 "Arkansas was used in one of the opening scenes in Gone With the Wind. I cannot begin to tell you how many Arkansans are so proud of that fact. Local production brings an enormous amount of pride to people in communities all over America. We want to make sure that you are on a level playing field so that you can do the kind of work you do, on your own soil, as opposed to being lured away by tax incentives offered to you by every other country on the globe."
– Senator Blanche Lambert Lincoln
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Q: When do productions need to commence to qualify for the new incentive?
A: The incentive is available for qualified productions commencing after October 22, 2004, and before January 1, 2009.
Can the immediate write-offs be taken in more than one year?
Yes, if an election is made to use the incentive, the immediate deduction takes place in the year the expenditure is incurred. Therefore, if production expenditures are incurred in more than one year, the immediate tax deduction will be taken in more than one year.
When, where, and how does the "election" to immediately deduct the qualifying expenditures apply?
The election is to be made on the tax return for the taxable year in which the production costs are first incurred. The election must be made by the due date (including extensions of time) of such return. The manner and form of the election will be determined by the IRS at a later date.
Does it apply to all productions (e.g., big budget productions)?
No, the immediate write-off provision does not apply to productions whose aggregate cost exceeds $15 million ($20 million in the case of productions in certain low-income and eligible areas of the country). However, all productions including those below and in excess of $15 million ($20 million) have other new potential incentives including a new 9% tax deduction for U.S. production activities.
What is the real benefit of this incentive?
This is a significant new Federal tax incentive that allows producers of qualifying productions to take a tax deduction for the full costs of a production in the year the cost is incurred (as opposed to having to spread or amortize those costs over a period of years). Deducting the costs up front, while deferring the income from the films until later years when it is incurred will significantly reduce or eliminate taxable income for the film in the early years of exploitation.
How do I determine if it is beneficial to my production?
Since the new incentive is elective, producers can run numbers both with or without the new incentive and determine whether or not to elect to immediately expense the production costs in the first year(s).
What tax form do I need to fill out to get the incentive?
Currently, there is no specific form to fill out. The IRS is expected to issue further guidance on the incentive. In the absence of specific guidance, the legislative history states that: "deducting qualifying costs on the appropriate tax return shall constitute a valid election." Therefore, deducting the production costs (that would otherwise be capitalized) on your tax return will qualify as electing to take advantage of this incentive.
Is the incentive transferable?
No. However, different entity structures such as limited liability corporations, partnerships, and others, should be considered to properly allocate costs that could be immediately expensed.
 "We have always contended that production for movies, television, documentaries, for all the different outlets, is not just a local issue. It's a national issue. Runaway production has major impacts on the economy of all parts of America."
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What happens in the case of a co-production or a film financed by multiple investors?
The $15 million ($20 million) threshold refers to the qualifying film. Thus, a qualifying film that is co-produced must in total come under the threshold. The benefits of the provision must be allocated among the owners of a film in a manner that reasonably reflects each owner's proportionate investment in and economic interest in the film.
What is considered "aggregate costs" to determine if my aggregate production costs exceed the $15 million ($20 million) threshold?
The determination of what costs are included in the calculation of the threshold is not specifically addressed in the legislation. These costs should be the costs that would otherwise be capitalized and amortized as part of the production. IRS guidance in the form of Notices or regulations may help clarify this issue.
In order to qualify for the higher ($20 million) threshold what does it mean to require that a "significant" amount of the expenditures be incurred in an eligible area?
The term "significant" is not defined in the new statute, but for Federal tax purposes, it can have a number of meanings. Typically, it means that over 50% of the expenditures would have to be incurred in the eligible area. This is another issue that may be subject to further clarification by IRS guidance.
How will other practical issues related to this new incentive be determined?
Like other tax issues, producers should consult with their professional tax advisors on any issues related to this new Federal tax incentive. It is expected that the Treasury Department and the IRS will issue guidance to further interpret the statute. This guidance may come in the form of Notices and Regulations. A number of groups that worked on this important legislative change are expected to continue working with the Treasury Department and the IRS to ensure the incentive fulfills its objective and provides the industry with meaningful tax relief.
THIS DOCUMENT IS FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE VIEWED AS TAX ADVICE WITH RESPECT TO YOUR PRODUCTION ACTIVITIES. FOR SUCH ADVICE, YOU SHOULD CONSULT WITH YOUR TAX ADVISOR.
