Four years after the American Jobs Creation Act was signed into law by President George W. Bush, a survey of the labor landscape in the United States offers some sobering statistics: at least 760,000 jobs lost this year and 159,000 payrolls slashed in September, the most in 5½ years.
That is one reason why many in Hollywood are cheering the tax incentive legislation passed by Congress as part of the $700 billion Wall Street bailout bill. The amendments to Internal Revenue Code sections 181 and 199, originally part of the American Jobs Creation Act, make it easier for film and television productions to take advantage of the incentives.
“This very modest incentive helps us to create a much stronger flow of both jobs and ultimately taxes back to the state and back to the federal government,” says Independent Film & Television Alliance president and CEO Jean Prewitt, who worked with the Directors Guild of America and the industry coalition to get these provisions passed.
Prewitt says the industry coalition had originally worked with Congress five years ago to write the same language that is in the recent amendments into the legislation crafted for the American Jobs Creation Act, but late in the process the Ways and Means Committee changed the provision without consulting with the industry. The changes essentially made the incentives unworkable for the majority of filmmakers.
This has all been remedied by the bailout legislation. Perhaps the most important change to Section 181 was removing the hard cap of $15 million ($20 million for shooting in economically distressed and low-income areas) to qualify for the 100% deduction.
“How it works (is) if you spend $10 million in production costs in 2008, then when you’re doing your tax return for 2008 you deduct $10 million. It’s a deduction, you deduct 100% of it because you spent it on production costs,” says Jeff C. Foy, veteran film finance attorney, producer and author of the book “Using Section 181.”
The effective period for the Section 181 incentive was also extended to December 2009, and the changes are retroactive for productions that began principal photography this year.
“Many more films are now eligible for the Section 181 incentive, including films now in production which did not meet the cost-limits requirements in effect until (the) amendments to Section 181,” Foy explains.
Lesser-known, and more technical, Section 199 — also known as the domestic production deduction incentive — is an important benefit that was also impractical before it was changed by Congress. The incentive provides a 6% tax deduction (9% starting in 2009) of “qualified production activities income,” limited to 50% of the W2 wages paid in the United States.
The amendment broadens the definition of “qualified” film by including new distribution methods such as streaming video on the Internet. The definition of domestic production gross receipts has been expanded to include various forms of merchandising. Finally, the amendment accounts for different partnership arrangements between studios.
However, not everyone is excited about the Hollywood tax breaks.
“This falls into the category of provisions that are unrelated to the bailout or the actions that were taken to stem the crisis in the credit market,” says Jean Ross, executive director of the California Budget Project. “I think its unfortunate when you start seeing the piling on of unrelated provisions to a bill that was clearly very necessary to try and stem the current economic crisis.”