January 17, 2024

I.R.C. Section 181 Deduction:

A Federal Tax Break for Filmmakers/Investors

Courtesy of Freepik.com

Filmmakers and investors in qualified film/television projects may qualify for an accelerated deduction under Internal Revenue Code § 181 (Section 181). The deduction allows for producers to deduct the full cost of their production in the year in which the costs are incurred versus amortizing the cost of this capital asset over multiple years. This deduction is allowed even if the project isn’t released until later years.

There are several intricacies to utilizing the Section 181 deduction. See below to determine if your project qualifies and how to make the deduction.

What is a Qualified Film or Television Production?

To qualify for the Section 181 deduction, a film or television production must meet the following requirements:

• It must be a new production, not a remake or sequel,

• It must be filmed in the United States,

• It must have a minimum budget of $1 million, and

• It must not be an X-rated film.

How Does the Section 181 Deduction Work?

In order to utilize this deduction, an election has to be made to the Internal Revenue Service. The tax election must be made in the first taxable year in which you begin to pay or incur production costs. Furthermore, the election must be made by the due date of the return (e.g., April 15th) even if the individual files their full return under extension.

The deduction is limited to $15M per project and allows for an additional $5M of qualifying expenses if filmed in a low-income community.

When considering the types of costs that can be included as deductible costs, production costs include the following:

• all direct costs paid or incurred in a production;

• compensation paid for services;

• compensation paid for property rights;

• non-compensation costs;

• participations and residuals paid;

• financing costs paid (e.g., premium for a completion bond) for the production; and

• all costs that are paid or incurred in the acquisition of a production prior to its initial release or broadcast.

By allowing producers/investors to fully deduct production costs in year 1, Section 181 reduces upfront costs of production and makes it significantly more attractive for investors to finance productions.

If you need help navigating this deduction, reach out to BANKABLE; we’re ready to help!