As far as state incentives go you need to look at each state's program to determine that.
As far as Section 181 goes, here's a good simple explanation: http://governor.state.tx.us/files/press-office/Federal_Section_181.pdf
Section 181 is back!
- Thread starter Zak Forsman
- Start date
As far as state incentives go you need to look at each state's program to determine that.
As far as Section 181 goes, here's a good simple explanation: http://governor.state.tx.us/files/press-office/Federal_Section_181.pdf
Zak Forsman
Major Contributor
every state has a different program. some are in the form of rebates and they cut you a check, some are tax credits. and each has their specific guidelines you have to meet. traditionally, michigan, new mexico and illinois have the favorable programs. but seriously, i'm about six months behind on this stuff because it looked like 181 was dead in the water. I need to brush up (by talking with my accountant).
as an example, here are the new mexico requirements to qualify for a 25% rebate. pretty easy to meet and it's why I've developed two projects I could shoot there. I've even spent a week scouting locations around ABQ.
http://www.nmfilm.com/filming/incentives/tax-rebate.php
as an example, here are the new mexico requirements to qualify for a 25% rebate. pretty easy to meet and it's why I've developed two projects I could shoot there. I've even spent a week scouting locations around ABQ.
http://www.nmfilm.com/filming/incentives/tax-rebate.php
Drew Ott
Wish I were banned.
Thanks for the reply Zak. What you said is what Barry spoke of before (with slightly different numbers). What's confusing me is this line from Justin's original post. "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."
Where is 100% coming from?
Zak Forsman
Major Contributor
I think he means 100% of their investment qualifies as a deduction for whatever tax bracket they fall in. It's not that they'd get 100% back, but that they wouldn't have to pay taxes on the full amount of money they invested. see, you could have a scenario where some of the invested money is not eligible for whatever reason, like if they invested $30 million. Section 181 caps at $15 million ($20 million under special circumstances). but again, not exactly a business-minded tax professional you're talking to here. 
Barry_Green
Moderator
That number is based on the investor's state income tax, plus the rebate from the state that you shoot in, combined with section 181.
Assuming you're talking to someone who's in the top tax bracket, they'll be paying:
35% federal income tax
about 10% state income tax (depending on their state)
---------
45%
That means that if they kept their money in the bank, 45% of their money would be sent to the federal and state taxing agencies. But with Section 181, their entire investment becomes tax-deductible (depending on their individual accountant's advice, of course). So if they make a spare $100k and put it in the bank, they will have to write the IRS and the state checks for $45,000, meaning they get to keep $55,000.
If, however, they gave that $100k to you to make a film with, they would NOT have to write the IRS any check at all on that $100k, nor would they have to write it to the state (assuming that the state tax is calculated based on their AGI, obviously). So that's a $45,000 debt that they avoid, by writing the check to you instead. In effect, their bank balance is reduced by $55k, but they've bought a $100,000 share in your movie with that money, so with Section 181, it's like a two-for-one sale practically.
Then, you add in the state incentive. If you shoot in Michigan in a depressed area, you'll get a 42% rebate. Add that to the prior 45% from the governments, and you've got an 87% return of the investor's money, before the production is even sold!
So now, it's like getting an 87% discount on your film investment. Or a guaranteed 87% return of your money. Instead of risking $100,000 the investor is really only risking $13,000 because the federal government, state government, and Michigan government are guaranteeing (guaranteeing!) that he'll get 87% of his money back, at a minimum. If you sell the film successfully, he'll get even more. So yes, you could make a million-dollar film, sell it for $140,000 and make a PROFIT on it.
Again, though, this all needs to be run by the investor's accountant, to make sure that the investor's particular tax situation allows for full advantage of the program. They may have too much passive income or they may be hit with the AMT or who knows what other situation might mess things up. And, it also is dependent on how much you spend in the state with the rebate; Michigan will give you 42% back, but only 30% on crew you import to the state, so if you bring your own crew with you you won't get the full value of the 42%, etc. And, of course, if your investor lives in one of the 7 states that don't have a state income tax, then you can't count that (average) 10% in the formula, because it would be irrelevant. For someone in NJ or NY or Hawaii or CA, 10% might be a bit low, but for someone in NV or TX, the state tax is zero, so the tax deductibility of that state tax is, of course, zero. So if soliciting an investor in TX, the maximum guaranteed return of capital you could talk about would be 77%.
But here's the deal: when asking an investor for money, the #1 thing they want to know is: how will I get my money back? And now your answer can be: an 87% return of capital is guaranteed by two state governments and the federal government. That's a hugely compelling argument!
