Section 181 of the Internal Revenue Code has been providing tax breaks to investors in films and TV shows shot in the United States for more than a decade. But without an act of Congress, it will expire at the end of the year. Given the current political climate, there’s a good chance it won’t be renewed.
That uncertainty, in turn, has led to something of a “gold rush,” as investors and producers scramble to take advantage of the law before it expires, says attorney Hal “Corky” Kessler, one of the industry’s leading experts on the oft-overlooked federal tax break.
Kessler, who’s helped more than 100 filmmakers obtain Section 181 tax breaks, is doubtful that Congress will renew them. “I don’t think so because of the election year,” he told Deadline. Congress he said, could only extend it as part of a larger omnibus package of other expiring tax provisions.
Under Section 181, for example, anyone who spends $1 million for a qualified film or TV show can claim a 100% loss against taxable income in the year or years the money is spent. A producer or investor in the 30% tax bracket would thus be able to save $300,000 in taxes, while someone in the 35% bracket would save $350,000. Coupled with a share of the tax incentives offered by various states, a smart investor can be assured of a 50% to 70% return on investment whether the project’s a success or not.
The IRS allows 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.
Deadline filed a Freedom of Information Act request with the IRS asking how much tax relief has been afforded investors under Section 181, and the IRS answered: “We have no data on this particular tax benefit.”
“There is no data,” Kessler laughed. “None. I spoke a couple of years ago at a conference of over 200 people in the industry and asked how many knew about Section 181 and only two hands went up..”
Despite this lack of data, the law has been extended by Congress year after year – sometimes retroactively – ever since it was enacted as part of the American Jobs Creation Act of 2004. But this year, which is fraught with so much political uncertainty, might be different.
“I wouldn’t bet on it, and I wouldn’t bet against it,” Kessler told Deadline, noting that this is the first time in a decade that he’s had any doubts about its extension. Congress, he said, “is not going to be able to concentrate on the extender act, and they can’t single out any one thing and there’s too much stuff in the act that Congress does not want to pass.”
The law, which substantially reduces the risk of investment, was passed to encourage film and TV production to stay in the U.S. It 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 undermine that of the U.S.
The MPAA has called Section 181 “an important provision that promotes domestic film production.” Last year, when it was again lobbying for its extension — as it does every year — 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. A major motion picture shooting on location contributes roughly $225,000 every day to the local economy. 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.”
The incentives were extended last year, but Kessler, of the Chicago law firm of Deutsch, Levy & Engel, has his doubts about its chances this year. “Do I have a crystal ball?” he asked rhetorically. “No. But look at what this election is all about. It’s crazy.”
Even if it’s not extended, he said, those who act before the end of the year can get the benefits grandfathered in perpetuity. “It’s a gold rush. They should do it now, but the frustrating thing is that people still don’t know about it.”