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Regulations concerning deductions of costs of post-2007 film and television productions

October 18, 2011 | No. 2011-504


The Treasury Department and IRS today released for publication in the Federal Register final and temporary regulations (T.D. 9552) and, by cross-reference, proposed regulations (REG-146297-09) concerning the rules for deducting the costs of producing film and television productions under section 181 for amounts incurred after 2007.

For electronic versions of today’s regulations: T.D. 9552 and REG-146297-09

Background

Section 181 was added to the Code by the American Jobs Creation Act of 2004; was subsequently modified by the Gulf Opportunity Zone Act of 2005; and then was again amended and extended to apply to film and television productions commencing before 2012 by later legislation.

Section 181 permits an owner of a qualified film or television production to elect to deduct production costs paid or incurred by that owner for the year the costs are paid or incurred (in lieu of capitalizing the costs and recovering them through depreciation allowances).

  • For a qualified film or television production that commenced before January 1, 2008—or “pre-amendment production”—this deduction is available only if the aggregate production costs paid or incurred by all owners do not exceed $15 million ($20 million if a significant amount of the production costs are paid or incurred in certain designated areas) for each qualified production—or, the aggregate production cost limit.
  • For productions commencing on or after January 1, 2008, the aggregate production costs limit does not apply. Instead, the aggregate deduction under section 181 for production costs paid or incurred by all owners of a qualified film or television production is limited to $15 million ($20 million if a significant amount of the production costs are incurred in certain designated areas) for each qualified production—or, the deduction limit.

A “qualified” film or television production is one which at least 75% of the total compensation of the production is compensation for services performed in the United States by actors, directors, producers, and other production personnel.

In late September 2011, the final regulations (T.D. 9551) relating to deductions under section 181—which did not specifically reflect the removal of the aggregate production costs limit—were published. The preamble stated that further proposed and temporary regulations were expected to deal with the post-2007 rules. See TaxNewsFlash 2011-474.

 

Temporary regulations

Today’s temporary regulations under section 181 add a provision reflecting the statutory rule for film and television productions commencing on or after January 1, 2008—that section 181 permits a deduction for the first $15 million (or $20 million) of aggregate production costs, regardless of the total cost of the production.

Today’s regulations also state that in determining whether a production qualifies for the $20 million deduction limit, compensation to actors, directors, producers, and other relevant production personnel is allocated entirely to first-unit principal photography. [The earlier regulations provided the same rule for determining whether a pre-amendment production qualified for the $20 million production cost limit.]

The temporary regulations also clarify that the costs of a post-amendment production that are not allowable as a deduction under section 181 may be deducted under any other applicable provision of the Code.

  • The temporary regulations apply to qualified film and television productions for which principal photography (or if animated production, in-between animation) began on or after the date when these regulations were filed with the Federal Register (October 18, 2011).
  • A taxpayer may choose to apply the temporary regulations to qualified film or television productions beginning on or after January 1, 2008, and before October 18, 2011.

T.D. 9552 and REG-146297-09 will be published in the Federal Register on October 19, 2011.

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ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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