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in Filmmaking
on Feb 9, 2007

It’s late at night in Europe, and I’m not quite sure what to make of this article I’ve just read in Variey by William Triplett entitled “IRS strips indie film tax breaks.” The thrust of the article: the IRS has ennacted onerous restrictions on the film financing tax break contained in the American Jobs Creation Act of 2004. This tax break has incentivized private investors to invest in independent film by allowing them to deduct the full amount of their investment in the first year rather than amortizing it over multiple years.

According to the Variety article, the IRS is now requiring producers to include the costs of future participation payouts and guild residual payments in their initial budgets. The article quotes the IRS as saying that this requirement will prevent producers from manipulating the $15 million budget cap by not including such costs.

The IRS decision has been met with outrage by supporters of the provision:

The IRS said it decided the budget must include P&R payouts to prevent filmmakers and producers from “manipulating the total production cost” by counting standard compensation as P&R and thus helping the budget stay under the $15 million cap.

Congressional staff who worked for almost six years to pass the bill and its provision were “so angry” about the ruling, as one put it. While the ruling isn’t final, “this kind of thing basically never gets stopped.” Congress will have to enact new legislation in order to restore the provision.

“We are extremely disappointed with today’s ruling, which we believe undermines the intent of the production incentive contained in the Jobs Act legislation,” the DGA, SAG and IATSE all said in a joint statement. “While the incentive may still prove workable for television production and for some independent films, the ruling that participation and residuals — which are often based on sales and profits that cannot be known at the time of production — must be included as original production costs undermines the use of the incentive for many independent, low budget films.

On the one hand, I think the article overstates the number of films this will affect. I produced a film last year for which the investor received this tax break. The film cost $2 million, and even if I included ‘best case” scenarios for deferral and participation payments, I’d have had a hard time busting the $15 million cap. On the other hand, though, the IRS ruling is nonsensical. Residuals to SAG actors, DGA directors and WGA writers, which are mandatory payments for the films (or the distributors of the films) signing these guild agreements, are based on the revenue generated by sales to “ancillary” markets like television and home video. Obviously, any true independent production cannot predict these costs at the time of production.

At first read, it sounds like the ruling will affect films with budgets close to the ceiling and which may have foreign sales and ancillary deals in place. But I’ll be following this and will try to post some more details as I learn them.

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