Greetings,
Usually costs associated with producing a film are capitalized and then depreciated over a period of years. The expenses are spread over many years. Sec 181 allows a deduction in full of the expenses in the year incurred for production; but only if you meet all of the qualifications listed in the section. Expensing reduces taxable income in the year of the expense and can produce a net loss in that year. Often the loss will pass to investors (if the film company is organized as a partnership or as an S Corporation). You do need to be aware that Section 181 is set to expire on Jan 1, 2009. So, unless it is extended, you must begin production this year in order to benefit from this section. You do not have to complete all of the production in 2008, but you do have to start it.
Treating the cost as an expense which is not chargeable to a capital account means that cost does not become part of an asset which has a deduction over multiple years. Instead, there is current year deduction of the expense, in full.
I hope this helps.
Best regards.
Hello again,
The law is in effect until December 31, 2008, therefore investments must be made before that date and the money invested into qualifying productions must be spent by then by the producers to claim the amounts in the current year. So, there is no deduction for 2009 unless the provision is extended, as I understand it.
Indeed, it is my understanding that it is the investors that made the investment that get to take the deduction; but you need to review both this section and the partnership agreement to ensure that is the proper treatment. I admit that I have not researched this to any great degree and am simply going by my reading of the section.
As is often the case, the exact line on the return is not critical but whether the proper treatment be afforded the amounts entered in the return by the partner. It seems that 1065,page 3, line 13d is appropriate. According to 2007 Instruction 1065 Schedule K-1 the section 181 deduction should wind up in Box 13 with code V on the K-1.
Whether you choose to list details or simply a lump sum is mostly a matter of preference and personally I do prefer to include a subschedule that lists the expenses (in the same categories as provided by the taxpayer); but that is mostly for my convenience in verifying the amounts included in the total and for ease of reference years after the return has been prepared. Either method is acceptable.
The state return requirement is not clear to me from what you have stated and would appear to depend on whether there is nexus to the state in 2009; so I will decline to speculate on that.
I hope this general discussion is useful and helps to clarify for you.
Enrolled Agent
I have prepared individual, trust, partnership, and corporate taxes since 1987.