Federal Motion Picture Incentive
On October 3, 2008, Congress approved an extension and modification of “Section 181,” a federal tax incentive designed to combat runaway film and television production.
Qualifying Film Expenses Immediately Deductible
Producers or active financial participants in qualifying film and television productions may elect to immediately deduct the cost of qualifying film expenditures in the year the expenditure occurs.
Qualified film and television productions include any film or video tape production of a motion picture or television show whose costs would otherwise be required to be capitalized but for section 181. Only the first 44 episodes, including the pilot production, of a television series are eligible under the law.
In the case of a film co-produced by multiple investors, the deduction for qualifying expenditures must be allocated among the owners of the film in a manner that reasonably reflects each owner’s proportionate investment and economic interest in the film.
Qualifying Expenses Include First $20 Million of Expenditures
The proposal applies to the first $15 million in production costs for qualifying film or television productions. This is a major expansion from the previous law which only applied to productions with production costs under $15 million.
A higher expenditure cap of $20 million applies to productions the aggregate costs of which are “significantly incurred” in: a) areas eligible for designation as low-income community under the New Markets Tax Credit program (as defined in section 45A of the Internal Revenue Code), or b) areas eligible for designation by the Delta Regional Authority as a distressed county or isolated area of distress, which includes Pulaski County.
As defined by the New markets Tax Credit program, qualifying low-income communities include any census tract if (a) the poverty rate for such tracts is at least 20%; or (b) (1) in the case of census tracts not located within a metropolitan area, the median family income for the tract does not exceed 80% of statewide median family income, or (2) in the case of a tract located within a metropolitan area, the median family income for the tract does not exceed 80% of the greater of statewide median family income
or the metropolitan area median family income. Information on qualifying communities can be found at: http://www.cdfifund.gov/what_we_do/programs_id.asp?programID=5.
A list of areas eligible under the Delta Regional Authority statute as distressed counties or isolated areas of distress can be found at: http://www.dra.gov/about/maps.aspx.
The IRS temporary regulations (T.D. 9312) outline two alternative tests to determine if costs are “significantly incurred” in qualifying low-income areas. The first test is based upon production costs and establishes a 20% threshold for the test. It compares production costs incurred in first-unit principal photography that takes place in a designated area to all productions costs incurred in first-unit principal photography. This does not include preproduction, editing and post-production costs. The second test
is based upon the number of days of principal photography. If at least 50% of the total days of principal photography take place in the designated area, the production will be deemed to satisfy the significantly occurred text.
Definition of Qualifying Production
To qualify, at least 75% of the total compensation expended on the production must be for services performed in the United States.
Qualifying compensation includes payments for services performed in the United States by actors, directors, producers, and other relevant production personnel. Compensation does not include participations and residuals (as defined in section 167(g)(7)(B) of the Internal Revenue Code.
Tax Benefit Duration
This revised domestic film production incentive program – covering the first $15 million of costs of all productions – will be in effect for qualifying productions commencing after December 31, 2007 and before January 1, 2010.
This information is provided by the Directors Guild of America (DGA) and is for informational purposes only and should not be viewed as tax advice with respect to your production activities.
For more information, Gary Newton, CCE (Executive Vice President; Commissioner, Little Rock Film Commission), 501.377.6007.