Barry_Green
Moderator
There's only one 42% state, that's Michigan. And you only have to spend $50,000 to qualify.
The other mega-rebate state is Oklahoma, which can go up to 37%.
Barry_Green
Moderator
That's what section 181 allows -- the investor can DEDUCT 100% of their investment, off their federal income tax return. Which means that they will not be taxed on that money. And if they're in the 35% tax bracket, that means that effectively the government is underwriting 35% of their dough.
If the investor keeps his $100k, he has to write a check to the IRS for $35,000, which means he only really gets to keep $65,000 in the best-case scenario.
If the investor instead chooses to invest that $100k in your film, he doesn't have to write the IRS a check for anything. So the net effect is: instead of having $65,000 in his bank account, he owns $100,000 of a film investment. It makes investing much more attractive by lowering his overall exposure.
Furthermore, many (most? perhaps all?) states determine their state income tax off of the person's federal Adjusted Gross Income. So if the person made a million dollars in AGI, the state might ask for $100,000 in tax (10%). But if the person invested $100k in your movie, then their AGI would be $900,000 and the state would then ask for 10% of that, being $90,000. So by investing in your movie, the investor has avoided writing a check to the state for $10,000. And avoided writing a check to the federal government for $35,000. So that's $45,000 of taxes he doesn't have to pay. Hence, that's like a 45% return of their money, right off the bat. It's dough in their savings account they wouldn't have, if they hadn't invested in your film.
Barry_Green
Moderator
I think he means 100% of their investment qualifies as a deduction for whatever tax bracket they fall in. It's not that they'd get 100% back, but that they wouldn't have to pay taxes on the full amount of money they invested. see, you could have a scenario where some of the invested money is not eligible for whatever reason, like if they invested $30 million. Section 181 caps at $15 million ($20 million under special circumstances). but again, not exactly a business-minded tax professional you're talking to here.
Said in a couple of sentences what it took me several paragraphs to say. Sigh.
But yes, there are restrictions -- if the investor isn't in the top tax bracket, obviously this becomes less appealing. Someone in the 15% bracket, who lives in Nevada, and investing in a film that is shot in Nevada (a state with no film incentives) would see a grand return of 15% of equity. Whereas an investor in Hawaii who's in the 35% tax bracket, investing in a film shot (and all budget spent) 100% in Michigan, might see a return of 88% of their investment right off the bat -- 35% federal tax, 11% state tax, and 42% state rebate on the full investment.
However, if you're talking about a passive investor with no passive income to write off their passive deduction against, then section 181 might not apply. Or, if their tax situation is so complex that they're hit by the AMT, then no section 181 savings might apply. Or, as Zak said, if you've got too big of a budget, then not all of it would apply. Or, if you're shooting in a low-rebate state, then those 87%-88% figures won't apply; the best you could do in New Mexico, for example, would be 70% (35% fed + 10% state + 25% NM credit).
Drew Ott
Wish I were banned.
I sent the original post to an HNI friend. Below is his response... I think it'll at least show some idea of how an investor would respond initially upon hearing about Section 181 (assuming they're not already familiar).
"I can’t directly write about Section 181, however, there are a couple of things that come to mind from previous business dealings. And I’m not going to use official IRS/accounting terms plus I am going to simplify things…. I like to lump tax credits into 3 categories: unlimited tax credits against the tax bill, unlimited tax credits against a certain type of taxes, and limited tax credits against certain type of taxes.
1. The first is pretty easy and the preferred tax break. If you owe the IRS $5,000 and you have a tax credit of $1,000 you only have to pay $4,000 to the IRS.
2. The second means you have to qualify for the tax credit for you to be able to claim the credit. I can’t claim energy savings credit if I don’t install green equipment.
3. The last means I qualify for a tax credit (installation of green equipment), but am only permitted up to a certain dollar amount per year. The remaining credit may or may not carry over to the next year. So if I have a $5,000 tax bill that includes $3,000 of green equipment that qualifies for a tax credit cap of $2,000 I owe the IRS the $5,000-$2,000=$3,000 and I get to carry a $1,000 credit to next year.
The problem with the thirs type is that if I keep maxing out the tax credit it may be years (years!) before I fully realize the tax saving benefit. Think in terms of next year I install additional green equipment…say a solar system of $100K. I have the $1,000 from this year plus the $100K from next year and can only credit $2,000 per year. The actually pay-back and benefit schedule for the project isn’t just a couple of years as stated by the mfg and State…but decades based upon the realized IRS tax benefits.
