If You Want Investors, Start Filming This Year

cameronchapman

cameronchapman

IndieWIRE has an article today about IRS Section 181, which allows investors in independent films to deduct their entire investment (up to $20 million) in the year it was made, regardless of whether the film has been finished or whether it's showing a profit or loss. The only catch is that it expires at the end of 2011, and it's not likely to be renewed.

All you have to do to have your production qualify is four things BEFORE the end of the year:

1. You need to have a screenplay (this can be modified later).
2. You need to have a budget (this can also be modified later).
3. You need to have an LLC set up.
4. You need to film at least one day of principle photography, including a scene with dialogue that appears in the screenplay. None of the footage here has to make it into the final cut, but it does have to be completed on or prior to December 31, 2011.

Make sure that your lawyer has a record of all of the above so that if you need to, you can prove that your film qualifies.

Now, the great thing here is that your investors don't have to invest this year. They can invest in 2012, 2013, or whenever, and they're grandfathered in. You don't even have to finish the film for them to be grandfathered in.

This is a HUGE deal for indie film investors, so if there's even a possibility that you might want to seek traditional investors, and there's any way that you can get the above four things done prior to the deadline, do it. While it's possible the provision could be extended, it doesn't look likely.

Personally, I don't think I'm going to be in a position to take advantage of this, which sucks. But I know some of you are a lot further along in your pre-production planning, and could probably manage this. Even if all you do is throw together your simplest scene with secondary characters and grab some friends to do it, it's worth it if you can make your project more attractive to investors.
 
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This is interesting...

There's a couple of random "TV" scenes in our feature, a show that a supporting character is watching. We could shoo those easy by the 31.

Thanks for the heads up!
 
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A couple things to think about:

This is an incentive for “low budget” projects, not really “micro
budget” products. Essentially it’s an incentive for investors
putting in one million and above on a total budget of five million
and above. It’s a tax shelter. In my experience I have found very
few investors in the under one million range that need this
shelter. An investor of under a million - especially one under
$500,000 - does not get much of a break under Section 181.

Yes, if you already know someone willing to put up under a million
they should know about this as should you, the filmmaker. But
despite the articles statement, “But if you act fast, you can
preserve the federal tax incentive for your project.” this just
isn’t the case.

I have funded six projects since 2004 using this and it didn’t
really help the investors at all. But it was a paperwork nightmare
for my prodCo and cost me money because of the attorney fees. So
it is not an incentive to an experienced, knowledgeable investor.

Any of you putting together a project with a budget of over
$5,000,000 should use this. But any investor putting up that kind
of money already knows about Section 181.

For those of you considering fast tracking a production with a
budget under $500,000 I suggest you contact an attorney who
specializes in this kind of investments before you use Section 181
as an incentive.
 
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directorik said:
A couple things to think about:

This is an incentive for “low budget” projects, not really “micro
budget” products. Essentially it’s an incentive for investors
putting in one million and above on a total budget of five million
and above. It’s a tax shelter. In my experience I have found very
few investors in the under one million range that need this
shelter. An investor of under a million - especially one under
$500,000 - does not get much of a break under Section 181.

Yes, if you already know someone willing to put up under a million
they should know about this as should you, the filmmaker. But
despite the articles statement, “But if you act fast, you can
preserve the federal tax incentive for your project.” this just
isn’t the case.

I have funded six projects since 2004 using this and it didn’t
really help the investors at all. But it was a paperwork nightmare
for my prodCo and cost me money because of the attorney fees. So
it is not an incentive to an experienced, knowledgeable investor.

Any of you putting together a project with a budget of over
$5,000,000 should use this. But any investor putting up that kind
of money already knows about Section 181.

For those of you considering fast tracking a production with a
budget under $500,000 I suggest you contact an attorney who
specializes in this kind of investments before you use Section 181
as an incentive.
Click to expand...

This is pretty much why raising small money is harder than raising big money. I agree, and have experienced it already, no one with investor capital wants to dish out sub 500K if (most of the time anything less than 1M) because it's not even worth their time.

If you're sub 100K, hopefully you know someone who just likes you a lot and believes in your work. At that point it's not about the write-offs etc, but the longterm view of going with you wherever you go.

Invaluable resource you are, Rik.
 
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Wont this help anyways though for a person that invested, say, $25,000, if they (personally) make over $1 million annually? Isn't a tax break a good thing regardless? Business persons are always looking for tax breaks :)

This is a serious question because this is new to me! Thanks!
 
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DeJager said:
Wont this help anyways though for a person that invested, say, $25,000, if they (personally) make over $1 million annually? Isn't a tax break a good thing regardless? Business persons are always looking for tax breaks :)

This is a serious question because this is new to me! Thanks!
Click to expand...

That was my thought on it, too. I'm thinking that at the sub-$100k level, you're probably not approaching film investors, so much as people you know with money. And for those people (a lot of whom are going to be business owners), the added tax incentive could be a big plus, and maybe even be a deciding factor for someone who's on the fence. And for those people, being able to lower their taxable income by $20,000 (or whatever amount) could result in them stepping down a tax bracket, which could save them a lot of money.
 
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for this to have any real impact for the micro budget investor, the investor would have to be investing a sizable percentage of their annual income. Which nobody with a brain would do.. That said, there could be an advantage for YOU the filmmaker, who IS willing to lay it ALL on the line and invest 40-60% of your annual income on your movie, however, if your investing $25K and thats half your income, well, you likely already reduced your tax to 0 from normal biz expenses in which case no benefit. But you should do it anyway, as it doesn't COST you anything up front and MIGHT save you some money, though any INVESTMENT you make in your movie SHOULD be covered under you biz expenses.. This can count as a home based biz, even if you dont do LLC or biz license etc...
 
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DeJager said:
Wont this help anyways though for a person that invested, say, $25,000, if they (personally) make over $1 million annually? Isn't a tax break a good thing regardless?
Click to expand...

Yes. If you can find that person and are willing to cover the attorney
fees which can be 10% of your total budget. A business person
making around $1 million a year will usually shelter $25,000 in a
less risky investment. Remember, this isn't a tax write off, it is a
temp shelter for a very large some of money. If the movie looses
money the investor looses the money. Frankly a tax brake of less
than 2% (which is what would happen in your scenario) will not
cover the loss of 25 large.

Now a good friend who believes in you as a filmmaker may do this.
It's fun to be involved in a movie and they get a temp tax break. But
this is not an investment incentive to someone who doesn't know
you and is looking to either shelter some money for a while or get a
tax brake and then make a profit.
 
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directorik said:
Now a good friend who believes in you as a filmmaker may do this.
It's fun to be involved in a movie and they get a temp tax break. But
this is not an investment incentive to someone who doesn't know
you and is looking to either shelter some money for a while or get a
tax brake and then make a profit.
Click to expand...

For these people, who may be able to fit the literal bill of a certain sum, absolutely.

Couldn't agree more, man.
 
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