Ruling hurts independent film productions

The Internal Revenue Service issued a ruling Friday that effectively guts tax incentives Congress crafted three years ago for independent filmmakers.

A provision of the American Jobs Creation act of 2004, signed into law that October by President Bush, contained tax breaks for films made domestically with production budgets under $15 million. As written, the provision excluded from the budget tally any future participation and residual payouts the filmmakers would have to make, thus helping them stay under the $15 million cap in order to qualify for the breaks.

Friday’s ruling, however, requires the budget tally to include estimates of future participation and residual payouts. Indie pics that have production budgets just under the $15 million cap will no longer qualify for the tax breaks once estimated future payouts are added in.

The IRS said it decided the budget must include P&R payouts to prevent filmmakers and producers from “manipulating the total production cost” by counting standard compensation as P&R and thus helping the budget stay under the $15 million cap.

Congressional staff who worked for almost six years to pass the bill and its provision were “so angry” about the ruling, as one put it. While the ruling isn’t final, “this kind of thing basically never gets stopped.” Congress will have to enact new legislation in order to restore the provision.

“We are extremely disappointed with today’s ruling, which we believe undermines the intent of the production incentive contained in the Jobs Act legislation,” the DGA, SAG and IATSE all said in a joint statement. “While the incentive may still prove workable for television production and for some independent films, the ruling that participation and residuals — which are often based on sales and profits that cannot be known at the time of production — must be included as original production costs undermines the use of the incentive for many independent, low-budget films.

“It was exactly those productions that the legislation was intended to help.”

Intended to help rein in runaway production, the American Jobs Creation Act of 2004 allowed producers to write off a movie in a single year if it had a budget under $15 million and 75% of that budget was spent in the U.S., or $20 million if it was shot in a low-income area.

Movies with higher budgets would have to follow standard depreciation rates over several years. The tax break, dubbed Section 181, was a small component of a $136 billion corporate tax bill aimed at ending a bitter trade war with Europe.

“After years of working to pass a tax incentive that would help keep film productions in this country, it is a huge disappointment to see regulations that virtually negate that goal,” Rep. Howard Berman said. “However, there is a new climate in Congress, and both the chairman and ranking member of the Ways and Means Committee …have indicated their interest in finding solutions that will encourage productions to stay in the United States. We’ll have to get back to work on it as soon as possible.”

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