Along the lines of the solar panels…certain expenses will not qualify for tax credit. I might have lawyer bills due to deal with any construction contracts. Then there is the increases CPA bill now that the taxes require additional paperwork…year-after-year. I might have had to do roof preparation work or now roof maintenance will become more costly as the roofers have to deal with 100 solar panels.
So let’s say the $100K solar project has another $20K of “hidden” expenses over the lifetime of the panels. This amount may or may not be a tax credit.
You may recall my grandfather was a director/producer and my grandmother an actor. We have been dealing with MGM for years. There is a film that earns thousands and thousands of dollars annually. Yet, MGM always seems to find expenses that zero out a payment to us. It’s okay, just means I don’t owe taxes…but it would be nice to have a check that would cover at least 1 dinner. =)
Bringing this back to you….
I see 2 primary means for raising capital: loans or investment. Loans are straight-forward. We sign a promissory note indicating I loan you $10K at 10% paid with 12 months and that I am first paid for all income/revenue generated by the project. Failure to pay results in legal bills, court sessions, and you doing my laundry. I receive no tax credit, but I will receive $1K in interest…for which I will pay taxes.
Investment becomes trickier. Legal fees for the contracts and negotiations. Which become an expense and a tax credit. Let’s say I do invest $10K. Per your email snip-it, it is all production costs for a music video (seeing how a porn video doesn’t qualify!) I should see a $10K tax credit. I am presuming a type 1 from above. So I spent $10K CASH to save $10K off my tax bill. In return, the music video does moderately well and after expenses, distribution fees, etc I get a check 6 months for $15K. Well, I no longer get a tax credit. The $10K I paid you came back to me as income, so that becomes a wash. And now I owe taxes on the $5K. I do see a higher pay-back since I am not guaranteed a return as I am with a promissory note. I also take a higher risk since I am an investor and have no control over expenses, etc…which means I run a greater chance of not seeing any money.
So, if as an investment, there is no $15K given to me…in fact, no check at all. I spent $10K to get a $10K credit on my tax bill. I could have just as easily put the money into an IRA, CD, or green equipment. At least with these options, I will see some return for my money.
And that reveals the partial fallacy of tax credits. They require spending money in order to reduce payments to the IRS. Whereas if I don’t spend, I might only pay 33 cents per dollar…but still get to keep the other 67 cents for dinner.
Why do people invest...using the stock market, people just don’t buy stock in 1 company. They invest in several companies in several industries (aka mutual fund). This increases the chance that any decrease is countered by an increase in another industry/company. Enough increases and there becomes a profit.
The same goes with a movie investor. You are not really looking for a single-time investor. The risk of failure is too great and the investor has no counter-balance of a successful project. You want the investor that is looking at this as a business; they invest in 5+ projects in the hope that 2 or 3 make a profit…and enough to at least break-even. As a business, this then opens a whole set of IRS tax credits. Travel, lawyers, and other expenses are now business expenses."
"I can’t directly write about Section 181, however, there are a couple of things that come to mind from previous business dealings. And I’m not going to use official IRS/accounting terms plus I am going to simplify things…. I like to lump tax credits into 3 categories: unlimited tax credits against the tax bill, unlimited tax credits against a certain type of taxes, and limited tax credits against certain type of taxes.
1. The first is pretty easy and the preferred tax break. If you owe the IRS $5,000 and you have a tax credit of $1,000 you only have to pay $4,000 to the IRS.
2. The second means you have to qualify for the tax credit for you to be able to claim the credit. I can’t claim energy savings credit if I don’t install green equipment.
3. The last means I qualify for a tax credit (installation of green equipment), but am only permitted up to a certain dollar amount per year. The remaining credit may or may not carry over to the next year. So if I have a $5,000 tax bill that includes $3,000 of green equipment that qualifies for a tax credit cap of $2,000 I owe the IRS the $5,000-$2,000=$3,000 and I get to carry a $1,000 credit to next year.
The problem with the thirs type is that if I keep maxing out the tax credit it may be years (years!) before I fully realize the tax saving benefit. Think in terms of next year I install additional green equipment…say a solar system of $100K. I have the $1,000 from this year plus the $100K from next year and can only credit $2,000 per year. The actually pay-back and benefit schedule for the project isn’t just a couple of years as stated by the mfg and State…but decades based upon the realized IRS tax benefits.
