Success in the entertainment industry has not been confined to mega-studios, but includes independent film makers funded by private investors. In 2007, all of the independent films nominated for best picture at the Academy Awards were funded, in whole or in part, through private investors. In 2006, five out of six films nominated for awards were funded by private investors. Such nominations have never occurred before in the film industry. Accolades given to independent film makers have now made private investment in the industry an attractive option for qualified investors. The strengthening viability of this industry, along with favorable legislative incentives, creates unique opportunities for appropriate investors. This article examines how the federal government and certain state governments are working to preserve the entertainment industry jobs in the United States by providing investment incentives.
The Jobs Creation Act of 2004 (the “Act”) included two revisions to the Internal Revenue Code (the “Code”) that revised the investment incentives available to investors in the entertainment industry. The first is provided under Section 181 of the Code and deals with the tax treatment of certain qualified television and film productions. While the incentives, described below, were scheduled to expire at the end of 2009, the recent federal rescue package, passed by Congress on October 3, 2008, extended Section 181 to apply to the cost of any qualifying film and television productions commencing before 2010.
Previously, the incentives offered under Section 181 only applied to films costing $15 million or less to produce. Under the revised Code, up to $15 million of production costs may be immediately expensed under Section 181 regardless of the aggregate cost of the film. This $15 million can be increased to $20 million if a significant amount of the production expenditures are incurred in areas eligible for designation as a low-income community or eligible for designation as a distressed county or isolated area of distress. With respect to a television series, only the first 44 episodes of the series may be taken into account. The remaining cost of the film or television series would be recovered under customary amortization methods (e.g., income forecasting).
The second incentive program is available under Section 199 of the Code. Section 199 provides a reduction in taxable income generated by a qualified film. As revised, Section 199 expanded the definition of “qualified film” to include the film production but also the copyrights, trademarks and other intangibles associated with the film. Thus, income from the licensing of copyrights and trademarks relating to a qualified film is now eligible for Section 199 deductions. The deductible amount of taxable income under Section 199 is 6% until 2010 and 9% thereafter.
The Code specifies that the methods and means of distributing an otherwise qualified film do not impact its eligibility under Section 199. Distribution of a film or program over the Internet (i.e., digital programming) or on broadcast television is to be treated as a disposition for purposes of Section 199. Thus, advertising revenue and other income attributable to any such distribution of a qualified film is eligible for Section 199 benefits.
The following is an example of how benefits are calculated under Sections 181 and 199 for a qualified film or television production along with the assumptions for the example.
- The film is produced solely in the state of Illinois.
- The taxpaying investor is an accredited investor and is in the 35% tax bracket.
- The taxpaying investor invests $100,000 in the film and the entire investment is spent on qualifying expenses on a qualifying film in 2009.
- The production is completed in September of 2009 and the expenses are certified and approved by the state of Illinois in October of 2009.
- The qualified expenditure in the state of Illinois was $2,000,000 and thus, a tax credit of 30% (or $600,000) will be afforded to the production company. The state tax credit is received by the production company in November of 2009.
- The state tax credit of $600,000 is sold in 2010.
Based on the assumptions, the taxpaying investor is eligible to deduct 100% of his/her investment on his/her 2009 federal tax return. The state of Illinois provides a 30% tax credit (an increase from the prior 20% tax credit) that applies to Illinois goods and services including wages paid to Illinois residents. Illinois issues its tax credits within sixty (60) days of their submission.
Other states provide similar tax benefits, for example, in Tennessee, the taxpaying investor may be eligible for a 32% deduction. The state of Tennessee issues tax credits to the production company for the amount of the qualified expense assuming the expenses were incurred in that state.
Private investment in films is now a viable investment alternative. Section 181 provides benefits relating to costs of production and Section 199 permits tax deductions at the federal level against taxable income for investors in any film or television production. Section 181 incentives are earned in the tax year or years during which invested capital is “spent”. As mentioned above, tax incentives are also available at the state level. At least 37 states provide tax incentives for investments by an accredited taxpayer of any distribution or sale proceeds from a film. These benefits provide a possibility for investment in independent films and a forum for taxpayers who have never invested in films to consider as a choice for disposable funds.
Just imagine being able to see the film in which you invested and then learning that that film has been nominated for Best Picture of the Year at the Academy Awards. See you on the Red Carpet!