Following article is not to be construed as legal advice. Current Information as of 2019.
Tax deductions are amazing for any industry. The entertainment business isn’t an exception to this rule. With the introduction of Section 181, film and television are now an attractive investment pool.
How so? Below is detailed analysis of that. Section 181 will be discussed, explaining what it is.
Additionally, there will be an analysis of the entertainment business, and who benefits from the deductions.
First – Tax Cuts & Jobs Act 2017.
As the title implies, this is a new act initiated at the start of Donald Trump’s presidency. The act itself isn’t exclusive to the entertainment industry. Instead, it spans all forms of taxation.
It includes single individuals and married tax deductions. It also includes tax deductions for businesses of all types.
However, the film industry has received special treatment in this act. Section 181 provides a tax cut of up to 100%. This applies to stage productions, TV series, or movies made in the United States, as long as they conform to the original Section 181 standards.
How The New 181 Differs From the Older Version.
It should be noted that the current Section 181 is an edit of an older version of the same section. Plus, the edit brings many changes that are advantageous entertainment financers.
First, the new 181 lacks a cap on projects. That is, previously there was a limit on who was allowed to benefit from tax cuts. This cap was $15 million, and higher production costs were subject to different standards.
But with the new changes, larger productions can take advantage of the tax deductions. This benefit doesn’t just apply to mega-financers, but it also applies to facilities that aid in movie production. Plus, the concept of special zones that warrant higher movie caps have been eliminated all together with the elimination of the cap concept.
Also – this update applies to all investors subject to the US federal tax income. So this includes both domestic and international investors interested in US productions.
Another change is the procedure of applying the tax. Normally, taxes on movie investments are done through deductions. This can be complex, especially for investors who aren’t versed in tax procedures of the entertainment industry. But as a result of the new changes, more investors will seek to diversify to movie and entertainment productions. So this is an invitation for new investors to join the markets.
Beneficiary – Studios.
Studios for will benefit greatly. Studio space is notoriously expensive to rent. With Section 181, there will be drops in rental values, plus more demand for shooting locations. This will incentivize even more business for the next 5 years.
Beneficiary – Indie Movies.
There is a condition for the new tax deductions. That is, 75% of production costs should be spent in the US. This means that locally made productions have an advantage over those requiring international shooting.
This is an incentive for the support of independent movies that lack an overseas filming budget. It allows them to easily raise funds locally, while easily competing with larger productions.
Important Beneficiary – Investors.
Producers and any individuals investing in a movie gain 100% deduction. Every dollar an investor spends has higher ROI. Previously, while an investor may have had to share 37 cents for every dollar of profit, they now get to keep that share.
This is a massive incentive for movie funding. It means that an investor can quickly break-even on their projects. Plus, there will be less risk involved in movie production (which are notoriously risky).
Benefits for the Job Market.
Tax cuts in general have cumulative effects on all workers within the industry.
An employee benefits, as more production projects become available, and more labor is needed. And this will be needed on the creative level for writing, and performance. It’ll also be required for editing (specifically movies and television) and acting.
As mentioned before, many institutions also benefit, such as studios and distributor channels.
This is an element that the original 181 shares with the updated version.
Here, a producer can create a special securities offering, setting specific requirements on investors that are allowed to join. From there, the conditions are drafted into a private placement memorandum (PPM). The method of drafting is dictated by the original Section 181.