INVESTING WITH US
With IRS Section 181, investments in film with budgets below $15,000,000 are 100% tax deductible for revenue. Consider investing with us in a variety of projects by contacting Mammoth Pictures directly. We are involved in some high profile projects which present lucrative opportunities for serious investors and individuals looking to gain tax deductions and make their dreams a reality. Please read below to learn more.
IRS SECTION 181 TAX DEDUCTION
The American Jobs Creation Act Of 2004 and the 2004 enactment of Section 181, marked an unprecedented change in U.S. policy toward the phenomenon known as “Runaway Production” for the film industry. Hollywood, like many American industries, had grown tired of the high cost of labor and taxes in the United States. Canada and other countries identified the potential financial benefit and took advantage by successfully luring American film and television production onto their soil, taking enormous amounts of production dollars with them. The government’s reaction was to include Section 181 within the American Jobs Creation Act of 2004. Section 181 offers tax incentives for investors in independent film and television productions produced within the United States.
Section 181 states that investment in a motion picture shot in the US is 100% tax deductible for the investor in the same year invested. Under Section 181 an investor may deduct the money which is invested in a film or television production from his or her passive income earned in the same year. If the investor is actively involved in the operation of the production, he or she may deduct the amount of investment from all active income earned in the same year. Productions with budgets below $15,000,000 (up to $20,000,000) which have at least seventy-five percent 75% of its production completed within the United States qualify under Section 181. Investors can be either individuals or businesses.
POINTS OF INTEREST ABOUT SECTION 181 TAX DEDUCTION
• 100% of the motion picture costs are deductible in the same year of investment.
• 75% of the motion picture must be shot in the US to qualify for Section 181
• There is a $15 to $20 million dollar budget cap.
• There is no minimum film production budget cost.
• TV pilots, TV episodes (up to 44), short films, music videos and feature films all qualify for Section 181.
• Section 181 can be applied to active income or passive income.
• Investors can be either individuals or businesses.
• Section 181 is retroactive to 2004 and was just renewed as part of the ‘Fiscal Cliff’ Bill on early 2013.
• There is no expectation for film distribution or film completion.
• The motion pictures corporation issues Schedule K-1’s to the investors so they can take advantage of Section 181.
WHAT THIS MEANS FOR INVESTORS
Tax rebates and incentives for money spent on film or television production within a particular state can be combined with the benefits of Section 181 allowing an investor to greatly minimize his or her risk on what would ordinarily be considered a risky investment. For example, if a tax payer is in the thirty-five percent (35%) tax bracket and a qualifying film is shot in Louisiana which has a state tax credit up to forty percent (40%), an investor has greatly reduced their risk. They would get the deduction of their federal taxes equal to their investment PLUS most states with incentives monetize the credits BEFORE production for up to 90% of the credit amount. Continuing this example, if a film is shot in Louisiana with a budget of $1,000,000, the state would provide the production entity up to 40% of the entire budget in transferrable state tax credits. If the investor was not a resident of Louisiana, the state would monetize 90% of the credit to the production company before filming commenced. That would provide the investors a return of $360,000 ($1,000,000 x .40 x .90) before filming even began. Most states in the United States that have some type of tax credit or rebate plan.
For certain audio visual works (referred to herein as “Qualified Audio-Visual Works”) that commence principal photography from January 1, 2008 through December 31, 2013, Section 181 permits a 100% write-off (the “Film Deduction”) for the first $15 million of the cost (“Film Costs”) of such works, regardless of what media they are destined for (e.g., theatrical, television, DVD, etc.) and regardless of whether the particular expenses were incurred before or after the dates set forth above (as long as commencement of principal photography falls within those dates). It seems likely that Section 181 will be extended, since it has been repeatedly extended so far, even retroactively to prior years (although it is hard to see how that approach encourages U.S. production other than by clairvoyants).
Seventy-five percent of the total compensation relating to the audio-visual work paid for services performed by actors, directors, producers (which probably includes executive producers and associate producers), writers, composers, choreographers, casting agents, camera operators, set designers, lighting technicians, make-up artists, and other persons directly involved in the production of the film, whether employees or independent contractors (“Total Compensation”) must be paid for such services rendered in the United States (“U.S. Compensation”).
The regulations permit the current deduction of all costs, including development and pre-production costs, relating to a film if the taxpayer reasonably believes that (a) the film will ultimately be a Qualified Audio-Visual Work and (b) the film will be set for production (referred to in the industry as “greenlit”). However, the deduction of these costs must be recaptured as ordinary income in any subsequent taxable year during which both these requirements are no longer met.
Only the taxpayer that owns the Qualified Audio-Visual Work for tax purposes (based on owning the benefits and burdens of the work) and pays the Film Costs can take the Film Deduction, even if it pays an independent production company to physically produce the work. Thus, the Film Deduction applies to the taxpayer that is otherwise required to capitalize the Film Costs.
The taxpayer is required to make a binding election to deduct the Film Deduction in lieu of normal income forecast amortization with respect to each particular Qualified Audio-Visual Work. The election must be made by the due date (including extensions) of the tax return for the first tax year in which qualifying costs for such work could be deducted.
More important than what is written in Section 181 is what is not written, since taxpayers must consider all the other provisions and doctrines of existing tax law, two of which are discussed below.
If the production activity constitutes a trade or business, as seems likely to be the case, the Film Deduction will be subject to the passive loss rules with respect to certain taxpayers, including individuals and personal service corporations. Individuals and personal service corporations that do not “materially participate” in the activity can only deduct passive losses, including the Film Deduction, to the extent of “passive income,” which generally is limited to income from real estate and from passive interests in businesses held by pass-through entities. Passive income also includes income from the Qualified Audio-Visual Work. If the Film Deduction is restricted under the passive loss rules, the excess carries forward and may be deducted when it is “freed up” by future passive income or upon disposition of the taxpayer’s interest in the activity.
For individuals and Closely Held Corporations, the Film Deduction will also be subject to the at-risk rules. Under the at-risk rules, the taxpayer may only take a deduction for direct investment and borrowed amounts for which the taxpayer has ultimate direct recourse liability. For example, if any portion of the Film Deduction is funded with debt, the taxpayer must have ultimate liability for that debt directly to the lender, without a right to reimbursement from any third party. Such a liability will be included in the “at-risk” amount even if the risk is ameliorated with future license payments from a creditworthy licensee.
Even if the passive loss rules and at-risk rules do not restrict the Film Deduction, the net result is to merely accelerate the deduction of Film Costs by about one year, since most Film Costs would be deductible in the year the film is released, at least for independent films.
Contact Mammoth Pictures directly to discuss investing with us.