Federal Film Tax Incentive: Bogus?

A pair of articles in Variety last week highlighted early applications of the film production provisions of the American Jobs Creation Act, passed by Congress and the Bush administration in October 2004 in an effort to stem runaway production.

The Act sought to:
(1) reduce the corporate income tax rate for domestic producers of film and television provided that 50% of their wage budget was paid to U.S. residents, and
(2) allow low-budget domestic productions costing between $1-15M, or up to $20M in distressed economic areas, to write off 100% of production costs in a single year, provided that 75% of their wage budget was paid to U.S. residents.

Variety's Matthew Ross reports, "Most important, the act as drafted permitted gains on sales on the film held for more than one year to be treated as capital gains -- which are taxed at 15% -- rather than ordinary income, which is taxed at 35%. Initially, the bill was hailed as a major victory for the independent sector, but that enthusiasm was short-lived. In January, the Joint Committee on Taxation announced that the capital-gains clause was unintended and would most likely be revoked, and that budgets would include participation and residual deals, thus making fewer projects eligible for the $15 million condition."

While many producers believe the Act is essentially useless in spurring film investment and production, some say that it does have real benefits to offer.

Producers of TV series, for example, seem to be the primary beneficiaries of the Act so far. That was the conclusion at a recent panel hosted by showbiz tax experts Jeff Tolin from Ernst & Young and Rick Rosas from PriceWaterhouseCoopers. As Variety's Dave McNary reports, "Rosas and Tolin indicated that feature producers appear to be less inclined than their small-screen brethren to take advantage of the new provisions because of their concerns that production costs will exceed the $15 million cap. They also noted that the language contained in the legislation applies to all features -- including animation and documentaries -- and may even be broad enough to be applied to costs on TV news and sports programming."

>> Feds' bait-and-switch move gets mixed reviews [Variety, 5/8/05]
>> TV catches a break [Variety, 5/12/05]
>> American Jobs Creation Act of 2004 [Public Law 108-357]
(Provisions on Film/TV production can be found in Section 199, Income Attributable to Domestic Production Activities, and Section 181, Treatment of Certain Qualified Film & Television Productions.)

(Note: Variety links require subscription.)