IRS Publishes Temporary Regs on Deduction of Film, TV Production Costs

 Deduction for Qualified Film and Television Production Costs

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations relating to deductions for the cost of producing film and television productions. These temporary regulations reflect changes to the law made by the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, and affect taxpayers that produce films and television productions within the United States. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on October 18, 2011.

Applicability Dates: For dates of applicability, see § 1.181-6T.

FOR FURTHER INFORMATION CONTACT: Bernard P. Harvey, (202) 622-4930 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to 26 CFR part 1 to provide regulations under section 181 of the Internal Revenue Code of 1986 (Code). Section 181 permits the deduction of certain production costs by the producer of a qualified film or television production.

Section 181 was added to the Code by section 244 of the American Jobs Creation Act of 2004, Public Law No. 108-357 (118 Stat. 1418) (October 22, 2004), and was modified by section 403(e) of the Gulf Opportunity Zone Act of 2005, Public Law No. 109-135 (119 Stat. 2577) (December 21, 2005). Section 502 of the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, Public Law No. 110-343 (122 Stat. 3765) (October 3, 2008) further modified section 181 for film and television productions commencing after December 31, 2007, and extended section 181 to film and television productions commencing before January 1, 2010. Section 181 was extended again to film and television productions commencing before January 1, 2012, by section 744 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Public Law No. 111-312 (December 17, 2010).

On September 30, 2011, the IRS and the Treasury Department published in the Federal Register (TD 9551, 76 FR 60721) final regulations relating to deductions for the cost of producing film and television productions under section 181 as enacted by the American Jobs Creation Act of 2004 and modified by the Gulf Opportunity Zone Act of 2005.

Explanation of Provisions

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 (a "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 (the "aggregate production costs 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 (the "deduction limit"). A film or television production ("production") is a qualified film or television production if at least 75 percent of the total compensation of the production is compensation for services performed in the United States by actors, directors, producers, and other production personnel.

These temporary regulations amend § 1.181-1 to define the term "post-amendment production" and specify that the aggregate deduction under section 181 (rather than the amount of aggregate production costs) is subject to the dollar limits imposed under § 1.181-1(b). The temporary regulations also amend §§ 1.181-0 (table of contents) and 1.181-6 (effective date provisions).

Effective Date

These temporary regulations apply to qualified film and television productions for which principal photography or, for an animated production, in-between animation, commenced on or after October 18, 2011. An owner may choose to apply these temporary regulations to qualified film or television productions commencing on or after January 1, 2008, and before October 18, 2011.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) and (d) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), please refer to the Special Analyses section of the preamble to the cross-reference notice of proposed rulemaking published in the Proposed Rules section in this issue of the Federal Register. Pursuant to section 7805(f) of the Code, these temporary regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Bernard P. Harvey, Office of Associate Chief Counsel (Income Tax and Accounting). However, other personnel from the IRS and the Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par.2. Section 1.181-1 is amended by revising paragraphs (a)(1)(ii), (a)(6) and (b)(1)(ii) and (b)(2)(vi) to read as follows:

§ 1.181-1 Deduction for qualified film and television production costs.

(a) * * *

(1) * * *

(ii) [Reserved]. For further guidance, see § 1.181-1T(a)(1)(ii).

* * * * *

(6) [Reserved]. For further guidance, see § 1.181-1T(a)(6).

* * * * *

(b) * * *

(1) * * *

(ii) [Reserved]. For further guidance, see § 1.181-1T(b)(1)(ii).

* * * * *

(2) * * *

(vi) [Reserved]. For further guidance, see § 1.181-1T(b)(2)(vi).

* * * * *

(c) * * *

(2) [Reserved]. For further guidance, see § 1.181-1T(c)(2).

* * * * *

Par. 3. Section 1.181-0T is added to read as follows:

§ 1.181-0T Table of contents (temporary).

This section lists the entries for §§ 1.181-1T and 1.181-6T.

§ 1.181-1T Deduction for qualified film and television production costs (temporary).

(a) through (a)(5) [Reserved]. For further guidance, see entries for § 1.181-1(a) through (a)(5).

(6) Post-amendment production.

(a)(7) through (b)(1)(i) [Reserved]. For further guidance, see entries for § 1.181-1(a)(7) through (b)(1)(i).

