Members of Congress are looking at ways to counter a recent ruling by the Internal Revenue Service that pulled the rug out from legislation enacted in 2004 to provide tax incentives for low-budget film and television productions that was meant to curb runaway production.”Obviously we’re going to have to go back and deal with this somehow,” said one well-placed Congressional source who worked on the original legislation. “We’re having meetings right now deciding what course to take, but first we need to come to some consensus on the right approach.” Passed with great fanfare as the first action ever taken by the federal government to encourage film production in this country through tax incentives, the provision of the $137 billion American Jobs Creation Act of 2004 that’s been called into question was supposed to provide breaks to independent films with budgets up to $15 million—or $20 million if they were made in economically distressed areas.But a long-delayed IRS ruling handed down in early February has created uncertainty about the value of these tax breaks, because it requires the producers of a movie to include an estimate of future profit participations and residual payouts, adding those to the budget total.That means many producers of films with budgets under $15 million who thought they could tap the incentive will find that adding to the cost total an estimate of future profit payouts will push the budget over the cut-off point, even if they’re not spending any more than $15 million to make the picture.The Directors Guild of America, the Screen Actors Guild and IATSE in a joint statement expressed disappointment in the IRS ruling: “We believe it undermines the intent of the production incentive contained in the Jobs Act legislation. While the incentive may still prove workable for television production and for some independent films, the ruling that participation and residuals—which are often based on sales and profits that cannot be known at the time of production—must be included as original production costs undermines the use of the incentive for many independent, low-budget films. It was exactly those productions that the legislation was intended to help. We do not believe that this is the outcome Congress intended.”Rep. Howard Berman (D-CA), one of the authors of the original legislation, reiterated that view: “After years of working to pass a tax incentive that would help keep film productions in this country, it is a huge disappointment to see regulations that virtually negate that goal.”On the bright side, Berman noted, “there is a new climate in Congress, and both the chairman and ranking member of the Ways and Means Committee have indicated their interest in finding solutions that will encourage productions to stay in the United States.” Rep. Charles Rangel (D-NY), the new chairman of the Ways and Means Committee, which originates changes in tax legislation, “is aware of the problems and has a desire to fix this if we can do so in a fiscally responsible way, and can find a vehicle we can attach it to,” said the Congressional source who asked not to be identified.Under the legislation as passed, producers with movies budgeted at or below the $15 million threshold—or $20 million in a qualifying low-income area—who spent at least 75 percent of that budget here, could write off 75 percent of that budget in the first year. The IRS saw a potential loophole if profit participants, say lead actors, accepted a scant salary to keep down the budget, and then profited later when the film was released. But the ruling created a kind of Catch 22. The requirement to estimate such future participations and payoffs ignores the fact that most films never make money and guessing which will be a hit or a miss requires a crystal ball that doesn’t exist.There are at least two avenues under consideration in Congress to fix the problem: “One would be pass legislation that overruled the IRS, and stated that profit participations and residuals would not be counted or counted in a limited degree, in calculating the budget of a film. The other option is to take a bigger-picture look at the credits, and apply them to the first $15 million for all films made in this country. That’s the way it came out of conference when it was first enacted into law, but was later changed,” said the source.However, expanding the break would probably hit a roadblock. “We’re dealing with such huge deficits that when you propose anything that reduces tax revenues, it’s very difficult. And Hollywood is not the most popular place to target for tax breaks.” The original incentive provision for low-budget features was set to expire at the end of 2008, so any new legislation is likely to include a time extension, said the source, adding: “We really haven’t had an opportunity to see if this provision will do what we hoped it would do. First there was the uncertainty about how the law would be interpreted by the IRS, which caused filmmakers to hold back from using it. Now that the IRS has ruled, they don’t think it’s going to work.”
Written by Jack Egan
