If you’re an investor, one of the best reasons to fund an independent film isn’t supporting the arts, the chance to see your name on a movie screen or even the crazy notion that you’ll make a profit: It’s Section 181, the seven-year-old IRS ruling that’s allowed investors to deduct their entire film investment — up to $20 million — in the same year it was made.
However, Section 181 is set to expire at the end of 2011. But if you act fast, you can preserve the federal tax incentive for your project.
Part of the American Jobs Creation Act of 2004, Section 181 addressed the then-burgeoning issue of runaway productions by allowing U.S. taxpayers to treat 100% of a film or TV investment as a tax deduction against passive income — regardless of the project’s future profit or loss. It initially expired at the end of 2009 and was revived a year later.
However, Chicago-based entertainment attorney Hal “Corky” Kessler says that despite the dire economy, there’s little to no hope that will happen again. “I don’t think we’ll get it extended,” says Kessler, who worked on the tax code’s prior extensions. “I’m telling every one of my clients to get their projects grandfathered.”
To grandfather a project — that is, to have it qualify for Section 181 in 2012 and beyond — you must prove that it was well under way by December 31, 2011. By that date, you don’t need to have any investors; you do need to have a lot of paperwork filed with your attorney.
To qualify, here’s the four things you must have in the next 81 days:
• A screenplay. It can be amended at any point thereafter.
• A budget. The budget can later be amended.
• An LLC. You must form and file an LLC for the project and draft all investment documents. Even if you don’t have the prospect of investors, you have to prove you were ready and able to accept them by the end of 2011.
• One day of photography, with dialogue. This must be a scene that’s in the screenplay — but there’s no requirement that it makes the final cut. (Give your attorney production reports that may be filed as proof.)
Once a project has been grandfathered, there’s no time limit to finish the film and the investment qualifies for Section 181 even if you wind up abandoning the project.
All of this comes with the caveat that tax codes are never simple and you should speak with your attorney to ensure that it’s relevant for your project. And unless an investor has an active role on the film, the deduction only applies to other forms of passive income through vehicles like rental property, limited partnerships and online ad revenue. However, it’s worth the ask: Section 181 is the only federal benefit that’s available for indie-film investors.