Before we get started let me make something extremely clear: I am not an accountant, attorney, nor a licensed tax professional. For guidance on your individual tax liabilities and which deductions and credits are best for you personally, I strongly advise you to seek the counsel of your tax professional. However, as a filmmaker in the state of Louisiana, I am knowledgeable about Louisiana’s Motion Picture Investor Tax Credits as well as the broad strokes of Section 181 of the US Tax Code as both pertain to filmmaking. From that general knowledge, I will proceed to share in layman’s terms and hopefully you will proceed to read a little more. If I explain it well enough then you will understand my excitement about Section 181′s inclusion in the deal to avoid the “fiscal cliff” on January 1, 2013. Let’s face it, the US Tax Code is not exactly riveting material, so a former infantryman in the US Marines who upon discharge enjoyed some modest success on the silver screen and the boards of Hollywood’s Theatre Rowe, feeling towards a bunch of politicians in DC like Sally Field felt towards Academy voters when she received her Oscar ® for Places in the Heart requires explanation. That explanation is forthcoming!
The reason I am so grateful this important section was extended as part of the legislation is because it makes investing in film better for the investor by mitigating their risk. And it doesn’t just provide a little bit of risk mitigation either. For qualified investors that can take full advantage of the 181 deduction, they can mitigate as much as 39.6% of their investment! Now, that’s great but since I’m not stroking six, seven, and eight figure checks, why am I personally so excited? Because it makes the part of my vocation I dislike the most (rasing funds) much easier which lets me focus the majority of my time towards the part of my job that I love as a filmmaker… MAKING FILMS!!!
The following are the basics on Section 181:
- 100% of the motion picture costs are deductible in the same year of investment.
- There is a $15M dollar budget cap (which can be bumped to $20M if shooting in an economically depressed area).
- There is no minimum film production budget cost.
- Section 181 applies to TV shows, short films, music videos, and feature films.
- Section 181 can be applied to active income or passive income.
- Investors can be either individuals or businesses.
- Section 181 is retroactive.
- If the film does not get distributed, the Section 181 still applies with no penalty. It is based on the amount invested, not recoupment, nor return of investment.
- To qualify the production company will give K-1’s to the investors which they and their tax professionals need to file with their returns to take advantage of the 181.
- It is a deduction, not a credit.
So let’s look at an example investment for a Louisiana individual investor, who is in the top income bracket, and is making full use of the Section 181 and the Louisiana film tax credits. The individual investor puts up $3,000,000.00 of which he can deduct 100% that tax year. At a 39.6% income tax rate, he just saved nearly $1,200,000.00 that would have swollen the coffers at the IRS had he not made this investment! Now, he also gets 30% of his investment back under the Motion Picture Investor Tax Credit structure for the state of Louisiana. That’s another $900,000.00. Then there is an additional credit for hiring Louisiana workers (which I always prioritize when hiring). So assuming 50% of the budget is qualifying payroll, that would be another $75,000.00 in credits. So from Section 181 and Louisiana Credits alone, the investor has 72%+ of their investment covered. So yes, even though the guy I was a decade ago would have given me today a black eye for using this much math, that guy also couldn’t explain how you could save hundreds of thousands if not millions of dollars on your state and federal taxes! For more information or to discuss working with Sandstorm Productions, please email me directly at firstname.lastname@example.org or give us a call at our office at (225) 384-0411. I hope you found this article informative and as engaging as a Tax Code post can possibly be!
Kessler Gives the 411 on the Extension of Section 181 | Filmmakers Notebook