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CHAPTER 9


FEDERAL FILM INCENTIVE


In 2004, Congress passed the American J obs Creation Act. Section 181 of that act
provides for an incentive for film and television productions. Attorney Hal “Corky”
Kessler of Deutsch, Levy & Engel has contributed the following explanation of the
incentive (and the J ump Start Act). Under Section 181 of The American J obs Creation
Act, 2004, any taxpayer, company or individual who invests in a qualifying film or
television project under the act can deduct 100 percent of the investment as a loss in the
year or years the money is spent. Regardless of budget, filmmakers can take advantage
of the first $15 million (or $20 million in specific depressed areas). For television it is
either $15 or $20 million per episode for the maximum of 44 episodes. The triggering
effect is when the money is spent.

On February 9, 2007, under the IRS temporary rules and regulations, the IRS answered
many of the outstanding questions and concerns. It stated that Section 181 deductions
may be taken only by the owner of a production, including pass through entities, that
received investments from investors. The investors, who had no active participation in
the production or were not a part of the production company, could only take their loss
under Section 181 as a passive loss and not against ordinary income. The IRS temporary
rules and regulations also stated, for the first time, that all contingent compensation,
(residual or otherwise), when paid became part of the production budget.

Section 181 said that each qualified film or television project can expense out to the
taxpayer investors an amount up to a maximum of $15,000,000 per film or $20,000,000
per film if a significant amount is filmed or paid in a low-income state. In television, the
amount allowed to be expensed out to the taxpaying investors is up to a maximum of
$15,000,000 or $20,000,000 per episode for up to 44 episodes. The original act was
extended three times with the last extension ending in December 2013. The incentive
still applies for any films that were qualified through appropriate methods from J anuary
2012 and before the Act expired in 2011. Any buyer of a certified 181 film project,
wherein the copyright and all intellectual property is transferred to the buyer, can now
receive the new 181 benefits for the amount paid and any finishing funds.

Section 199
In addition to the tax reduction incentives under Section 181, the income received also
has some tax reduction opportunities under Code Section 199 which was also added by
the Act. Under the manufacturing sections of the Act, film production businesses are
considered “manufacturing businesses.” From 2010, manufacturing businesses can
deduct from their qualified production activities income an amount equal to nine percent
of such income. This deduction may also apply to television productions. For example,
for $100 received after 2010, the taxable income would be $91. A film can qualify under
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both sections. However, even if a film does not qualify for income tax benefits under
Section 181, the film may be a “qualified film production” pursuant to Section 199 if (a)
direct labor and overhead costs incurred within the United States account for 20 percent
or more of the total costs of the film, and (b) 50 percent or more of the total cost of the
film is spent on services performed in the United States. In addition, expenses incurred in
Puerto Rico are allowed to take advantage of Section 199.

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