2/14/11 – Pawel

Section 181 compiled off the net

I once had a dream to be a tax lawyer. God how sad you say. I say NO! I say Exciting. Why do I say exciting, because what is more exciting than free money. I jest of course there is no such thing. However, Film as an investment vehicle can be pretty dreamy. Have you heard of section 181? Well then, get a piece of toast and read on…. I’ve put together some information from other writers on this topic for your reading pleasure…

Section 181 of the IRC

Generally tax-advantaged theatrical film and television investment for affluent individuals comes with little risk. Most often, the cost of production is recouped by a combination of federal and state tax incentives, thereby eliminating most of the risk. Capital is still required as a direct investment (partnerships can be used), but must also be “at risk”, which allows § 181 IRC write-offs. For example, if a private equity source is found (individuals with capital or a private wealth management firm representing individuals personal funds), the investor pays for the film or TV production, and receives back an equal amount of capital in tax-incentives, pre-sales and state tax credits, thereby making the investment and recoup a wash. This is a highly specialized tax play, and is often looked upon as risky by those who do not understand the risk mitigation offered through state tax and federal tax incentives like § 181 IRC. (http://en.wikipedia.org/wiki/Film_finance)

Specifically Section 181… Embedded deep inside the tax bill President Obama signed into law in December was a provision extending a powerful tax incentive for film and television producers. The provision — Section 181 of the Internal Revenue Code — permits an immediate tax deduction for up to the first $15 million of qualifying production costs (more in certain circumstances). Importantly, the reinstated Section 181 applies retroactively to films that commenced principal photography on and after January 1, 2010. This may provide an unexpected significant tax benefit to films already produced in 2010. Section 181 is an elective provision and a film production wishing to take advantage of it for a 2010 production will need to make an appropriate election. The election is made with the filing of the tax return for the period in which the film was produced. As a result, a film production company that has used (or is considering the use of) a short first taxable year, e.g., to receive a state film tax incentive refund, should consider what steps it may be able to take to utilize Section 181 for its 2010 film. On a going forward basis, the reinstated Section 181 will apply to films whose principal photography commences on or before December 31, 2011. (http://www.entertainmentlawmatters.com/?cat=8)

Section 181 represents the first time that the U.S. federal government has recognized this impact by passing tax legislation to actively combat the flight of film and television programming. Section 181 permits a 100% write-off for the cost of certain audio-visual works, regardless of what media they are destined for (e.g., theatrical, television, DVD, etc.). An individual or company who makes an investment into Section 181 qualified productions can take a 100% deduction of their investment against their passive (individual) or ordinary (as C Corporation) income in the year their investment was made. The deduction can be made against active income should the investment be made by or through a widely held C corporation. The law is in effect until December 31, 2009, therefore investments must be made before that date and the money invested into qualifying productions must be spent by then by the productions. (http://www.articlesbase.com/business-articles/investing-in-film-using-irs-section-181-for-federal-tax-credits-vs-new-markets-real-estate-credits-746745.html)

An example, should an individual or corporation that is taxed at a 35% tax rate have passive income to take a deduction against, then should that individual make a $1 Million investment into a qualified production or film fund, the actual net investment will be $650,000 since they can take a deduction against that full $1 Million against their passive income, and 35% of $1M is $350,000, which is the value of the deduction they can make in the year they make their investment. Therefore, 1M minus $350,000 is $650,000 which is the net amount of their investment into the qualified production.
However, an investor or Company can also receive an additional 15-30% in state tax credits on the entire budget of a film BEFORE profits and other exit strategies that Noci Pictures Entertainment has in place. This clearly shows a premium in tax credit and tax liability deduction compared with the other Federal Tax Credit Programs available. Further, The Section 181 and State Programs benefit the tax credit investor, the producers, and the community by offering:

In the Short Term:
1. 100% passive or ordinary income deductions under the IRS Section 181 “American Jobs Creation Act” for both individuals and corporate tax payers
2. 20%-30% in State Tax Credits (depending on state)
3. Economic Development
4. Job Creation, Including For Minorities And Women
5. ROI on Investment of 60-100% prior to revenues

In Medium-Long Term it would offer

1. hedge of revenues (after Section 181 and state incentives of 60-100% ROI) back to investors from individual or a slate of films
2. Discount of future taxation from income under Section 199 for a Section 181 investment
Read more: http://www.articlesbase.com/business-articles/investing-in-film-using-irs-section-181-for-federal-tax-credits-vs-new-markets-real-estate-credits-746745.html#ixzz1DyAryidu
Under Creative Commons License: Attribution

(http://www.articlesbase.com/business-articles/investing-in-film-using-irs-section-181-for-federal-tax-credits-vs-new-markets-real-estate-credits-746745.html)

Going to put together more on this. I have a ton of paperwork to review- but the above should at least get everyone going for now.

This article reposted from wemakemovies.org, your friendly neighborhood Indie-film Collective

The information provided here is intended to provide general  information and does not constitute legal advice. You should not act or  rely on such information without seeking the advice of an attorney and  receiving counsel based on your particular facts and circumstances. Many  of the legal principles mentioned might be subject to exceptions and  qualifications, which are not necessarily noted.  Furthermore, laws are subject to change and vary by jurisdiction.

Partner of the legal firm sasik|moon, Pawel Sasik is an attorney specializing in entertainment and technology. Pawel has consulted on various multi-million technology development projects ranging in scope from entertainment / social media to professional practice facilitation tools. Some of his projects include, the enterprise grade litigation and transactional tools from RealPractice™ and the social entertainment website yoostar.com™. Pawel’s understanding of technology and law has allowed him to focus on assisting film makers produce and distribute their films through traditional and non-traditional methods. A native of Poland Pawel is fluent in Polish. Pawel holds a Juris Doctorate degree from Loyola Law School Los Angeles and business and music degrees from the University of Southern California and can be often found strumming the guitar or writing a script for relaxation.
 

 

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