Section 181 of U.S. Tax Code

C

Clay

I am planning a production and have been looking into how to finance it. I came across an article on the Internet talking about Section 181 of the U.S. Tax Code; and how it is a boon for investors in film.

According to the article if your production meets certain criteria (mostly made in U.S., less than $15million) investors can deduct the amount of their investment from their passive income, but if they are actively involved they can deduct their investment from their active income (i.e. from their salary from their real job).

For instance, assume your salary from your job is $40,000 and you are in the 25% tax bracket; thus your Federal tax bill is $10,000. (Let’s try to keep the math simple by ignoring standard deductions and such.) If you invest $40,000 into a film project where you are actively involved, you can deduct this $40,000 from your income, lowering your tax bill $0. This is a 25% return right off the bat.

Has anyone ever done this?
 
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All the investors I have worked with have used Section 181.
I don’t personally know anyone who has used this reduce
their personal income tax but it can be done.

Hurry; this deduction expires with the current tax year.
 
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I used it on a feature that I directed and also put money into. Since I was an active investor I was able to deduct my investment from my earned income. My accountant also was able to get me rebates from two prior years using Section 181. I don't know what the mechanics of getting money back from prior years was but the accountant said it was perfectly legal, and he also carried the loss/investment forward for the next year, so overall Section 181 is a great thing. Talk to your accountant about it. Also make sure your investors are aware of the differences between using 181 as an active investor versus being a passive one. Tell them to talk to their accountants as well so everyone is clear. But like directorik said above Section 181 is set to expire at end of this year with no guarantee to be brought back but you can "grandfather" your project before 181 ends and still use it after it has ended. Just google around regarding how to grandfather your film for 181, there is tons of info available.
 
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You need to be very careful about approaching or soliciting money for investments from people who are not legally considered "accredited investors".


"The federal securities laws define the term accredited investor in Rule 501 of Regulation D and as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act as:

a bank, insurance company, registered investment company, business development company, or small business investment company;

an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

a charitable organization, corporation, or partnership with assets exceeding $5 million;

a director, executive officer, or general partner of the company selling the securities;

a business in which all the equity owners are accredited investors;

a natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase, or has assets under management of $1 million or above, excluding the value of their primary residence;[2][3]

a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;[4] or

a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes."[1]
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Clay said:
I am planning a production and have been looking into how to finance it. I came across an article on the Internet talking about Section 181 of the U.S. Tax Code; and how it is a boon for investors in film.

According to the article if your production meets certain criteria (mostly made in U.S., less than $15million) investors can deduct the amount of their investment from their passive income, but if they are actively involved they can deduct their investment from their active income (i.e. from their salary from their real job).

For instance, assume your salary from your job is $40,000 and you are in the 25% tax bracket; thus your Federal tax bill is $10,000. (Let’s try to keep the math simple by ignoring standard deductions and such.) If you invest $40,000 into a film project where you are actively involved, you can deduct this $40,000 from your income, lowering your tax bill $0. This is a 25% return right off the bat.

Has anyone ever done this?
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slapshot said:
I used it on a feature that I directed and also put money into. Since I was an active investor I was able to deduct my investment from my earned income. My accountant also was able to get me rebates from two prior years using Section 181. I don't know what the mechanics of getting money back from prior years was but the accountant said it was perfectly legal, and he also carried the loss/investment forward for the next year, so overall Section 181 is a great thing. Talk to your accountant about it. Also make sure your investors are aware of the differences between using 181 as an active investor versus being a passive one. Tell them to talk to their accountants as well so everyone is clear. But like directorik said above Section 181 is set to expire at end of this year with no guarantee to be brought back but you can "grandfather" your project before 181 ends and still use it after it has ended. Just google around regarding how to grandfather your film for 181, there is tons of info available.
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can I ask who your accountant is?
 
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