Interesting post - I plan to link to it on our site. I'll be curious to see if any tax attorneys do chime in.
Incidentally, we had a post about Obama and his overall arts policy:
http://artsake.massculturalcouncil.org/blog/artsake/index.php/2008/11/05/obama-and-the-arts/
Anyway, consistently good stuff here - thanks.
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posted by ArtSake @ 11/07/2008 9:21 AM
Thanks for the comment and the kind words. I'm going to post your link up on the blog as well.
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posted by Scott Macaulay @ 11/07/2008 10:18 AM
I think Noah would do quite well in the tax world...as stated, Section 181 was extended pursuant to legislation in last month's bailout package. For investors that do not materially participate in the production of a film, Section 181 provides for an expedited method of recognizing expenses, however it is important to note that these tax allocations are passive.
Passive losses provide a hurdle to deductibility for these investors.
Generally, to get the tax benefit from passive losses you need either
1. passive income from other sources (ie real estate, or another profitable film) 2. profits down the road from the actual film you invested in and have prior passive SEction 181 losses 3. a disposition in the film you've invested in and have losses from.
Important to note, however, if there is no sale of your asset, there is no capital gain or loss. Losses from investments in film are "ordinary losses".
Obama's proposed tax plan does incorporate raising tax rates on long term capital gains from 15 to 20%...however that is only for taxpayers who are married and make inxs of 250k (or inxs of 200k if unmarried).
I'm not totally sure where the 30% better calculation is arrived at, however Section 181 does provide for expedited expensing against income as compared to the traditional method.
I believe I read in some tax literature that when this legislation was originally proposed, the idea was to remove the hurdle of passive limitations.
That hurdle has not been removed, but if it was, then you'd probably see investment in qualifying films skyrocket because of the immediate deductibility SEction 181 provides.
Ira Klein
CPA
iaklein@aol.com
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posted by @ 11/09/2008 10:21 PM
Ira, thanks for your extended comment.
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posted by Scott Macaulay @ 11/10/2008 9:56 AM
my 30% comment was based on the idea that previously you were getting a break off a 15% rate and now off a 20% and 20 if 30% more than 15... it's 5% better in absolute terms, it's 30% better in relative...
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posted by Noah @ 11/13/2008 1:29 AM
Two quick things:
1. Obama has proposed that the capital gain rate increase from 15 to 20% if income is inxs of 250k for married couples ....this is a tax increase...so it'll actually cost investors more taxes if their income exceeds the threshhold.
2. Income/losses allocated from films are generally at ordinary tax rates, not capital gain rates....only when an investor sells his/her interest in the film, do cap gain rates start to apply...but then other tax complications come into play as well......so much for tax simplification.
ira
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posted by @ 11/18/2008 2:38 PM
Has the bill to extend 181 actually passed the Senate yet? Everything I have seen has it passing the House but not the Senate.
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posted by lawyer4musicians @ 12/14/2008 7:04 PM
What an interesting thread & discussion. FYI: it looks like the Senate did OK this extension, and the $15M disqualifying cap is now a ceiling, in terms of the cost limits, only the first $15M of costs can be immediately expensed; if the film goes over, now these additional costs are depreciated, instead of the production being disqualified and the deduction regurgitated as income, which should also be helpful. Agreed on the active income sheltering enhancement: why can't film partnerships get the same special treatment as oil & gas partnerships? Or certain real estate investments? I think lowering the minimum production cost and allowing losses to be deductible against active could income could motivate more ordinary citizens to invest in independent film productions, which could create many more jobs than under the current regime.
H.R.6049
Title: To amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes.
Sponsor: Rep Rangel, Charles B. [NY-15] (introduced 5/14/2008) Cosponsors (17)
Related Bills: H.RES.1212, H.R.2776, H.R.5351, H.R.7060, H.R.7201, S.3125, S.3335
Latest Major Action: 9/23/2008 Passed/agreed to in Senate. Status: Passed Senate with an amendment by Yea-Nay. 93 - 2. Record Vote Number: 205.
House Reports: 110-658
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posted by Study on multiplier @ 12/24/2008 4:38 AM
What you are referring to as Section 181 having challenges for individual investors in terms of passive income, you are correct on.
However, many financiers, investors, and film makers don't realize that if a C Corporation is the investor, then its much easier to deal with in terms of deducting the expense against ordinary income vs. Passive.
Which means if you rich Uncle Hyman or Vito recently sold a company or merged with one and transferred the proceeds into a C Corporation his cap gains would be easier to play with vs. a dentist who make 2 million dollars a year as a sole proprietor and wants to invest in a movie.
Also, its important to make sure that investors get a PPM outlining Section 181 and their share of benefits and prorate that against their actual equity positions in film in conjunction with film state tax credits that can be used as part of the ROI.
Yuri Rutman
http://section181.blogspot.com/
www.noci.com
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posted by Yuri Rutman @ 1/13/2009 2:10 PM
There may be a flip side to the use of the C-Corp in my opinion...First if invest as a partner and you are subject to passive limitations, and the films goes bust...you can dispose of your interest and then fully utilize the 181 losses to offset ORDINARY income (disposition of a passive entity) Second, if you have passive losses being restricted you can sell your interest in the film and once again you have disposed of your interest in a passive entity and are allowed to use your losses to offset ordinary income.
If the film is profitable, and your investment stems from a C-Corp...how do you get the money out of hte C-Corp....dividends?...then double taxation comes into play. These are just some initial thoughts that come to mind. Ira
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posted by @ 3/04/2009 1:50 AM
does anyone know how long they extended 181 and where I can find the printed update about this?
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posted by Seth @ 12/07/2009 10:56 PM
