Lights! Action! Deduct!


There may be a documentary film to be made about the documentary filmmaker who stood up to the IRS and won! A recent tax court case could be an extremely important precedent for independent filmmakers and documentarians. The issue in the case was the ability of the filmmaker to take deductions for expenses incurred in creating a documentary film given the fact that many documentary films do not make a profit.

The IRS has two different tax regimes. One for people who are, for lack of a better word, deemed "professionals," and the other for "hobbyists." Deductions are permitted for professionals: "those who engage in an activity for profit." The "professional" may deduct ordinary and necessary business expenses incurred in carrying on a trade or business. The tricky part for documentarians or independent filmmakers is satisfying the IRS that their filmmaking is in fact engaging in a trade or business and not a hobby. In order to do that, the filmmaker must show the IRS that she or he had a bona fide intent to make a profit. The burden for that is on the taxpayer. Whether one is considered to be "engaged in an activity for profit" is handled on a case by case basis, taking into account the facts and circumstances of each separate situation, and the factors provided in IRS Section 183. Since documentarians often do not make a profit, the IRS has taken the position that documentary filmmaking is not an activity engaged in for profit, but rather a "hobby." The IRS does this even though the legal requirement is not that the filmmaker actually make a profit, but rather that it was her or his expectation and bona fide intent (even if not a reasonable expectation) to make a profit.

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Published In: Art, Entertainment & Sports Updates, Intellectual Property Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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