The film industry is about to lose the federal tax program known as section 181 on January 1, 2014. This fiscal law allowed investors of motion pictures to expense out 100% of their investment in one year, compared to the normal amortization of investments over five years.

Not only did section 181 give the investor the ability to deduct the full investment in one year, but it also allowed the investor to use it two years prior to obtaining it or up to 44 years after obtaining it. In other words, if the investor needed to offset high incomes from 2011, they could file a corrected tax return utilizing the write off benefit from this year. Or, the investor could hold it until a higher than normal income year hit their books.

The good news is that filmmakers can grandfather in section 181 into their film project for use in the future. The grandfather clause allows the filmmaker to set things in place before January 1st and can be used at anytime within the next 44 years.

To qualify for grandfathering in section 181, the filmmaker must file the following by 12/31/13:

1. A completed screenplay.
2. A full budget top sheet.
3. Footage from one day of filming a scene.
4. Investor documentation.

The screenplay needs to be titled and copyrighted. It can be any length, but must qualify as a feature film. I believe 47 minutes is the current length for a film to be considered a feature by the MPAA. While the title can’t change, the screenplay can be 100% rewritten when the rest of the film is to be shot.

The full budget top sheet can also have changes made to it, but keeping the gross total the same will help the validity of the grandfather clause. There is a $20MM cap on the gross project cost and the details of section 181 would need to be reviewed for what portions of the budget qualify. There are specific rules about above the line and below the line items, as well as a certain level of spend being done in a “depressed” area.

One day of principal photography needs to include a segment from the screenplay and its dialog placed onto a DVD. The amount of footage shot or the number of hours it takes to capture it is not of importance. The footage doesn’t even have to make the final edit or include the final actors. Nor does it require a full crew. But, it does need to be clear that it’s principal photography.

The investment document that needs to be in place is the subscription agreement. However, it is safer to also have an operating agreement, the investor questionnaire, and the manager questionnaire. This deliverable also assumes that all the future investors will be accredited, so a private placement memorandum would not be needed.

If the filmmaker has all these items in place, he can sign investors on any year after 2013 and give them the full grandfathered in benefit, allowing investors to deduct 100% of their investment immediately or when it’s ideal for them, rather than amortizing it over five years.

And yes, if a filmmaker was creative enough and had a high degree of business acumen, he could set up several LLCs with these grandfather clauses for future films over the next 44 years. And, he could also sell some of those companies to other filmmakers who want to give the full benefit to their investors, as the company will retain the grandfathered in section 181.

The only issue is that the title of the film, the grand total of the budget, and the LLC paperwork must stay the same. And, with the new law that allows motion picture offerings to now be promoted on websites, it will make those smart filmmakers ideal candidates for investors who need a full tax write off.

One man shared last week that he owed $5.2MM in taxes and invested $6MM in a section 181 film. Because he was just barely above the 39% tax bracket, the dollar for dollar write off dropped his taxes down to $1.4MM. Because the numbers didn’t mathematically work for me, I asked a few more questions and learned he also used the film company’s tax credit to drop his number all the more.

In other words, by investing $6MM in the film, he saved $3.8MM in taxes, which meant he only had a third of his investment at risk. And, he shared that the film made $37MM in profit, so he was looking for another section 181 film to invest in to help offset his new tax issues.

Now is the time for investor savvy filmmakers to prep a few companies with the section 181 for their investors before it disappears in January. And, for those who already qualify, but their accountants don’t understand the tax relief program, they should fire their accountant and hire one that knows how to use section 181 to their favor.

Copyright 2013 by CJ Powers

The 49th Annual International Film Festival (Oct. 10-24) is in full swing. Yesterday was the Chicago Film and Media Summit & Expo at the Cultural Center. Tonight is the Chicago Showbiz Networking gathering at Chicago’s Laugh Factory. And, there are several other gatherings this month by multiple Chicago film organizations.

October seems to be the key month when Chicago filmmakers find a new mix of talent and spin great creative projects. Some get fleshed out and produced, while others find no traction. In either case, networking opportunities rise to a new high as well.

Last Friday night, I met with a group of up coming actors who have a great idea for a television series. After reviewing their first draft script, we made alterations to the story structure that would make it ideal for HBO. The energy in the room from all the creative input was tremendous.

I’m not sure if all these networking opportunities play a role in the process, but several film grants are made available in October for Chicago filmmakers. This year one organization has increased their grants to $100,000 with the hope of seeing more films made.

Many times the grants will cover equipment costs. Typically the actors, crew and filmmakers will donate their time to leverage the project for greater visibility with gaining full funding from investors or a studio’s attention. There are also small film projects that are sometimes funded in full by the grants.

Some years back, I won a grant for a documentary that I produced on female barbershop quartets. The grant provided a lot of equipment and film stock, but at the time I was in need of finishing funds. The timing was off due to the quartet’s competitive schedule. They participated in the national competition that took place in the EnergySolution arena – Home of the Utah Jazz.

The timing of networking, festivals and grant applications never perfectly match any green lit film project. Seldom do you sign your entire ideal list of actors, crew and locations. There are few people locked to each project that can determine the timing of the shoot. Most have to find a way to adapt if they want to participate in the project.

November and December will soon follow – The two biggest months for attracting investors due to their need for tax write offs. These last two months will also see several single days of shooting for many companies, as they try to grandfather in their tax incentive program for carry over in 2014.

Copyright © 2013 by CJ Powers

Social media has become increasingly more important in the promotion of feature films. It has also become critically important to start developing the fan base well before the film is released. This past week I’ve interviewed a dozen social media experts to learn what they can offer our team, so I thought I’d share some insights.

Each social media guru has access to specialty lists, not too dissimilar to the mailing lists of yester year. The coverage can be pinpointed down to the activities and purchasing choices that each potential fan makes, giving us a clear picture of the exact type of person that is willing to buy a ticket to see our movie.

My development team is looking at a primary audience of women between the age of 18 and 39. Our primary woman loves intrigue, wants a movie that requires some thinking, and wants a romantically pleasant ending. She is a person who loves a great theatrical experience that includes some good-natured humor, little foul language, and characters that suck you into their lives.

With this in mind, we can search vast databases for a handful of films and books that generate similar responses and do a demographic sort based on these elements. By cross referencing Hulu, Netflicks, and other online distribution channels, we are able to create ideal lists of people who are interested in our film before we start principal photography.

Our secondary audience is people of all ages that like wholesome and moral films. This category gives us access to 2,000 bloggers that reach 1 million likeminded people and an additional 6 million Twitter impressions. By adding in our primary audience with an expectation that they each share info about our film with two people, we can generate more than 100 million impressions before we start filming.

Once we begin filming, we are able to add in magazines, news outlets, and promotional tracks that will provide us an additional 200 million impressions. And, during the film’s release, our ad dollars will help us target the exact geographic areas of our theaters. Our goal is to have 500 million impressions in total.

These numbers are very realistic, but will cost thousands of dollars. However, the value is worth every dollar and then some, as retailers will want to join us in cross promoting products within each of our promotions. This of course is limited based on related content.

We have set a social media marketing budget in place that should outperform any other film of the same type and genre. It will be fun to see how the approach works. I’m really looking forward to it. And you…You will be able to help us with social media too. I’ll let you know more about that in the near future (October).

Copyright © 2013 by CJ Powers