Levin & Ginsburg, 180 N LaSalle Street, suite 3200, Chicago, Illinois 60601 -2800
Direct line is 312 334 6175
Gen no is 312 368 6175
Email is ckessler@lgattorneys.com

Corky has donated his time to my seminars and teaching filmmakers how to package their films and use these new laws for funding. He is dedicated to supporting filmmakers and I highly recommend him. You could not find a better person to advise you.

Since you are an attorney and have also been an executive producer, tell us why you think this new American Jobs Creation act is beneficial to filmmakers.

I want all filmmakers to know, in October of 2004; President Bush signed into law the American Jobs Creations Act of 2004. The act itself is about 1500 pages and in section 181 it relates to how investors can now take their investment as a total loss when the money is spent and therefore certainly get a relief from their taxes in the year or years that their investment in the film is spent. Also there is section 199 that affects the film industry. It says that when revenue is returned instead of paying taxes on 100% you get a slight discount for each year the investment is returned.

Please tell us about section 181 and how it relates to film investors.

Section 181 in it’s pertinent part states that any tax payer in the United States such as any individual, company, or a pass-through organization like a LLC corporation or a sub S corporation, that invests in a qualifying film or TV project whose budget is less than $15,000,000 for film and $15,000,000 per episode for television (with a cap of 44 episodes) can take a 100% loss against their income in the year or years the money in spent. There is no floor, it could be a $1000 movie, it could be a $10,000 movie, it could be a $500,000 movie, there is no floor, and it just has a ceiling that says it can’t be greater than 15 million. The one exception is that the budget could go up to $20,000,000 if more than 50% of your expenses in your budget are spent in a low income or depressed area. If this qualifying matter is met, if the film or TV project is not sexually explicit and if 75% of the wages in the budget are performed and paid in the United Sates, the tax payers who invest can take 100% loss against their income in the year or years the money is spent.

What if the film is made over two years, say starting in December and finishing in Feb of the following year?

What you spend in the first year you can write off and what you spend in year two you can write off. Section 181 expires and sunsets, at the end of 2008 unless it is extended. The Department of Commerce wants a report by the end of December 2006 as to the impact that section 181 has had in the film and TV industry in the USA.

So the more people who take advantage of this program, the better our chance to have it extended?

Exactly. That’s why I am talking to filmmakers and I am encouraging them to take advantage of this new federal incentive. I will be involved in giving data for this report and I want to have the greatest amount of data that I can to encourage its extension.

What Section 181 does not clearly state has created confusion in the industry among filmmakers, producers, accountants and attorneys. It does not state whether the loss is an ordinary loss against your income or whether it is a passive loss to be written off only against passive income. All of the indicators in the legislative intent and history behind this Section and all that has happened since the act was enacted, have indicated that you can take the loss as an ordinary loss and thereby substantially reduce or even wipe out the investor’s tax liability in the year or years the money has been spent. However, it is critical that the taxpayer check with their own tax advisors or tax consultants.

Can you give me an example, say someone had a liability of $100,000 in tax and the shooting was completed in the year they needed the write off, can they get the full $100,000?

If the $100,000 was spent in 2006 and if they were a 35% income tax bracket payer then the net result of their $100,000.00 being written off against ordinary income would create the equivalent of a $35,000.00 tax credit against your actual taxes paid. However, you can not carry forward the loss to subsequent tax years. If you have a greater credit than your tax liability, then you forfeit the difference.

That’s when it would benefit you if the film was shot over two years.

Yes, people are taking a look at how to maximize the benefits for the investors, 2005 was the first year this law was used. I know of tax payers who filed their tax returns for investment and used this as an ordinary loss and it was accepted. It works!

The accountants who want to be ultra conservative say since there are still no tax regulations yet on how to apply Section 181 losses or tax forms to any such losses; the loss is only a passive loss. This should not be a reason to not take advantage of the loss against your income. The taxpayer should get a K 1 form the Production Company showing what money was invested and what money was spent. You should also get a letter from the Production Company stating what the taxpayer’s investment was and what was spent in that tax year. The taxpayer should then attach these two documents and a copy of section 181 to your tax return and record the loss as a loss against income.

