The IRS has issued temporary regulations for when a Company can elect to deduct production costs in the year they occurred from qualified film or television productions.Don’t fall into the traps!
Section 181 added by the American Jobs Creation Act of 2004 and modified by Gulf Opportunity Zone Act of 2005, generally permits owners of qualified film or television production to elect to deduct production costs in the year incurred.The IRS has now issued temporary regulations that define some of the key aspects of the law like clarifying that the owner of the project can only take the accelerated deduction.
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Regulations Address Film and Television Production Costs Deduction
Temporary and proposed regulations relating to deductions for the cost of producing film and television productions have been issued. T.D. 9312, 72 Fed. Reg. 6,155 (2/9/07); REG-115403-05, 72 Fed. Reg. 6,190 (2/9/07).
Code Section 181, which was added by the American Jobs Creation Act of 2004 and modified by the Gulf Opportunity Zone Act of 2005, generally permits owners of qualified film or television production to elect to deduct production costs in the year the costs are paid or incurred instead of capitalizing and recovering such costs through depreciation allowances. The aggregate costs must not exceed $15 million for each qualifying production or $20 million if a significant amount of the production costs are incurred in certain designated areas. A film or television production is a qualified film or television production if 75 percent of the total compensation of the production is compensation for services performed in the United States by actors, directors, producers and other production personnel (the 75-percent test).
The IRS has now issued temporary regulations which clarify that only the owner of a film or television production may elect to deduct production costs. An owner is deemed to be the person otherwise required to capitalize production costs under Code Section 263A. The regulations require that, at the time the election is made and in any year that a deduction is claimed, the taxpayer must have a reasonable basis for believing that the production will be set for production. Further, costs of acquiring a production and costs of obtaining financing are included in the definition of production costs, while distribution costs are excluded. Participations and residuals costs are production costs for purposes of the production cost limit.
The temporary regulations adopt two different tests for establishing when production costs have been significantly incurred in a designated area (i.e., the “significantly incurred”requirements). The first test, which is based on production costs, establishes a 20-percent threshold for the “significantly incurred†standard. The 20-percent-cost-based test compares the production costs incurred in first-unit principal photography that takes place in a designated area to all production costs incurred in that first-unit principal photography. Under the second test, which is based on the total number of days of principal photography, the “significantly incurred†requirement is deemed satisfied if more than 50 percent of the total days of principal photography takes place in a designated area.
For purposes of defining a production, the temporary regulations adopt a broad statutory definition under Code Section 168(f)(3) and specifically provide that a production includes any film or videotape production the production cost of which is subject to capitalization under Code Section 263A. In addition, the regulations provide that a service is performed in the United States for purposes of the 75-percent test if the principal photography to which the service relates occurs within the fifty states, the District of Columbia, the territorial waters of the continental United States, or the airspace above the continental United States and its territorial waters. A special rule applies to animated productions.
Finally, a special recapture provision requires the recapture of any production costs in the year the election is voluntarily revoked or the production fails to meet the Code Section 181 requirements.
The temporary regulations apply to qualified film and television productions with respect to which principal photography or, in the case of animated production, in-between animation, began on or after February 9, 2007, and before January 1, 2009.
For a discussion of elections to deduct amounts that would otherwise be capitalized, see TaxExpert’s Analysis and Explanation, Section 25.7.