Along the lines of the solar panels…certain expenses will not qualify for tax credit. I might have lawyer bills due to deal with any construction contracts. Then there is the increases CPA bill now that the taxes require additional paperwork…year-after-year. I might have had to do roof preparation work or now roof maintenance will become more costly as the roofers have to deal with 100 solar panels.
So let’s say the $100K solar project has another $20K of “hidden” expenses over the lifetime of the panels. This amount may or may not be a tax credit.
You may recall my grandfather was a director/producer and my grandmother an actor. We have been dealing with MGM for years. There is a film that earns thousands and thousands of dollars annually. Yet, MGM always seems to find expenses that zero out a payment to us. It’s okay, just means I don’t owe taxes…but it would be nice to have a check that would cover at least 1 dinner. =)
Bringing this back to you….
I see 2 primary means for raising capital: loans or investment. Loans are straight-forward. We sign a promissory note indicating I loan you $10K at 10% paid with 12 months and that I am first paid for all income/revenue generated by the project. Failure to pay results in legal bills, court sessions, and you doing my laundry. I receive no tax credit, but I will receive $1K in interest…for which I will pay taxes.
Investment becomes trickier. Legal fees for the contracts and negotiations. Which become an expense and a tax credit. Let’s say I do invest $10K. Per your email snip-it, it is all production costs for a music video (seeing how a porn video doesn’t qualify!) I should see a $10K tax credit. I am presuming a type 1 from above. So I spent $10K CASH to save $10K off my tax bill. In return, the music video does moderately well and after expenses, distribution fees, etc I get a check 6 months for $15K. Well, I no longer get a tax credit. The $10K I paid you came back to me as income, so that becomes a wash. And now I owe taxes on the $5K. I do see a higher pay-back since I am not guaranteed a return as I am with a promissory note. I also take a higher risk since I am an investor and have no control over expenses, etc…which means I run a greater chance of not seeing any money.
So, if as an investment, there is no $15K given to me…in fact, no check at all. I spent $10K to get a $10K credit on my tax bill. I could have just as easily put the money into an IRA, CD, or green equipment. At least with these options, I will see some return for my money.
And that reveals the partial fallacy of tax credits. They require spending money in order to reduce payments to the IRS. Whereas if I don’t spend, I might only pay 33 cents per dollar…but still get to keep the other 67 cents for dinner.
Why do people invest...using the stock market, people just don’t buy stock in 1 company. They invest in several companies in several industries (aka mutual fund). This increases the chance that any decrease is countered by an increase in another industry/company. Enough increases and there becomes a profit.
The same goes with a movie investor. You are not really looking for a single-time investor. The risk of failure is too great and the investor has no counter-balance of a successful project. You want the investor that is looking at this as a business; they invest in 5+ projects in the hope that 2 or 3 make a profit…and enough to at least break-even. As a business, this then opens a whole set of IRS tax credits. Travel, lawyers, and other expenses are now business expenses."
Last edited:
Drew Ott
Wish I were banned.
Can anybody help me clear up what "sexually explicit productions" means?
I'm confused, because in section 2257 of title 18 of the U.S. Code (which is what Section 181 references when it says no sexually explicit productions) it says: the term “actual sexually explicit conduct” means actual but not simulated conduct as defined in clauses (i) through (v) of section 2256 (2)(A) of this title.
So actual, but not simulated. According to this, it sounds like anything goes unless the actors are having real sex (porn or a movie like Short Bus); however, when I check out the definition that is referenced, it is this:
(A) Except as provided in subparagraph (B), “sexually explicit conduct” means actual or simulated—
(i) sexual intercourse, including genital-genital, oral-genital, anal-genital, or oral-anal, whether between persons of the same or opposite sex;
(ii) bestiality;
(iii) masturbation;
(iv) sadistic or masochistic abuse; or
(v) lascivious exhibition of the genitals or pubic area of any person;
So this sounds like actual OR simulated.
I'm looking at http://www.law.cornell.edu/uscode/18/usc_sec_18_00002257----000-.html and http://www.law.cornell.edu/uscode/html/uscode18/usc_sec_18_00002256----000-.html#2_A
I'm confused, because in section 2257 of title 18 of the U.S. Code (which is what Section 181 references when it says no sexually explicit productions) it says: the term “actual sexually explicit conduct” means actual but not simulated conduct as defined in clauses (i) through (v) of section 2256 (2)(A) of this title.
