Wealth Preservation and Tax Strategies for Film/TV Investors
When most people think about investing in Film or TV production, they assume that the strategy is simply to put money into ‘the next great idea’, wait for that film or show to be released, and rake in the money as audiences around the world fall in love with the creator’s genius.
That’s sometimes the case but it really only accounts for about 20% of investments or why people put money into Film/Tv productions. The other 80% are taking advantage of strategies beyond just hoping for profit-participation. This can include programs like media production lending (MPL), senior debt financing (lending), mezzanine financing, or tax strategies.
These tax strategies are used by real estate developers, professional athletes, entertainers, doctors, dentists, stockbrokers, Enterprises, and other high net worth individuals who allocate capital to Film/TV productions in order to get returns/benefits uncorrelated with box office returns or streaming performance. It’s their way of hedging returns while still participating in Film/TV investments.
In this post we want to touch on the latter, the tax advantages one can benefit from when it comes to Film/TV finance.
The reality is, one of the best reasons to allocate money to the Film/TV asset class has more to do with wealth preservation than wealth creation.
One of the key benefits is the potential for participation in tax programs related to State and Federal liabilities. By offsetting one’s existing tax burdens or their passive income, these tax strategies allow Film/TV financiers to reduce their tax burden.
For example, under the US Tax Code high net worth individuals, family offices, executives, or large companies might be eligible for federal tax deductions found in Section 168 and 181 of the Internal Revenue Code. These investors can also purchase State-issued tax credits generated by Film and TV productions that comply with state regulations on how to spend money related to their production.
These incentive programs can help offset significant tax burdens for the financiers.
Federal Tax Programs for Film/TV Investors
Section 181 allows media producers to deduct the expenses associated with a particular production in the year the costs are incurred. Alternatively, Section 168 permits investors to utilize bonus depreciation or standard 10-year amortization techniques, depending on which option is more beneficial to the company’s long-term financial position or current tax situation.
181 offers the investor the opportunity to elect to treat Film/TV production costs as expenses: “A taxpayer may elect to treat the cost of any qualified film or television production, and any qualified live theatrical production, as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction.”
The program is not dissimilar to IRC Section 179 which is used to make similar deductions against ownership of a private jet.
This was enabled by the Tax Cuts and Jobs Act of 2017, otherwise known as “The Act,” and became a watershed event for film finance.
Prior to the Act, tax code Section 181 was used to describe the complete deductibility by passive investors in pass-through entities of film production expenses in the year those expenses were incurred. Section 181 treatment was available for qualified film productions (up to a deductible expense cap of $15 million, or $20 million in certain economically depressed areas).
Under the Act’s latest rules, qualified film productions may now be eligible for bonus depreciation under Section 181. This bonus depreciation permits the complete deduction of the production costs of a feature film in the year the film or TV production is placed in service.
State Tax Credits and Rebates for Film/TV Investors
Additionally, financiers are eligible to claim state tax credits that can be worth anywhere from 20–40% the value of the production. These State programs can be leveraged separate from or in conjunction with 181/168 IRC.
In the example of a $5 million film, if shot in the state of Georgia, roughly $1,500,000 in credits would be available to the investor. Unlike 181/168 deductions, Tax Credits do not have to be offset against passive income and can be applied against any tax liability.
Many states offer state film tax credits as an incentive to produce a Film in that state. The state tax credit offered is generally equal to 20–40% of the amount of the budget spent in each respective state. These tax credits, which can be obtained by qualifying films and TV productions, are transferable to Buyers who may then leverage them to offset their own tax burden.
By participating as a investor in the film or TV production with the 168/181 strategies above, the investor gains the first-mover advantage over the State tax credits which can act as an additional offset on their personal/corporate tax liabilities or can be transferred (a.k.a re-sold).
Smart Money Saves Money
What can seem like excessive spending from the outside (investing in movies etc.) may actually be the investor’s way of saving money or earn returns/refunds through these tax efficiency strategies — ways of preserving and retaining wealth through strategic allocations.
Because these are regulated programs that are part of the tax code itself, they aren’t exactly loopholes, its the investors just making use of the law as written.
Of course, none of the above is tax advice. For clients interested in these programs we typically have them consult with our partners who are certified tax accountants at groups like CohnReznick or RSM.
If you’d like to learn more about FilmHedge’s offerings in these areas of tax efficiency and Film/TV tax investing email us at producer@filmhedge.com
References and Additional Reading
“Bloomberg Tax: Section 181 and Film Financing” https://bit.ly/3TQGlVP
“Ernst and Young: US IRS releases interim guidance on 15% corporate alternative minimum tax” https://bit.ly/4aPtsl8
“Cornell Law: 26 U.S. Code § 181 — Treatment of certain qualified film and television and live theatrical productions” https://bit.ly/4aNf2BH
“Mauldin & Jenkins CPA: The Return of Section 181 Deductions for the Entertainment Industry” https://bit.ly/3HtFRhb
“Krost CPA: Cashflow Strategies for the Sports & Entertainment Industry” https://bit.ly/48p5wmX
“Domestic Film Production Incentive Program Revised Section 181 of the Internal Revenue Code” https://bit.ly/4aJYISl
“FilmHedge: Film + TV Private Credit Insights: Media Production Lending and Private Credit 2023” https://bit.ly/48G5RBk
Disclaimer: FilmHedge sometimes uses fair-use editorial images in its blog posts to help educate and inform its readers. Unless otherwise stated, FilmHedge does not have any affiliation with the film or television productions referenced in blog posts and does not profit from the use of these images.
