WASHINGTON — Possibly as soon as next month, Congress will consider dramatically reducing two key provisions that independent film producers hailed as major victories in last year’s corporate tax bill.
After years of lobbying, indies rejoiced upon learning in October that President Bush had signed the bill, which included a sweeping tax break for filmmakers and an incentive for financiers to invest in indie films. But congressional staff members now say the two provisions appear to be “oversights” that should be “corrected.”
As written, the provisions allow producers of films with budgets under $15 million and their investors to deduct their costs or investment in a single year — as opposed to depreciating it over several, which the tax code previously required. If the film is eventually sold, the provisions also allow investors to be taxed on profits at the capital gains tax rate, which is significantly lower than the personal income tax rate.
Because of these allowances, investors were guaranteed to make a profit even if the film sale only broke even. For example, a $10 million investment, deducted in one year, yields a $3.5 million savings on taxes (based on a 35% tax rate). The net outlay is thus $6.5 million. If the film is later sold for $10 million, breaking even, the investor pays only a capital gains tax rate of 15% (vs. the normal 35%), walking away with $8.5 million — $2 million more than his $6.5 million outlay. And if the film is sold for a higher amount, the investor would still be taxed at the capital gains rate.
“This was a bona-fide tax subsidy to encourage film financing in the U.S.,” said Schuyler Moore, an entertainment industry tax expert. “It’s very hard to raise money for these films, and this is just what was needed.”
But Moore said he recently learned that Congress’ Joint Committee on Taxation believes the provision was unintended, and that profits should be taxed at 35%, the normal income tax rate for million-dollar sums. “If that happens, they will eliminate the tax-savings incentive for raising money,” Moore said.
Moreover, he said the Joint Committee on Taxation wants film budgets to include participation and residual deals — costs not normally included. While most pics today include these deals, producers don’t usually pay out on them until profits start coming in. Producers will have to estimate in advance what these costs will be and include them in the budget, which then will increase and likely exceed the $15 million ceiling, thus disqualifying the pic for any of the above allowances.
“They said they want to amend the statute, but they might as well just repeal it,” Moore said.
A spokesman for the Joint Committee on Taxation referred all questions to either the House Ways & Means Committee or the Senate Finance Committee, both of which will ultimately decide whether the provisions should be reconsidered. However, congressional staff members told Daily Variety the allowances “do appear to be an oversight and might be appropriate candidates for a technical corrections bill.”
A spokesman for the House Ways & Means Committee said the committee could not comment on any legislation under consideration, adding the earliest action could occur is February.