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Will The Section 181 Film Tax Incentive Be Extended?

The film tax incentive known as “Section 181” is due to expire at the end of this year, removing one enticement producers have been using to convince investors to finance independent feature films. Part of the American Jobs Creation Act of 2004, Section 181 allowed investors to write off the complete cost of a qualified film in the first year. (Normally, this write-off is amortized, occurring in future years as a film demonstrates that it is money-losing.) If and when profits then occur, they are treated as ordinary income by investors.

At the close of 2009, Section 181 was similarly endangered, but after a hiatus Congress signed an extension. Could the same thing happen this year?

Matthew Savare, an attorney at Lowenstein Sandler PC, isn’t holding his breath. “Although I’m hopeful Congress will renew Section 181 as it did last year, I’m very skeptical that will happen,” Savare says. “The political climate is very different – and even worse – than it was a year ago. Also, the economic climate is gloomy and with several states rolling back or discontinuing their incentive programs – such as New Jersey – I just don’t think Congress will have the appetite to extend this. I hold out hope, though, especially if an extension can be incorporated into a larger jobs bill to reduce the high unemployment rate.”

Filmmakers who have been pitching their projects using Section 181 as an incentive have one option to still qualify — begin production by the end of the year. “Filmmakers seeking to take advantage of Section 181 must commence (not necessarily complete) principal photography before December, 31, 2011, so they should get their cameras rolling right away!” advises Savare. “Also, they obviously need to ensure that their production otherwise qualifies. The most important condition is that at least 75% of the service wages need to be performed and paid in the U.S.”

At Indiewire, Dana Harris outlines other requirements, most importantly the formation of an LLC able to accept investors. At Film Closings, Jeff Steele stresses that filmmakers shooting just a day on their film to qualify must make sure the scene shot is in the original shooting script and that the project’s first tax return must declare Section 181-election status. He also tells you to date and time stamp your dailies.

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