Independent filmmakers are excited about President Obama’s new tax bill that extends section 181 film tax credit to the end of 2011. And, it can be applied retroactively to 2010. This bill allows the producer to deduct the cost of qualifying expenditures in the year it occurs, rather than amortizing the costs over 3-5 years – giving investors an immediate 100% write-off of their investments in the year they invested.
The producer only has a few “strings attached” issues to pay attention to:
- Expenditures can’t exceed $15m (This may be inclusive of all union residuals and deferrals)
- 75% of the film must be shot/spent inside the US
- The incentive only applies to monies spent from US equity investors (The Producer can’t benefit from presale and gap loans)
If a certain amount of shooting (or percentage of the budget) is filmed in an “economically distressed” area the expenditure cap increases to $20M (e.g. pretty much the entire state of Michigan as well as the Gulf Region could be considered distressed).
However, if the residual income from a successful film pushes the “cost” (Possibly including prints and advertising) of the film past the $15M (or $20M) expenditure cap, the benefit can be retroactively disqualified. Therefore producers should be careful not to exceed $12M, to allow for a buffer.
One production company gave their investors the following example:
- If the investor is in the maximum tax bracket, the investor realizes a cash back tax deduction of 42% of the investment immediately in the current tax year.
- If the investment is held longer than a year, then the payments back to the investor are capital gains taxed at 15% of the money received back.
- Congress also gave a 9% top line tax credit to the investor. This means that for every 100 dollars paid back to the investor, only 91 dollars is subject to tax.
The investor invests one million dollars. The investor writes off the entire million dollars in the current year. Investor gets back (or saves) $420,000 that does not have to be paid on the investors first million in income for that year. The money returned to the investor from the actual investment comes back as capital gains taxable at 15 to 22% (depending on tax bracket). The returned money also has a top line tax credit of 9%—so when the million is returned the investor only has to declare $910,000 . . . giving the investor an additional savings of $37,800 (42% of $90,000). If the investor immediately re-invests the returned million dollars, the whole process starts over again if the tax law continues to be renewed. Of course, this works on smaller invested amounts too.
Today is a great day to invest in wholesome and independent entertainment for savvy investors who need the immediate tax write-off. And, with “Steele Blue” planning on production in 2011, it becomes an opportunity for those investors.
