26 U.S.C. § 181 (Section 181) has been renewed and extended to cover 2015 and 2016. Filmmakers and investors may qualify for tax breaks under Section 181 for any qualified film or television production. To benefit, you must make the tax election in the first taxable year in which you begin to pay or incur production costs. Production costs include:
- all direct costs or allocable share of such costs that are paid or incurred in a production;
- all costs that are paid or incurred in the acquisition of a production prior to its initial release or broadcast;
- participations and residuals paid or incurred;
- compensation paid or incurred for services;
- compensation paid or incurred for property rights;
- non-compensation costs; and
- costs paid or incurred in connection with obtaining financing for the production (for example, premiums paid or incurred to obtain a completion bond for the production).
You may use this tax break even if production costs span over multiple years, but only the costs paid or incurred before the projects’ initial release or broadcast are eligible, and does not include distribution or promotion costs.
Section 181 tax breaks applies to film or television productions that began after 2004 and before December 31, 2013. The passage of the Protecting Americans from Tax Hikes Act 2015 also expanded Section 181 to include producers and investors of commercial theatrical productions.
Investors may elect to deduct any production costs they paid or incurred, up to $15 million, as a deductible expense for the tax year such costs were paid or incurred in a qualified film or television production. A “qualified film or television production” is one in which at least 75% of the compensation (not including participations and residuals) is paid to actors, production personnel, directors, and producers for services performed within the United States. A filmmaker or investor may elect to treat production costs paid or incurred up to $20 million if the production is made in a low-income community or in a distressed county or isolated area of distress as declared by the Delta Regional Authority. A “qualified film or television production” includes any motion picture film or video tape, miniseries, scripted, dramatic television episode, or movie of the week. Video and computer games are excluded.
Any person that provided the capital to purchase and fund the various expenditures that went into producing the film or television production or any person who purchases the production before its initial release or broadcast, may be eligible for a Section 181 tax deduction. An initial release or broadcast means the first commercial exhibition or broadcast of a production to an audience. They do not include limited exhibition prior to commercial exhibition to general audiences if the limited exhibition is primarily for purposes of publicity, marketing to potential purchasers or distributors, determining the need for further production activity, or raising funds for the completion of production.
A person that acquires only a limited license or right to exploit a production, or receives an interest or profit participation in a production as compensation for services, is not eligible for a Section 181 tax deduction.
For television series, each episode of the series is treated as a separate production for the purposes of expensing election and only the costs for the first 44 episodes may take advantage of this tax break. And the requirements for whether each episode is qualified would be done on an episode-by-episode, as opposed to aggregate, basis. Sexually explicit productions, that is, ones that require reporting and recording keeping under 18 U.S.C. 2257, are not considered a qualified production for this election option.
Production costs do not include costs to distribute or exploit a production, prepare a new release or broadcast of an existing production after the initial release, or costs that the filmmaker or investor has deducted or begun to amortize prior to the taxable year in which the tax election was made under Section 181 or under any other provision of the Internal Revenue Code (IRC).
A filmmaker or investor may still make an election under Section 181 if he had made a prior deduction under other provisions of the IRC for amortization of the costs of acquiring or developing screenplays, scripts, story outlines, motion picture production rights to books and plays, and other similar properties for purposes of potential future development or production of a production, if such costs were paid or incurred before the first taxable year for which a Section 181 election may be made and which are included in the aggregate production costs.
A Section 181 election must be made by the due date of the investor’s Federal income tax return for the first taxable year any aggregate production costs have been paid or incurred, the investor reasonably expects that the production will be set for production, or the pre-amendment aggregate production costs are not expected to exceed the applicable limit of $15 million (or $20 million).
One final, but important note, for investors in production companies formed as C-corporations, if more than one person will claim deductions under Section 181 with respect to the same production for the taxable year, each person claiming the deduction must provide a list of the names and taxpayer identification numbers of all such persons; the dollar amount that each such person will deduct; the name of the production; the date aggregate production costs were first paid or incurred for the production; and the amount of aggregate production costs paid or incurred for the production during the taxable year. This does not apply to the investors of an entity who are issued a Schedule K-1 by the entity with respect to their interest in the production, such as a partnership, S-corporation or limited liability company.
Section 181 has been repealed and replaced by Section 168(k).