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Section 181 Set to Expire

by Norman C. Berns

Section 181 will end with this year. That’s the IRS ruling that lets investors deduct their entire investment in the same year it was made. While used less frequently than anticipated, the tax regulation was a boon to small-budget productions (under $20M) and an added perk for cash-hungry investors.

Chicago based attorney Hal “Corky” Kessler was instrumental in shaping those original regulations. He’s commented on it for reelgrok several times.  Now that this important investment aid is about to disappear, I asked him for the real skinny on 181 and he reports that there is little indication that Section 181 will be extended beyond the end of 2011.

“I talked to some of the usually people working with Congress and based on the issues facing Congress today and the divided feelings with little or no progress on other matters, Section 181 will not be extended,” said Kessler

Kessler noted that Section 181 originally expired at the end of 2009. “It did not come back until December of that year.  All filmmakers who made films for most of 2010 did so  with no federal benefits.  It was a holiday gift when Congress agreed to extend it for 2 years (beginning on December, 2009).  It related back to January 1, 2010 and for all of 2010 and then all of this year 2011.”

Kessler feels that the best plan for filmmakers would be to have their film projects grandfathered under Section 181.

According to the IRS Rules and Regulations, grandfathered film projects must show meaningful intent of moving forward.  To meet that requirement, a film must have completed one day of photography with dialogue. 

To meet that requirement, according to Kessler, a film will need the following:

1. A dated screenplay with a date this year or earlier.  The screenplay can be amended.
2. A budget.  The budget can also be amended at a later date.
3. All the LLC documents for the investment.  The  LLC must be filed before the end of this year and the investor documents must be drafted.  You do not need any investors.
4. One day of photography with dialogue.  The scene must be in the screenplay but need not stay in the film.

Once grandfathered, there is no limit on the amount of time it can take to finish the film. The investment qualifies even if the project is abandoned. 

In addition to Section 181 there is also a manufacturing provision - Section 199 states that any taxable income returned to investors for film and television and all other manufacturers in the US get a 9% discount. There is no expiration date on this. If the project returns one dollar of taxable income to an investor, the investor pays tax on only 91 cents. 

For IRS documentation, all related paperwork (including production reports from the day of filming) should be dated and kept, preferably by your attorney. 

Although Kessler is still working to get an extension, he reports that, “I am doubtful on such.” 

That leaves filmmakers with only a short sword in their funding aresenal. One that must be used before the end of 2011.  

Hal “Corky” Kessler
Deutsch, Levy & Engel, Chtd. 
312.346.1460 
kessler@dlec.com