Changes in the Federal Tax Law
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April 2005

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Changes in the Federal Tax Law
by Darlene A. Cypser

Whether you are shooting commercials, industrial videos, television series or feature films, now would be a good time to sit down with your tax professional and review how changes in federal tax law will affect your business in the coming year. The American Job Creation Act signed into law on October 22, 2004 makes several changes that you should be keeping in mind.

The change with the biggest impact on producers of commercials and industrial videos will be the new 3-9% credit or deduction for "Qualified Production Activities Income." "Qualified Production Activities Income" is defined as the domestic production gross receipts after deduction of the cost of goods sold and other expenses allocable to those receipts. Domestic production gross receipts include income derived from any lease, rental, license, sale, exchange, or other disposition of any film or video produced in which at least 50 percent of the total compensation related to the production is paid for services performed in the United States for actors, directors, producers and crew. The deduction cannot exceed 50 percent of the W-2 wages of the employer for the taxable year. The deduction for Qualified Production Activities applies to production activities after December 31, 2004. The deduction starts at 3% in 2005 and 2006, increases to 6% for 2007-2009 and then settles down to 9% in 2010.

The new Section 181 election to deduct as an expense the cost of creating qualified film or television productions rather than taking depreciation deductions over ten years as is required under the "income forecast method" will have a much greater impact on producers of motion pictures and television series. The 'income forecast method' of depreciation which the IRS started requiring to be used by all film and television projects in 1996 never had quite as large an impact on producers of commercials and industrial videos as it did on producers of movies and television series. The majority, if not 100% of the potential income from production of commercials will be received within one year of production and thus up to 100% of the expenses were deductible in the first year. Movie producers often had to wait up to ten years to deduct the full cost of the expenses of production. That delay can devalue the deductions from 20-50% resulting in a greater tax burden. The new Section 181 deduction eliminates that delay.

In order for a production to qualify under Section 181, the budget has to be under $15 million (not usually a problem in Colorado) and 75% of the total compensation is for services performed in the U.S. by actors, directors producers and other relevant production personnel. Participations and residuals are not included as "compensation" for the purposes of the Section 181 deduction. This deduction is applicable to productions commenced after October 22, 2004, but before December 31, 2008.

Film and video producers maybe able to lure new investors by passing on the new federal deductions and tax credits, and commercial producers may be able to use their tax savings to invest in HD equipment of other new technologies. But some planning may be necessary to make full use of the deductions.

Colorado Tax Incentives?
The current proposal in the Colorado General Assembly (House Bill 05-1146) to waive Colorado state sales tax on production expenses is a token gesture that pales by comparison to the federal incentives and is unlikely to lure new productions into Colorado. This is due in part to the fact that items subject to sales tax make up such a small part of a production budget compared to salaries and in part because the Colorado state sales tax is already lower than the sales tax in most other states. A study by the Colorado Legislative Council done in November 2003 using US Census Bureau and Bureau of Economic Analysis data determined that Colorado ranked 42nd in sales taxes, 25th in individual income taxes, and 42nd in corporate income taxes compared to California's rankings of 28th, 10th and 7th.

This is not a fact that has been highly publicized by either Colorado producers or the Colorado Tourism department. Some states offer sales tax rebates of 10-20% to companies that bring film production into their state But since Colorado's sales tax is already 39% lower than California's and 38% below the national average, the savings are built right in. There's no need to wait for a rebate check of apply for a waiver certificate.

Passing of House Bill 05-1146 would at least be a gesture of appreciation to the local industry. But a bill that requires the state of Colorado itself to give preference to Colorado commercial producers might be a more effective gesture.

Darlene A. Cypser is a movie producer and sales agent currently working with Inferno Film Productions, LLC in Littleton, CO. She manages production, post-production, sales and distribution of the feature film Dragon and the Hawk and other projects still under development. She also represents other movies seeking distribution at film markets.

Cypser is a licensed attorney in both Colorado and New York with a Juris Doctor degree from the University of Oklahoma. She is also Chief Executive Office/Venture Capital Management with the Midgard Corporation of Littleton where she oversees the financing and management of start-up companies and other investments. She is a public speaker and writer, author and a member of the Colorado Film & Video Association and American Geophysical Union. She may be reached at 303-587-9792.

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