Investing in Film Using Irs Section 181 for Federal Tax Credits Vs. New Markets Real Estate Credits


The New Markets Tax Credit (NMTC) Program permits taxpayers to receive a credit against Federal income taxes for making qualified equity investments in designated Community Development Entities (CDEs). Substantially all of the qualified equity investment must in turn be used by the CDE to provide investments in low-income communities. The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to five percent of the total amount paid for the stock or capital interest at the time of purchase. For the final four years, the value of the credit is six percent annually. Investors may not redeem their investments in CDEs prior to the conclusion of the seven-year period.

An organization wishing to receive awards under the NMTC Program must be certified as a CDE by the Fund.

To qualify as a CDE, an organization must:

* be a domestic corporation or partnership at the time of the certification application;
* demonstrate a primary a mission of serving, or providing investment capital for, low-income communities or low-income persons; and
* maintain accountability to residents of low-income communities through representation on a governing board of or advisory board to the entity.


The 20% tax credit Preservation Tax Incentives reward private investment in rehabilitating historic properties such as offices, rental housing, and retail stores. Abandoned or under-used schools, warehouses, factories, churches, retail stores, apartments, hotels, houses, and offices in many cities have been restored to life in a manner that retains their historic character. The Preservation Tax Incentives have also helped to create moderate and low-income housing in historic buildings.

Under the provisions of the Tax Reform Act of 1986, a 20% tax credit is available for the substantial rehabilitation of commercial, agricultural, industrial, or rental residential buildings that are certified as historic. The credit may be subtracted directly from federal income taxes owed by the owner.

The Historic Preservation Tax Credit Program benefits the owner, the occupants, and the community by:

o Encouraging protection of landmarks through the promotion, recognition, and designation of historic structures
o Increasing the value of the rehabilitated property and returning underutilized structures to the tax rolls
o Upgrading downtowns and neighborhoods and often increasing the amount of available housing within the community.

The American Jobs Creation Act Of 2004: 100% Federal Deductions + 20-30% State Tax Credits!

In the United States, the 2004 enactment of Section 181 of the Internal Revenue Code of 1986 (the “Code“) marked an unprecedented change in U.S. policy toward the phenomenon known as “Runaway

Runaway Production refers to a film or television production that leaves one state or country to be filmed in another purely for economic reasons. This movement occurs because producers tend to film in the location where they can minimize production costs through tax incentives, cheaper labor.

Over the years, Canada has been the greatest beneficiary of U.S. runaway productions (according to some reports, Canada has claimed up to 80% of the U.S. runaways, generating an economic impact of $10.3 billion in production output in 1998 alone).

Section 181 represents the first time that the U.S. federal government has recognized this impact by passing tax legislation to actively combat the flight of film and television programming.

Section 181 permits a 100% write-off for the cost of certain audio-visual works, regardless of what media they are destined for (e.g., theatrical, television, DVD, etc.).

An individual or company who makes an investment into Section 181 qualified productions can take a 100% deduction of their investment against their passive (individual) or ordinary (as C Corporation) income in the year their investment was

The deduction can be made against active income should the investment be made by or through a widely held C corporation. The law is in effect until December 31, 2009, therefore investments must be made before that date and the money invested into qualifying productions must be spent by then by the productions.

An example, should an individual or corporation that is taxed at a 35% tax rate have passive income to take a deduction against, then should that individual make a $1 Million investment into a qualified production or film fund, the actual net investment will be $650,000 since they can take a deduction against that full $1 Million against their passive income, and 35% of $1M is $350,000, which is the value of the deduction they can make in the year they make their investment. Therefore, 1M minus $350,000 is $650,000 which is the net amount of their investment into the qualified production.

However, an investor or Company can also receive an additional 15-30% in state tax credits on the entire budget of a film BEFORE profits and other exit strategies that Noci Pictures Entertainment has in place.

This clearly shows a premium in tax credit and tax liability deduction compared with the other Federal Tax Credit Programs available.

Further, The Section 181 and State Programs benefit the tax credit investor, the producers, and the community by offering:

In the Short Term:

1. 100% passive or ordinary income deductions under the IRS Section 181 “American Jobs Creation Act” for both individuals and corporate tax payers
2. 20%-30% in State Tax Credits (depending on state)
3. Economic Development
4. Job Creation, Including For Minorities And Women
5. ROI on Investment of 60-100% prior to revenues

In Medium-Long Term it would offer

1. hedge of revenues (after Section 181 and state incentives of 60-100% ROI) back to investors from individual or a slate of films
2. Discount of future taxation from income under Section 199 for a Section 181 investment

Section 199 is the income section; it is called the manufacturing section of The American Jobs Creation Act, 2004. Film Production has been defined as a manufacturer but television is not. Section 199 does not apply to television.

This section says that any manufacturer (Film Production) can have some tax relief on money returned to the investor.
o from 2005 till 2007 the taxpayer is entitled to a 3% deduction
o from 2007 to 2010 they get a 6% reduction
o And from 2010 on the get a 9 % reduction.

For example, if an investor get $1.00 back on a investment in a movie after he has already written off 100%, then he will only be taxed on .94 cents if I he is given it back between 2007 to 2010. From 2010 on then an investor gets to pay taxes only on .91 cents and it stays at this 9% rate.

Yuri Rutman

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