I know the Section 181 Film Tax Deduction expires this year, but I am still confused about what exactly is required by the law and what deadlines there are, if any. A producer friend of mine suggested I set up an offering, but I also heard that in some cases a tax filing is required. Any help would be great.
Answer by Brandon Blake, Entertainment Lawyer:
Thanks for following up on Section 181. The regulations that the Internal Revenue Service enacted were never extremely detailed, which is the source of much of the confusion about the Section 181 Film and Television Tax Deduction. However, over the years precedents have been established for how to best take advantage of the tax deduction.
In order to avoid IRS tax penalties and securities fraud liability to the investors for a failure to secure the tax deduction, a number of things must be done. The following is not an exhaustive list, but gets to the core of what is required to both comply with the regulations and provide the investors and their accountants with what is needed to take advantage of the tax deduction:
1) Set up an offering of securities for the film or television series before January 1, 2017;
2) File the offering with the SEC and with the States where investors reside, not more than 15 days after the first sale of securities (in some states earlier), and not later than January 1, 2017
3) Shoot at least one day of principal photography before January 1, 2017;
4) Elect to take the IRS Section 181 Tax Deduction before March 15, 2017;
5) Provide the investors with a K-1, tax opinion letter, and copy of the tax election before March 15, 2017.
Now I will give a little more detail about each of the above.
First, a Section 181 compliant securities offering is required since it allows private equity investors to both invest in the film or television series in question, and then, to take a loss when the production company files for the Section 181 Deduction. Any time a production has passive investors in a film or television project, meaning the investors are not actively working on the project, a securities offering is required.
Second, once a sale of securities has been completed, the SEC requires that the exemption form be filed with the SEC. The time for this filing is not later than 15 days after the first sale. However, some States require a filing before the first sale, so consult with a securities firm like ours to determine when investments in a particular state must be filed. It is my opinion that an offering that has not been filed with the SEC cannot be grandfathered in for subsequent years, since there would be no evidence that the investment had even been offered before the expiration of the Section 181 Tax Deduction.
Third, the IRS regulations specifically require that at least one day of principal photography be shot before the expiration of Section 181, which is January 1, 2017. Moreover, that day of photography must be in the ordinary course of production. So in order to lock in the deduction for your production, both for 2016 and also for 2017 and subsequent years if needed, at least a day’s production must be completed this year, and it needs to be part of a larger plan of production.
Fourth, the election must be made by the production company to actually take the tax deduction as part of the corporate tax statements the company must file in 2017. There is no specific form or “check the box” available, so it will not show up as a line item in the company’s annual returns. If the company does not properly elect to take the deduction, then all expenses of the company will be treated in the ordinary way for the life of the production company.
Fifth, the investors will need to get a copy of the K-1 from the company, showing the investors share of the loss, as well as a copy of the tax election to take Section 181, and finally, a copy of an opinion letter from an attorney that specifies that the company qualifies for Section 181. Not every film qualifies under the rules that Congress set up, as it is supposed to promote domestic film and television production. So an opinion letter stating that the production qualifies for the deduction and that the offering has been conducted pursuant to the regulations is required.
Since it takes about eight weeks to file an exemption with the SEC, do not wait until December 1 to lock in the Section 181 Deduction for a film or television production. Now would be the best time to get started, to ensure everything is completed and filed in time.
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. Please feel free to contact my office about a quote.
- By Brandon Blake, Entertainment Lawyer