Film Production: Basis Recovery and Federal Incentives (Portfolio 599)
This Portfolio provides a comprehensive analysis of the basis recovery issues and federal incentives applicable to the filmed entertainment industry.
Tax Portfolio, Film Production: Basis Recovery and Federal Incentives (Portfolio 599), No. 599, provides a comprehensive analysis of the revenue recognition, basis recovery issues and federal incentives applicable to the media and filmed entertainment industry. This Portfolio begins with an overview of the evolution of film production over time and provides a glimpse into the broadcast and cable network television business. The Portfolio continues with an extensive discussion of tax ownership (and common financing and production transactions) and relevant copyright law guidance and topics. The Portfolio then provides a primer on revenue recognition, addressing common fact patterns and issues associated with theatrical film distribution, home video and sales/returns, and other matters. The section was tailored to frame the subject in a manner useful to various types of content producers, licensors and distributors. The Portfolio also addresses the Extraterritorial Income Exclusion and its relevance to media and entertainment companies. The Portfolio then addresses tax basis topics and launches into an analysis of depreciation methods applicable to production properties, including the amortization of intangibles under §167, the history, evolution and application of the income forecast method of depreciation, the amortization of §197 intangibles and basis recovery for abandoned property (including pre-development costs). This Portfolio also covers in detail §181, a federal incentive designed to deter runaway (i.e., non-U.S.) production, and which provides a current deduction for production costs paid or incurred for qualified film and television production. The Portfolio similarly addresses §199 as relevant to the film production (theatrical, free-TV, pay-TV, home video, etc.) and distribution industry. The Portfolio also addresses the recovery of software development and research expenses (and research credit eligibility) with a similar focus and discusses the manner in which certain production incentives might be accounted for under Generally Accepted Accounting Principles (“GAAP”). This Portfolio closes with a discussion of the pertinent issues involved in the disposition of film assets, which is equally applicable to video games, online content, and television content.
The creation of this Portfolio was spurred by two objectives. First, the authors wished to consolidate and coordinate in one place various pieces of theatrical film, home video, online content, cable and television, and licensing arrangement guidance regarding income recognition, basis recovery, and federal incentives. We believe a text that appropriately weaves such strands together, to enable the reader to view the entire tapestry, may facilitate meaningful issue identification and use from a planning and compliance perspective. Second, the authors believe an industry specific point of view, reflecting transactional and business realities, and commentary would be of value to a reader interested in the tax considerations addressed from both a historical and future planning point of view. A note about what this text is not. The text does not address every conceivable deal structure, property interest, technology evolution, or income tax issue. The text was purposefully limited to certain topics so that a more in-depth coverage could be accorded to these topics. The authors have not sought herein to read obscure footnotes from obsolete case law, under poor back-lot lighting, to support general propositions; but, rather, we have endeavored to reflect the state of the law with its areas of clarity and ambiguity from a practical and realistic perspective.
Table of Contents
I. Introduction: A Brief History of Film Production
II. Relevancy of Older Internal Revenue Service Final Published Guidance
III. Tax Ownership for Depreciation
IV. Basis Rules Overview
V. Methods of Depreciation
VI. Section 181: Treatment of Qualified Film and Television Production
VII. Section 197
VIII. Accounting for Abandonment Losses
IX. Section 199: Domestic Production Deduction
X. Research and Development Costs
XI. Disposition of Film Assets Overview
Vice President & Lead Tax Counsel
Senior Manager, State And Local Tax