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What is Section 181?

Gone But Not Forgotten

At the end of 2013 several things needed to occur in order to lock in the deduction for Section 181 Investing. In order to qualify the Investment company needed to begin principal photography by December 31, 2013. RMA Media Partners has begun principal photography on all of the films listed here. It is not enough to start principal photography in 2013, a special tax election must be taken by the investment company's tax return. RMA Media Partners has created entities for each one of its projects and the proper elections will be filed on or before the March 15, 2014 filing date.

As with any Federal Tax Deduction, things can and do change. It is possible that there will be a mid-year reinstatement of Section 181, as Congress has done on many previous occasions when Section 181 expired. Please check back frequently for updates on the status of our projects and any changes to the regulation.

Investment Objective & Strategies

The American Jobs Creation Act Of 2004 and the 2004 enactment of Section 181, marked an unprecedented change in U.S. policy toward the phenomenon known as "Runaway Production" for the film industry. Hollywood, like many American industries, had grown tired of the high cost of labor and taxes in the United States. Canada and other countries identified the potential financial benefit and took advantage by successfully luring American film and television production onto their soil, taking enormous amounts of production dollars with them. The government’s reaction was to include Section 181 within the American Jobs Creation Act of 2004. Section 181 offers tax incentives for investors in independent film and television productions produced within the United States.

Put simply, Section 181 states that investment in a motion picture shot in the US is 100% tax deductible for the investor in the same year invested.

Under Section 181 an investor may deduct the money which is invested in a film or television production from his or her passive income earned in the same year. If the investor is actively involved in the operation of the production, he or she may deduct the amount of investment from all active income earned in the same year. Productions with budgets below $15,000,000 (up to $20,000,000) which have at least seventy-five percent 75% of its production completed within the United States qualify under Section 181. Investors can be either individuals or businesses.

Here are some Investor broad strokes for the Section 181 Tax Deduction

  • 100% of the motion picture costs are deductible in the same year of investment.
  • 75% of the motion picture must be shot in the US to qualify for Section 181
  • There is a $15 to $20 million dollar budget cap.
  • There is no minimum film production budget cost.
  • TV pilots, TV episodes (up to 44), short films, music videos and feature films all qualify for Section 181.
  • Section 181 can be applied to active income or passive income.
  • Investors can be either individuals or businesses.
  • Section 181 is retroactive to 2004 and was just renewed as part of the ‘Fiscal Cliff’ Bill on early 2013.
  • There is no expectation for film distribution or film completion.
  • The motion picture’s corporation issues Schedule K-1’s to the investors so they can take advantage of Section 181.

WHAT IT MEANS FOR INVESTORS

k Tax rebates and incentives for money spent on film or television production within a particular state can be combined with the benefits of Section 181 allowing an investor (working with cooperative film producers) to greatly minimize his or her risk on what would ordinarily be considered a risky investment. For example, if a tax payer is in the thirty-five percent (35%) tax bracket and a qualifying film is shot in Louisiana which has a state tax credit up to forty percent (40%), an investor has greatly reduced their risk. They would get the deduction of their federal taxes equal to their investment PLUS most states with incentives monetize the credits BEFORE production for up to 90% of the credit amount. Continuing this example, if a film is shot in Louisiana with a budget of $1,000,000, the state would provide the production entity up to 40% of the entire budget in transferrable state tax credits. If the investor was not a resident of Louisiana, the state would monetize 90% of the credit to the production company before filming commenced. That would provide the investors a return of $360,000 ($1,000,000 x .40 x .90) before filming even began.

There are currently 38 states in the United States that have some type of tax credit or rebate plan.

MARRIAGE of Government Sponsorship and Section 181

Combine Section 181 federal tax break with a state film tax rebate.

By coupling the two together you can reduce an investor’s risk by 50-100%. Think about that. It does depend on how much the investor earns annually, how much they’ve invested in the movie and where the movie will be produced…but, it is possible that an investor could invest in a motion picture…and risk nothing. Conservatively, the risk could be 50% of your investment. That means for investing $100,000.00 you are assured to recoup $50,000.00 in tax deductions and rebates. Depending on the math and the possible film pre-sales to foreign territories, Investors could recoup 100% of their investment before the film is distributed.

While this program offers investors significant income tax savings, it is not a tax shelter, either by its intent or the letter of the law. The program’s primary objective is to generate cash distributions from successful movie production, distribution and sales.

Tax Code Compliance

The Tax Code allows investors in film production to deduct a substantial amount under Section 181 of the code. By utilizing what has been described as “perhaps the most generous business deduction in the Internal Revenue Code" investors are able to write-off a domestically film’s production costs against all categories of income.

As a General Partner, investors are considered to be active rather than passive and, therefore, exempt from material participation rules that would otherwise limit deductions.

Tax-efficient Investment Structure

Here’s an example of the tax benefits for a California resident:

  Before Investment After Investment
Ordinary gross income $500,000 $500,000
Section 181 Production deduction N/A $450,000
Adjusted gross income $500,000 $50,000
Federal & State tax rate 44% 44%
Taxes due $220,000 $22,000
After tax income $280,000 $328,000(1)
Income Tax savings $0 $ 48,000
State Tax Credits Passed to Partners $0 $52,500(2)
Net Income For Partners $280,000 $380,500(3)

(1) After Tax Income is calculated after all taxes and the Initial Cash of $150,000 is invested in the Domestic Film Project
(2) State Tax Credits available for filming in Louisiana and many other states
(3) Net Income is derived from After Tax Income and State Tax Credits ($328,000 + $52,500)

Limited Private Offering

Only a limited number of partnership units are available, paid for as follows:

  • A) Initial Cash Investment: $1,000
  • B) Subscription Note: $2,000

The note is full-recourse with interest at 3% per annum and a balloon payment at maturity, December 31, 2031. All subsequent interest is to be paid from Partnership cash flow will be accrued recourse to the Partner if cash flow is insufficient to pay the interest in subsequent years.

Cash Distributions

In addition to the tax benefits, an investment in the Partnership should generate a cash return. Cash flow from film projects will be distributed in the following priority:

  • Investors will receive a 10% Preferred Return on their investment
  • Investors will receive 100% of net cash flow until return to Investors of Initial Cash Investment
  • Pay Debt service on Subscription Note.
  • After return of Initial Cash Investment is returned, Investors will receive income as follows:
    • 75% Cash Flow until a 20% IRR is achieved, then
    • 65% Cash Flow until a 25% IRR is achieved, then
    • 50% Cash Flow until a 30% IRR is achieved, then
    • 25% Cash Flow once a 30% IRR is achieved on the lifetime of the project.

Optimized Financial Structure

RMA Media Management’ s Managing Agent has made arrangements to collateralize the Subscription Note using zero coupon, tax-exempt municipal bonds, or other securities of similar quality. The maturity value of these bonds is expected to equal the face value of the Subscription Note. By collateralizing the Subscription Note, investors are able to effectively pay off the Subscription Note‘s principal from cash distributions and the maturity value of the zero— coupon bonds thereby reducing the likelihood of an additional cash investment.

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RMA Media Management: Investor Information


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