Film Production Taxation

Hello All:

My client is a stunt coordinator for movies and tv shows, and as such, gets paid either as a 1099 contractor or W-2 employee. He has now formed a MMLLC that formed a second MMLLC that has produced a movie with domestic and international distribution rights. The person in charge of the books is not an accountant (although he does have a financial background) and has put part of it in Quickbooks, and part in Excel, so I'm trying to get the QB to match what is in Excel so I have a correct set of books. Is there anyone on this board that would be willing to advise on some questions I have, both for the accounting and the Form 1065?

In my search here, I saw that JR1 had some of these questions in earlier years, so I know that this comes up, and am hoping someone is willing to share some knowledge.

All help would be greatly appreciated. Please either PM me or reply here.

Thanks!

You should post the questions. Someone will help.

Yes...please post. We did an animated movie that took 4 years of production costs. Like to hear your issues.

I believe my biggest questions relate to expensing/capitalizing the movie expenses. Prior to 1/1/18, movie production expenses could be currently deducted under Section 181, providing they met the qualifications (which my client would meet). However, with the new tax law, Section 181 was terminated. However, the Master Depreciation Guide says that "100 percent depreciation is allowed for a qualified film, television show, or theatrical production acquired and placed in service after September 27, 2017, if it would have qualified for Code Sec 181 expense election without regard to to the $15 Million expensing limit or the December 31, 2017 expiration date."

So my questions related to what did "acquire" mean (did it mean creating the production or just purchasing it), or should I be using the Income Forecast Method of depreciation (11 years of depr) or the Safe Harbor (15 years of depr). I spent time researching the Income Forecast Method, which is do-able, but lots of work each year to revise the forecasts. I would prefer to use the 100 depreciation. From my Checkpoint research, it would appear that "acquire" means the production of the film as well as the purchase of a film. Does the forum agree with this conclusion?

My next issue with the depreciation is that the film costs will be paid for over both 2018 and 2019. In the Income Forecast Method, this is addressed by either revising your forecast or creating a new asset. So I thought I would create a 2018 asset and a 2019 asset and use the 100% bonus depreciation for both. I doubt the film will have much in revenue beyond 2-3 years, so this seems a way to wrap up the film revenue and costs and match them as much as possible without using the Income Forecast Method. So second question - does it seem appropriate to create two assets?

The LLC is beginning production on a new movie this month, so I need to have an answer and be able to use it as long as Sec 181 is terminated.

All comments and help are appreciated!

https://taxnews.ey.com/news/2018-0106-s ... d-jobs-act

Thank you, Nilodop, for the link. I hadn't seen that before. It summarizes what I had been thinking. The movie was placed in service, i.e., first film debut in November 2018. So I believe the costs from 2018 qualify for the 100%. The reason there are additional costs in 2019 is that not all expenses were paid in 2018, and this LLC is on the cash basis. So as the film is earning income on the distribution rights, the remainder of the expenses will be paid and those costs depreciated for 2019.

Thanks for the help.

Kate, don't forget to consider 263 vs 263A. Of course, TCJA made 263A n/a for small business taxpayers. If the taxpayer already had a method of accounting that included capitalizing 263A costs, then you need to file a 3115.

Don't forget to check state law. I'm in CA, and CA just retroactively conformed to the accounting method changes...thank goodness! But bonus depreciation is n/a for CA, so I will be stuck with income forecast method for state purposes. Just as an example.

If you need help with the 263A issues and prep of 3115, Brian Coddington is a frequent contributor to these pages, and I always consult with him on these issues. I do some prelim research and then touch base with him - he lives in these code sections. I also hire him to do my 3115s. He can do them better and faster than I can.

Thanks, JAD. This LLC is on the cash basis, so there shouldn't be any 263A issues. And the LLCs are in Washington State, so no state bonus depreciation problems. But you bring up a point for me to ponder, and perhaps maybe you or someone else can help. This is the first year they have ever produced a movie, so I don't believe there will be any Form 3115 issues to deal with either. However....with Section 181 terminated for now, and the only way to deduct the costs is through depreciation, then I guess the client is, by default, choosing to capitalize this asset for 15 years and then taking the 100% bonus. They have therefore chosen an accounting method. But, for each movie, they create a new SMLLC which is owned by one MMLLC. Would these new LLCs be considered to have chosen the safe-harbor capitalization method (15 years) since they are owned by the same MMLLC? Or does the fact that they are SMLLCs let them off the hook for this? At some point bonus depreciation will go away, and then they might be committed to the 15 year depreciation, instead of using the income forecast method. I will add that these new SMLLCs are organized completely separately and will probably have different investors, but am not sure if this would make any difference if the MMLLC owns them all. What do you think forum?

This LLC is on the cash basis, so there shouldn't be any 263A issues.

I think there are no 263A issues because it is the first year of business and small business taxpayers now are not subject to 263A. Cash basis has nothing to do with it.

then I guess the client is, by default, choosing to capitalize this asset for 15 years and then taking the 100% bonus.

Not choosing. Direct costs of producing a film must be capitalized. 263.