UPDATE with DGA reaction: The only federal tax incentive designed specifically to keep film and TV production in the United States is dead.
The program had been giving significant tax breaks to investors in shows shot in the U.S. for more than a decade, but it will end on the first day of 2017. For Hollywood, it’s the first casualty of the new political reality.
Enacted as part of the American Jobs Creation Act of 2004, Section 181 of the Internal Revenue Code was designed to stem the flow of runaway production to foreign countries that were, and still are, offering generous tax breaks to lure away American productions.
The MPAA has called Section 181 “an important provision that promotes domestic film production,” but it was not a permanent fix; it had to be renewed by Congress every two years. And this year, the lawmakers let it die. A House bill was introduced to extend it, but it died in the Ways and Means Committee. The incentive still could be renewed retroactively next year or the year after, as it was in 2010, but under a Donald Trump presidency, there might be little political will to do so.
“It was one of the greatest jobs acts we had,” lamented attorney Hal “Corky” Kessler of the Chicago law firm of Deutsch, Levy & Engel, one of the industry’s leading experts on the federal tax break. He’s still hopeful, however, that Congress will see the merits of reinstating it. “At some point it will come back,” he predicted. “I don’t know if it will be next year or the year after, but by the end of this year, it’s going to die.”
The Directors Guild of America, which played a key role in lobbying for Section 181, also weighed in on the program’s pending demise.
“In the face of film and television production leaving the U.S., the DGA led the fight for the creation of Section 181 as part of the Jobs Act of 2004, and has continued the fight for its improvement and extension five times since then,” the guild said in a statement to Deadline. “We are disappointed in the failure of the current Congress to extend the larger tax package of which 181 is a part. We will continue our efforts to push for legislation that keeps the U.S. competitive in film and television production.”
Passed to encourage film and TV production to stay in the U.S., the law substantially reduced the risk of investment by giving investors a 100% loss against taxable income in the year or years the money is spent. For example, a producer or investor who put up $1 million for a film who was in the 30% tax bracket could save $300,000 in taxes, while someone in the 35% bracket could save $350,000. Coupled with a share of the tax incentives offered by various states, a smart investor can be assured of a 50%-70% return on investment regardless of whether the project was a success.
The IRS allowed this deduction on the first $15 million invested in every qualified project – and up to $20 million if it’s shot in certain low-income areas. But not anymore.
The law was a much needed, if tepid, response to the flood of shows fleeing to Canada to take advantage of 35% tax credits there – an exodus triggered by the “cultural exemption” contained in the 1994 North American Free Trade Agreement that allowed Canada to subsidize its film and TV industry while undermining America’s.
Last year, when it was lobbying for its extension, the MPAA reminded the co-chairs of the Senate Finance Committee that “Congress enacted Section 181 in light of the job-creation, economic growth and other benefits that flow from filmmaking in the United States. … Recognizing the economic benefit of film production to their local economies, many of our major trading partners, (e.g., Australia, Canada, France and the United Kingdom) offer significant wage credits and other above-the-line incentives to attract film productions and jobs abroad.”
Section 181, the MPAA told the senators, “helps to respond to these foreign film incentives and encourages feature film and television productions to remain in the United States.”
But not anymore.