They’re Back! Federal Tax Incentives For Film, TV And—Now—Theater
February 8, 2016
by Travis Life
On December 18, 2015 President Obama signed legislation which reinstated Section 181 of the Internal Revenue Code permitting film and television production companies to once again provide tax incentives to potential investors. This tax incentive is new and improved from the previous versions of the code. The incentive is retroactive for all audio/visual productions which commenced principal photography in 2015 and for all such audio/visual projects which commence principal photography in 2016. An “audio/visual project” can be a theatrical motion picture, a short film, a television pilot, single show or series, a television commercial, a music video, an on-line program/series, etc. And, for the first time, the incentive now extends to live stage productions as well as audiovisual productions.
Section 181 is now available for audiovisual and theatrical productions with a budget up to$15,000,000. In addition, at least 75% of the production must be completed within the United States. There is no minimum production budget requirement.
Section 181 was originally included in The American Jobs Act of 2004 to prevent television and film production companies from leaving the United States to film elsewhere at a lower cost. The provision states that investments in audiovisual or theatrical productions can be tax deductible by the investor for the year of the investment. If the investor is active in the production, then the investment is a complete write off. If the investor is not active in the production, then the investment is a passive loss or gain. Whether an investor is considered “active” will depend on that investor’s level of activity and involvement in the production
So what does this mean for production companies?
By informing the potential investor of the Section 181 tax incentive, which means that the investor could completely write off all of the investment on his or her federal taxes, your pitch to potential investors just got easier. This federal incentive, coupled with any available tax incentive from the state(s) where you are shooting/producing a play should entice additional investors. An investor may write off the entire investment, and then use the state tax incentives or credits on the state taxes. The production company must elect the Section 181 incentive, notify the IRS and notify the investor in writing of this election and that his or her investment is a loss or gain at the conclusion of the taxable year in which the costs were incurred. In other words, when the production company is filing its taxes, it must elect to take that Section 181 incentive
For Illinois productions, producers can still take advantage of the Illinois Film Production Tax Credit Act and not lose out on the Section 181 tax incentive. The Illinois Film Production Tax Credit Act allows a credit of 30% all qualified production expenses as well as post-production. Production can take a 30% credit for all salaries of Illinois resident engaged for the production up to $100,000.00.
What does this mean for theater companies?
For the first time theater companies are able to take advantage of the Section 181 incentive. Theater productions are eligible if their first public performance was in 2016. The seating capacity of the theatre where the production is staged cannot exceed 3,000. Capacity for a seasonal productions cannot exceed 6,500. Just like the audiovisual productions, the theater production must elect to take the Section 181 election the taxable year in which the company first incurred productions costs. The theater company sends a letter to the investor informing him or her that the investment was received and was a complete loss (assuming that the production did not make any money within the same year as the investment).
Once again Section 181 is not exclusive and can be coupled with state tax incentives. For example, Illinois offers Live Theater Production Tax Credit which provides a transferable credit of 20% of all qualified Illinois expenditures including Illinois resident salaries (non-talent) up to $100,000.00 per worker. The Illinois Live Theater Production Tax Credit requires the minimum Illinois spend for the production is $100,000.00 for Illinois labor and marketing expenditures and the seating capacity of at least 1,200 seats for a Long-Run or Pre-Broadway productions. If the production falls within the requirements for the Illinois Live Theater Production Tax Credit, that same investor can write off the investment up $15 million for the investor’s federal taxes for the taxable year of the investment.
What does this mean for investors?
Your risky investment just got a little safer. Investors in audio/visual projects which commenced principal photography in 2015 or in theater productions which commenced production in 2015 can deduct their entire investment (up to $15 million). In addition, a savvy investor can combine the Section 181 tax break and any additional state tax incentives where the production is located. This permits the investor to write off the loss of the investment and take advantage of state tax credits.
What does a production company need to do to qualify as a Section 181 production?
- Principal photography on an audio/visual projects must have begun in 2015 or 2016.
- Initial performance in must occur in 2016 for live theater productions.
- Live theater productions must have an seating capacity of 3,000 seats or less or 6,500 or less for seasonal live theater productions.
- Spend at least 75% of the production budget in the United States.
- Have a production budget up to $15,000,000.00.
- Decided if your investors will be “active” or “passive” or how involved your investor will be in the production.
- Notify the IRS that the production is electing to take advantage of Section 181.
- At the conclusion of the tax year in which the investment was received, notify the investor, in writing, the amount that was invested, the amount that was spent and the production are at a total loss or if there was a gain, how much was gained. Investor will need this letter for his or her tax filing.
The reinstatement of Section 181 should continue to encourage investors to fund audiovisual and theatrical projects. This tax incentive should entice art supporters to take the risk and provide the much-needed financial assistance to project that would otherwise not exist. By amending Section 181 to add theater productions to the incentive will allow the theater community to grow, create new jobs and more exciting shows.