Now, I am not trying to be a tax expert here, so I will not try to “explain” all the ins and outs of Congress’ one year extension of the Tax Code provisions of the Tax Code Section 181 for films.

SEC. 181 TREATMENT OF CERTAIN QUALIFIED FILM AND TELEVISION PRODUCTIONS.

(a)Election To Treat Costs as Expenses.–

(1) In general.–A taxpayer may elect to treat the cost of any qualified film or television production as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction.

Source: http://www.taxalmanac.org/index.php/Sec._181._Treatment_of_Certain_Qualified_Film_and_Television_Productions

Attorney, Jeffery C. Foy (a client) has sent me his general thoughts regarding Section 181. He says that under the expanded and extended Section 181 “Many more films are now eligible for the section 181 incentive, including many films now in production which did not meet the cost limits requirements in effect until last week’s amendments to section 181. Many slate financing arrangements between studios and film funds will benefit from the removal of the production cost limits.

The crippling uncertainties about development costs, financing costs, bond costs, and participations and residuals being swept up into the calculation of production cost limits have evaporated.

The doors to the incentive have been opened to the major and mini studios who produce medium, high and ultra-high costs films. However, the amount they can deduct under section 181 is limited to the $15/20M caps.

“Sadly, the changes to section 181 do not remove any of the real impediments facing independent producers who wish to use the incentive. Locating willing investors with the right tax profile is very challenging for the average independent. Studios and film funds have a distinct advantage because large film funds require the efforts of many professionals – fund organizers, investment advisors, banks, hedge fund managers, private equity firm principals, and others –who have a stake in the successful formation and operation of the financing arrangement and insider relationships that let them identify desirable investor prospects.

Source: Jeffery C. Foy http://www.cfoyesq.com/Section181.php”>http://www.cfoyesq.com/Section181.php”>http://www.cfoyesq.com/Section181.php

SECTION 199: THE PRODUCTION ACTIVITIES DEDUCTION

“The Section 199 phased-in deduction for domestic producers has increased to 6% from 2007 through 2009, and will jump to 9% thereafter. It has an impact on a wide range of businesses, including U.S. manufacturing, production, growth, or extraction of tangible personal property, software development, and music recording; U.S. production of movies, television and video; U.S. production of electricity, natural gas and water; U.S. construction or substantial renovation of real property; and U.S. performance of engineering and architectural services.”

Source: http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/Tax/Business/PRDOVR~PC-186490/PC-186490.jsp

Mr. Foy further says that: “In general, I believe the changes will have more impact on studios, ministudios and slate financiers than independent producers. Everything said here, must of course, be understood against the backdrop of great uncertainty about the effects of the global credit crisis and economic instability…”

TREATING LOCALE AND STATE REBATES IN OUR PROJECTIONS

In the course of our work here at FilmProfit, we do not incorporate elements of Section 181 or 199. As Mr. Foy has said, even for investors who could qualify, the qualification for each individual taxpayer is so individual, and the level of their participation makes it hard to model and have it make real-world sense.

But, we do regularly treat locale-based rebates on production expense within our projections models, and, by extension, within cash flows for slates of films. These locale-based rebates can be pretty clearly estimated by collaborating with an experienced Production Manager who has “broken down” and budgeted the film in question.

In the case of a state like Michigan, which offers a 40% rebate; or Louisiana, which offers a 25% rebate, among many that are now available across the U.S, we can effectively identify what portion of the budget will most likely qualify for one, or multiple states, and then the rebate amount for each locale qualified in. Of course, we need certainty that the film will be produced in the locale, so that we are presenting reasonably achievable scenarios.

This is then illustrated in the Summarized Flow of Funds, and can be calculated in conjunction with the investor waterfall. These additions to our Projections of Potential Income can aid a producer in communicating clearly to a prospective investor how the entire production fares under the tax rebates, and how an individual investor at a certain level would fare. This all makes it easy to illustrate the impact on the investment.

Hopefully this helps shed light. Onward and Upward
Jeffrey Hardy