualifies. If I shoot a TV commercial, pornographic film, corporate video or informercial it won't qualify. Distribution expenses won't qualify. Development will, assuming it has been financed prior to the December 31st, 2011 deadline. And, because of the grandfathering clause, if I begin production on a movie in 2010 or 2011 but do not complete it until after December 31, 2011 then all of it's expenses will still qualify for Section 181 even if Section 181 is not renewed in 2012.

Those are the conclusions I have reached with my legal & tax consulting team. Please, consult with your own legal & tax experts. Be skeptical of my interpretations and this email. Verify the details with certified experts you trust.

However, the reason I'm writing this is because Section 181 has largely gone unused by smaller independent films and we're the ones who can benefit from this most. The studios already use this to minimize risk and accelerate an exit for their investors. Now, every independent filmmaker needs to use this. This can be the turning point for independent film in America. This is how we can be self-reliant.

I hope Section 181 enables your dreams to come true in 2011!

- Justin
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I kept searching anything on house.gov or senate.gov and couldn't find where 181 had been renewed. That PDF is the first I've seen of it. So how do we know for sure that that PDF is part of the amendments that passed?
 
It was tucked deep within Section 744 of HR 4853, more here... http://thomas.loc.gov/cgi-bin/bdquery/z?d111:HR04853:@@@L&summ2=m&#major actions

key excerpts:

SEC. 744. SPECIAL EXPENSING RULES FOR CERTAIN FILM
(a) IN GENERAL —Subsection (f) of section 181 is amended by striking ‘‘December 31, 2009’’ and inserting ‘‘December 31, 2011’’.

(b) EFFECTIVE DATE—The amendment made by this section shall apply to productions commencing after December 31, 2009.
 
Barry_Green said:
I kept searching anything on house.gov or senate.gov and couldn't find where 181 had been renewed. That PDF is the first I've seen of it. So how do we know for sure that that PDF is part of the amendments that passed?
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H.R. 4853 (the tax bill the house passed last night), Section 744.

Note that once you begin production (even just one day qualifies) and submit the necessary forms, the production is grandfathered in. So you can begin production in 2011 and finish in 2013 and still qualify all production costs under Section 181.
 
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That's so annoying, because I kept going on govtrack, house.gov, and senate.gov, to read the "full text" of the bill, and it never ever mentioned it. Even in Zak's link to Thomson, why am I not able to find Section 744? This is annoying. :)
 
This may be a temporary link, but try: http://thomas.loc.gov/cgi-bin/query/F?c111:5:./temp/~c111OFTcaR:e78239:

Or go to: http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.4853:

Click on "5 . Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Engrossed Amendment Senate - EAS)[H.R.4853.EAS2]"

Scroll down to "SEC. 744. SPECIAL EXPENSING RULES FOR CERTAIN FILM AND TELEVISION PRODUCTIONS." and click on it.

"SEC. 744. SPECIAL EXPENSING RULES FOR CERTAIN FILM AND TELEVISION PRODUCTIONS.

(a) In General- Subsection (f) of section 181 is amended by striking `December 31, 2009' and inserting `December 31, 2011'.
(b) Effective Date- The amendment made by this section shall apply to productions commencing after December 31, 2009."

Full IRS text on Section 181: http://www.irs.gov/irb/2007-12_IRB/ar10.html#d0e219
 
Mike@AF said:
And the full text of the H.R. 4853 bill as signed by the President: http://www.gpo.gov/fdsys/pkg/BILLS-111hr4853enr/pdf/BILLS-111hr4853enr.pdf

Section 744 is on page 24.
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Now THAT's what I'm talking about! Thanks Mike! That's what I wanted to see -- all in one, as signed, so that the total law can be reviewed. Whenever I saw the text in the amendments, I was never sure if those amendments had been incorporated word for word. So yes, the gpo version is the one I wanted to see.
 
Barry_Green said:
Now THAT's what I'm talking about! Thanks Mike! That's what I wanted to see -- all in one, as signed, so that the total law can be reviewed. Whenever I saw the text in the amendments, I was never sure if those amendments had been incorporated word for word. So yes, the gpo version is the one I wanted to see.
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:thumbsup: Now let's go make movies! (with our AF100's)
 
Mike@AF said:
H.R. 4853 (the tax bill the house passed last night), Section 744.

Note that once you begin production (even just one day qualifies) and submit the necessary forms, the production is grandfathered in for 3 years. So you can begin production in 2011 and finish in 2013 and still qualify all production costs under Section 181.
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hey mike, can you cite a source for this three year cap? I can't find anything on it and was under the impression that once a production is grandfathered, there is no time limit. i'm not exactly an expert though. :)
 
Barry_Green said:
This will make fundraising much easier, that's for sure.
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Did anything specific change, or was it just renewed?

Barry, I recall your number for immediate ROI for investors being 87% with all of the different (ideal) incentives and tax laws added together. How does Section 181 fit in with those numbers?
 
Zak Forsman said:
hey mike, can you cite a source for this three year cap? I can't find anything on it and was under the impression that once a production is grandfathered, there is no time limit. i'm not exactly an expert though. :)
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Sorry, that was my mistake. It was actually for something else in my notes. You actually never need to finish the film it appears.

I will edit my previous post so it doesn't give any wrong information.
 
Drew Ott said:
Did anything specific change, or was it just renewed?

Barry, I recall your number for immediate ROI for investors being 87% with all of the different (ideal) incentives and tax laws added together. How does Section 181 fit in with those numbers?
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No other changes. Just extended from Jan 1, 2010 through Dec 31, 2011.
 
Drew Ott said:
Barry, I recall your number for immediate ROI for investors being 87% with all of the different (ideal) incentives and tax laws added together. How does Section 181 fit in with those numbers?
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Initial ROI of 87% is probably with Section 181. Otherwise initial ROI would be well over 100% and everyone would just be spending boatloads of money (up to $15 million) making movies.
 
Drew Ott said:
Did anything specific change, or was it just renewed?

Barry, I recall your number for immediate ROI for investors being 87% with all of the different (ideal) incentives and tax laws added together. How does Section 181 fit in with those numbers?
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i'm sure barry will follow up but the scenario i use to explain this to people is that if you are in the 35% tax bracket (which is what section 181 covers; it's federal) and you shoot in michigan who has a 42% rebate for film productions, your investor essentially has 77% of their money guaranteed by state and federal govt on a qualifying production.
 
Zak Forsman said:
i'm sure barry will follow up but the scenario i use to explain this to people is that if you are in the 35% tax bracket (which is what section 181 covers; it's federal) and you shoot in michigan who has a 42% rebate for film productions, your investor essentially has 77% of their money guaranteed by state and federal govt on a qualifying production.
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That is how it works, to my understanding. I don't know of any other investment someone could make and get that much money back right off the bat. It reduces an investor's risk to typically anywhere from 25-40% depending on their tax bracket and the state tax incentive.
 
Zak who is "qualifying production" determined by? each state? What is the average (ballpark) budget for a qualifying production in a 42% state.
 
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