Question for FilmTVLaw.com:
Okay, so I keep hearing about “Grandfathering” the section 181 tax break and I wanted to find out what that meant and if the year-end is any kind of a deadline. Thanks in advance for the help and keep up the great work.
Answer by Brandon Blake, Entertainment Lawyer:
Excellent question about the American Jobs Creation Act (AJCA) Section 181 Tax Deduction for film, television and theater productions. The Section 181 deduction is expiring at the end of 2016, but producers of films, television series and theater productions can “grandfather” in projects, thereby keeping all the benefits for future years. Feel free to get more details at www.filmtvlaw.com.
It is an unprecedented thing made possible by Congress when they drafted the AJCA Section 181 to apply to projects that “start production” before the end of the year. This wording is what allows producers to lock in the Section 181 deduction for coming years by doing a few simple things before the end of this year.
First, for those that are not familiar with the benefits of the American Jobs Creation Act, Section 181, the tax deduction allows investors in a feature film, television series, and now a theater production, to take a 100% loss on the project in the very first tax year, even if the project goes on to make money later. Needless to say this is something that investors want, and that investors will expect to get not just this year, but for subsequent years, due to the number of producers that are grandfathering in projects.
So, what is required exactly for “grandfathering” Section 181? A couple of steps are required:
First, a limited offering must be set up for the particular project to be grandfathered in. Congress specified it is the “project” that must be grandfathered in, and not the company, so each project must be separately set up as a limited offering. Otherwise, private investors cannot invest in the project.
Second, the offering must be filed with the SEC before January 1, 2017.
Third, at least “one day” of principal photography must be shot before January 1, 2017. We can help qualify the production under Section 181, but only if our firm sets up the limited offering this year.
Fourth, a particular tax filing must be made at the start of 2017. Because the IRS never produced a “check the box” type of form for Section 181, the law firm handling the offering must provide the information to the IRS. There is no printed form to take the deduction, and it will not be apparent on the 2017 corporate or partnership tax forms.
It takes a minimum of one-month to file an offering now with the SEC. Because of the new online filing requirements, the company must first qualify to file the offering, and then the offering paperwork can be filed.
Unfortunately, this is not a process that can wait until mid-December to begin. By that point it will be too late to grandfather in a project. Moreover, there is expected to be a rush of applicants this November and December, which will most likely cause delays. So, it is crucial to begin this process this month to complete it by the year end.
Please feel free to contact our office for a quote. As with any entertainment matter, please do not make a decision about complex matters without consulting an experienced entertainment lawyer first. I have been representing feature film projects, television series, and recording artists for more than 16 years.
- By Brandon Blake, Entertainment Lawyer