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
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
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
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
As a General Partner, investors are considered to be active rather than passive
and, therefore, exempt from material participation rules that would otherwise limit
Tax-efficient Investment Structure
Here’s an example of the tax benefits for a California resident:
Ordinary gross income
Section 181 Production deduction
Adjusted gross income
Federal & State tax rate
After tax income
Income Tax savings
State Tax Credits Passed to Partners
Net Income For Partners
(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.
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
- Investors will receive a 10% Preferred Return on their investment
- Investors will receive 100% of net cash flow until return to Investors of Initial
- Pay Debt service on Subscription Note.
- After return of Initial Cash Investment is returned, Investors will receive income
- 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.