So actual, but not simulated. According to this, it sounds like anything goes unless the actors are having real sex (porn or a movie like Short Bus); however, when I check out the definition that is referenced, it is this:
(A) Except as provided in subparagraph (B), “sexually explicit conduct” means actual or simulated—
(i) sexual intercourse, including genital-genital, oral-genital, anal-genital, or oral-anal, whether between persons of the same or opposite sex;
(ii) bestiality;
(iii) masturbation;
(iv) sadistic or masochistic abuse; or
(v) lascivious exhibition of the genitals or pubic area of any person;
So this sounds like actual OR simulated.
I'm looking at http://www.law.cornell.edu/uscode/18/usc_sec_18_00002257----000-.html and http://www.law.cornell.edu/uscode/html/uscode18/usc_sec_18_00002256----000-.html#2_A
Barry_Green
Moderator
It's not a tax credit, it turns film investment into a tax-deductible expense.
Secondly, the state rebate is just that -- a cash rebate. Michigan writes you a check for 42% of what you spent.
He is correct that the rebate would be taxable, just like any income is taxable. What he's missing is this: for the last decade, film investment has been (almost unquestionably) the riskiest way in the world to invest. You were pretty much guaranteed to lose all your investment. The only reason people would do it is if they had some spare never-gonna-miss-it money, and the odds are so bad but IF you do get a hit, the returns are astronomical. So it's not like playing roulette, it's like playing Keno.
What Section 181 (and the state rebates) do is <eliminate the risk>. You used to have a 99.999% chance that you were going to lose every penny you put into the film, and a 00.001% chance you'd hit it rich. Now you have a guaranteed 87% return of your capital, and the same 00.001% chance to hit it rich.
There are no guarantees in investing (just ask those who sat through the last five years' bloodbath in the real estate market). But at least here you have a guarantee that you won't lose your shorts. You might lose a t-shirt (the 13%) but all the rest of your clothes are coming back to you. And you do have a chance to hit it out of the park.
Secondly, the state rebate is just that -- a cash rebate. Michigan writes you a check for 42% of what you spent.
He is correct that the rebate would be taxable, just like any income is taxable. What he's missing is this: for the last decade, film investment has been (almost unquestionably) the riskiest way in the world to invest. You were pretty much guaranteed to lose all your investment. The only reason people would do it is if they had some spare never-gonna-miss-it money, and the odds are so bad but IF you do get a hit, the returns are astronomical. So it's not like playing roulette, it's like playing Keno.
What Section 181 (and the state rebates) do is <eliminate the risk>. You used to have a 99.999% chance that you were going to lose every penny you put into the film, and a 00.001% chance you'd hit it rich. Now you have a guaranteed 87% return of your capital, and the same 00.001% chance to hit it rich.
There are no guarantees in investing (just ask those who sat through the last five years' bloodbath in the real estate market). But at least here you have a guarantee that you won't lose your shorts. You might lose a t-shirt (the 13%) but all the rest of your clothes are coming back to you. And you do have a chance to hit it out of the park.
If I remember correctly, my attorney, who actually helped draft the initial Section 181 and worked on pushing the new Section 744 of the new tax law, basically said if it's soft-core or hard-core porn you can't use it. It can be a movie that has nudity or a sex scene in it, but it can't be a porn film. It can be open to interpretation, so be careful if you're borderline because the IRS can say no if they want to and they aren't easy to fight on things. Always consult your attorney(s) before proceeding, but make sure they know and understand and have experience with Section 181.
This is the attorney I've worked with: Hal "Corky" Kessler. He does hold seminars on Section 181 in different cities throughout the year, which is how I learned about Section 181 and got in touch with him.
Last edited:
Lot's of people are worried about Michigan, things are not what they seem to be, I'd look elsewhere or shoot your project there really fast. Barry said in a previous thread he had a friend in Louisiana and that would be where I'd go for safety.
Here is a quote for the incentives office I got tonight. - Stay thirsty my friends
"MICHIGAN - A lot of producers are concerned about Michigan - does the state have money to cover their obligations, and will the regulations change? Thus far, Michigan has not changed its incentive, but regulations must be followed to the letter. Michigan requires a major pre-audit of the applications; e.g., if you estimate 32 filming days, and you shoot 29, you need to provide an explanation for the change.
Buying services are a red flag to the state; it is possible to use them, but the rules are very strict. However, Michgan is still a top incentives state. "
Lustgarten
Well-known member
This is kinda old thread I found while googling, but I see many production companies arguing that state incentives and 181 deductions are aggregated, such as 35% and 42% equal 77% scenarios suggested here. However, imho, when you get that 42% from the state back you just received income, which dilutes the value of your 181 deduction by an equal amount, though it may allow you to push it into the next year.