The federal film and television incentive known as Section 181 expires at the end of 2011.
If you have not grandfathered your film or series, then you must do so now, before the end of the year. If you do it correctly, then your film or series (up to 44 episodes!) will remain eligible indefinitely -- which can be a powerful motivator for potential investors.
You do not need to have investors to be grandfathered; you just need to memorialize a few things before year’s end.
Section 181 is a very lucrative, accelerated tax deduction that American investors can use to offset passive Income (e.g. income from residuals, royalties, real estate, oil & gas, etc.), or all income (including wages) if the investor participates in the production.
The incentive allows investors to deduct the entire amount of their investment in the tax year(s) the money is spent, as opposed to being required to amortize it over several years.
This is not a tax credit that producers can sell for cash, nor is it a rebate check from the feds; it is an accelerated deduction that can amount to significant tax savings for investors, which, in combination with a some state credits (like Louisiana) can cover as much as 50 percent of the investment risk.
Please note that this is not the convoluted Grand Army tax scheme that tried to net productions 10 percent of their budgets (barely covering the cost of the 50-plus attorneys it took to close the deal).
This is a straightforward election for how investors ultimately want to account for their investment -- the benefit of which can be divided pro-rata across multiple investors.
One could argue that using the 181 deduction converts investor profits into ordinary income, which is taxed at a higher rate than the capital gains rate they would otherwise pay. But how many film investments go into net profit?
Are independent film investors better off mitigating potential losses or maximizing potential profits?
If I had to guess, I’d say that 20 percent of producers would argue that you should mitigate losses, and 30 percent would say maximize profits. The other 50 percent don’t know because they don’t understand passive income or risk mitigation, which I believe, is why indie producers never embraced Section 181.
To be fair, over the years I’ve spoken with countless investors who also had no idea the law existed.
We hav devised a package for investors and filmmakers who wish to secure this for their 2011, 2012 or 2013 projects.
To grandfather your film or television series, you need:
• To have your LLC investor docs drafted and done, but do not need any investors. Note: Different docs are required for accredited vs. non-accredited investors.
• A budget and screenplay, but none need to be final and can be amended.
• One day of principal photography with dialog, but it need not be in the final edited film. This does not require a full cast/crew, just shoot it handheld on HD and make it look decent.
•The one-day needs to only be in the screenplay as originally drafted (keep the one-day in your file as proof along with the budget at the time and screenplay at the time.)
•The one-day should be time stamped and date coded.
• For a television series, you need to only do the one-day of the pilot or original episode and then you are grandfathered for up to another 43 episodes. The total under Section 181 is 44 episodes.
Most importantly, you need to have an entertainment attorney on board and an accountant that knows Section 181:
Failure to properly account for, or failure to declare 181 election status on the first tax return for the project, will exclude the project from Section 181 benefits.