I want to caution everyone to know that I am not giving tax advice. I want everyone to know that under IRS circular 230 attorneys and accountants can not give tax advice without a disclaimer that simply says under circular 230 that you should not rely on what is stated, you have to check with your own tax advisors for the full information. I am not substituting for your tax advisor. I am just giving you some personal opinions supported by my firm.

Ok, Corky, we understand that each filmmaker needs to have his/her investors check with their accounts for specific information on their personal deductions.

Can a filmmaker use both state incentives and this federal incentive?

You can use the federal tax benefits in conjunction with state benefits. They are not mutually exclusive, they are mutually inclusive. You can pick a state that has wonderful state incentives and get benefits from that state as well as the federal tax benefits. I’ll give you an example. In the state of Illinois a new legislation was passed in May 2006 and currently runs until May 2007, it is revisited each year. This means that a production company that spends money in the state of Illinois gets a 20% tax credit on all money spent on production in the State of Illinois.

That is a generous discount. Can you give me an example?

A production company on a $2,000,000 dollar project could amass a few hundred thousand dollars of actual Illinois tax credits. Since the Production Company probably will not pay much, if any, Illinois state taxes it is of little use to them. You can sell unused tax credits to Illinois taxpayers. The State of Illinois Film Office has a bank that provides buyers that will pay up to 90% for those tax credits.

That’s incredible!

Yes, you can get money after your film is shot and certified by the State of Illinois. This money can be used to repay your investors. This can be in addition to the federal benefits that Illinois tax payers might have if they have invested in the film. They would get both Federal and state benefits.

Filmmakers should continuously check out the state tax laws for their benefits, right?

The thing that a filmmaker needs to do is to pick out those States that best fits the climate of their movie and call or check each film office on line and see what the incentives are. The filmmaker can also call an attorney that is well versed in this area and secure this information. I would encourage any filmmaker to talk to the film offices of State or States that they might consider filming. If the City within the State has their own film office, they should check with that office too.

Filmmakers sometimes make the error that they don’t feel comfortable talking to the state, city or municipal film offices. This can be exceptionally useful in their planning stages for their film project.

Do you think the states compete for filmmaker’s business?

Yes, States are competing and State incentives change almost yearly. It is a very encouraging time to have filmmakers go forward with their films because they have a wider venue of potential investors and ones who have never invested in film before.

Can filmmakers use this tax incentive for shorts, documentaries and independent films?

Yes, they all fit the criteria.

Can you tell us about section 199?

Section 199 is the income section; it is called the manufacturing section of The American Jobs Creation Act, 2004. Film Production has been defined as a manufacturer but television is not. Section 199 does not apply to television.

This section says that any manufacturer (Film Production) can have some tax relief on money returned to the investor.

• from 2005 till 2007 the taxpayer is entitled to a 3% deduction
• from 2007 to 2010 they get a 6% reduction
• And from 2010 on the get a 9 % reduction.

This is a little known benefit, right?

Yes, this benefit is separate from the other investment benefit. It says that if you earn a return $1.00 you only have to show the return at the rates mentioned above.

To wrap up these new tax laws, would you say this is a magnificent time for emerging and established film and TV producers?

Yes, this is a great time for filmmakers to find new investor opportunities for people and companies who may never have invested in film before.

Hal (Corky) Kessler, attorney, Chicago, PHONE 312-701-6889, ckessler@fvldlaw.com; http://www.fvldlaw.com

DISCLAIMER:
This advice does not constitute legal or tax advice. This information is not intended or written to be used by any tax payer for the purpose of avoiding penalty that may be imposed on the tax payer under the internal revenue code of 1986, as amended. A taxpayer should seek advice based on taxpayer’s particular circumstances from an independent tax advisor.