(ii) Post-amendment costs.

(b)(1)(iii) through (c)(1) [Reserved]. For further guidance, see entries for § 1.181-1(b)(1)(iii) through (c)(1).

(2) Post-amendment production.

§ 1.181-6T Effective/applicability dates (temporary).

(a) In general.

(b) Application of temporary regulations to pre-effective date productions.

Par. 4. Section 1.181-1T is added to read as follows:

§ 1.181-1T Deduction for qualified film and television production costs (temporary).

(a)(1)(i) [Reserved]. For further guidance, see § 1.181-1(a)(1)(i).

(ii) This section provides rules for determining the owner of a production, the production costs (as defined in paragraph (a)(3) of this section), the maximum amount of aggregate production costs (as defined in paragraph (a)(4) of this section) that may be paid or incurred for a pre-amendment production (as defined in paragraph (a)(5) of this section) for which the owner makes an election under section 181, and the maximum amount of aggregate production costs that may be claimed as a deduction for a post-amendment production (as defined in paragraph (a)(6) of this section) for which the owner makes an election under section 181. Section 1.181-2 provides rules for making the election under section 181. Section 1.181-3 provides definitions and rules concerning qualified film and television productions. Section 1.181-4 provides special rules, including rules for recapture of the deduction. Section 1.181-5 provides examples of the application of §§ 1.181-1 through 1.181-4, while § 1.181-6 provides the effective date of §§ 1.181-1 through 1.181-5.

(2) through (5) [Reserved]. For further guidance, see § 1.181-1(a)(2) through (a)(5).

(6) Post-amendment production. The term post-amendment production means a qualified film or television production commencing on or after January 1, 2008.

(7) [Reserved]. For further guidance, see § 1.181-1(a)(7) .

(b)(1)(i) [Reserved]. For further guidance, see § 1.181-1 (b)(1)(i).

(ii) Post-amendment production. Section 181 permits a deduction for the first $15,000,000 (or, if applicable under paragraph (b)(2) of this section, $20,000,000) of the aggregate production costs of any post-amendment production.

(iii) [Reserved]. For further guidance, see § 1.181-1(b)(1)(iii).

(2)(i) through (v) [Reserved]. For further guidance, see § 1.181-1(b)(2)(i) through (b)(2)(v).

(vi) Allocation. Solely for purposes of determining whether a production qualifies for the higher production cost limit (for pre-amendment productions) or deduction limit (for post-amendment productions) provided under this paragraph (b)(2), compensation to actors (as defined in § 1.181-3(f)(1)), directors, producers, and other relevant production personnel (as defined in § 1.181-3 (f)(2)) is allocated entirely to first-unit principal photography.

(c)(1) [Reserved]. For further guidance, see § 1.181-1(c)(1).

(2) Post-amendment production. Amounts not allowable as a deduction under section 181 for a post-amendment production may be deducted under any other applicable provision of the Code.

Par. 4. Section 1.181-6T is added to read as follows:

§ 1.181-6T Effective/applicability dates (temporary).

(a) In general. (1) Except as provided in paragraph (b) of this section, § 1.181-1T applies to productions, the first day of principal photography for which occurs on or after October 18, 2011, and before the date of expiration of section 181 as provided in section 181(f). For an animated production, this paragraph (a) applies by substituting "in-between animation" in place of "principal photography." Productions involving both animation and live-action photography may use either standard.

(2) The applicability of § 1.181-1T expires on October 17, 2014.

(b) Application of temporary regulations to pre-effective date productions. An owner may apply § 1.181-1T to productions, the first day of principal photography (or "in-between" animation) for which occurs after December 31, 2007, and before October 18, 2011, provided that the taxpayer applies all provisions in § 1.181-1T and in §§ 1.181-1 through 1.181-5 (other than provisions specific to pre-amendment productions) to the productions. If a taxpayer does not choose to apply § 1.181-1T to a production, the first day of principal photography (or "in-between" animation) for which occurs after December 31, 2007, and before October 18, 2011, then the taxpayer must use a reasonable method to take into account the statutory change to section 181 under section 502 of the Tax Extenders and Alternative Minimum Tax Relief Act of 2008. See § 1.181-6.