Carole, I want to bring you up to date on section 181 of the American Jobs Act. Beginning Feb 9, 2007, the IRS published what they call “Temporary rules and regulations relating to section 181 of the American Jobs Creation act.” These were the first rules and regulations ever passed and put into effect. These will stay in effect until section 181 either gets extended and new changes are made or it terminates at the end of 2008.

What the IRS did say is for those productions that begin after Feb 9, 2007, is that all investors who invest in qualifying film and television will have a passive loss, meaning that 100% spent by the producers still is a loss but it is characterized as a passive loss unless they were deemed to have some active involvement in the film or TV show. This is not necessarily something that is so bad that it ruins the effect but according to Senator Koch and various other Senators congress violated the intent of the legislators when they passed section181. There is a big movement put forward by congress to change it and put in their own rules and regulations and that would be better for the filmmakers.

It is critical to understand that if there is an investor that wants an ordinary loss to be an expense against an income then the production company has to make them have some meaningful involvement in the production team. That can be discussed further, if you need to do this you can call me and I will walk you through this. For all others it is a passive loss and the passive loss can be used against passive income that the investor may have in that tax year or it can be carried forward for as long as the production is in existence. meaning, as long as the production company files tax returns for the project. When the last tax return is filed for the project, all passive loss that is still on the books becomes an ordinary loss and the tax payer can write it off as an expense against income at that time.

There are a lot of investors that need passive losses to match against passive income they have in a particular tax year.

Carole, there is another matter that has come up. The rules and regulations do say that all residuals and contingent compensation and fees paid in a production, when they are paid adds to the budget for the film. That is something that will have a massive effect. If you take a picture that is a 7 or 8 or 9 or 10 million dollar project, it qualifies but if you give residuals to kick in based on box office success of a film and when those levels get met and further compensation is paid then, whether it is a year later or two years later, and that money gets added to the budget and it brings the budget over the 15 million or the 20 million then you will have to go and take away all the benefits to the investors you have given. The investors will have to file their tax returns over.

So, I tell my clients that it is critical if they are going to give contingent or residual compensation that they must, must, be talking to their attorney very early before they reach those agreements.

The final thing that has come about and I have been getting several calls on is investors in other film projects have called me, because they believe me to be the expert and said, “I can’t get the effect of 181 because my accountant tells me that the K 1 reports that I got from the production don’t figure into any one category.

I simply tell them that I need to talk to the accountant for the production to see what the accountant did. Here is what is happening, the accountants that don’t know much about 181 don’t realize it only applies if you do not, and I repeat if you do not capitalize the expense of the production. It only applies if you chose not to capitalize the expense of the production. Typically, accountants would capitalize the investors investments and they would capitalize the expenses of the production. Well, if they do what is typical and don’t know anything about 181 then what they are doing is once they file their first tax return and send out the first K 1 showing they have capitalized the production expenses then you have waived and given up any claim to 181 relief.

I am finding that many of the production accountants didn’t understand 181 and they have waived all of the affects and these investors are not too happy.

I am constantly involved in section 181 and the American Jobs Creation Act and will stay involved as I think this is important for creating more independent films.

Hal "Corky" Kessler Levin & Ginsberg
180 North LaSalle St.
Suite 3200
Chicago, Il 60601-2800
312-368-6175
ckessler@lgattorneys.com