A Cornerstone of U.S. Film Financing
Section 168(k) of the U.S. Internal Revenue Code, commonly known as ‘bonus depreciation,’ has become one of the single most important financial tools for independent film production in the United States. In essence, it allows a business to take an immediate 100% deduction on the cost of qualifying assets in the year they are placed in service, rather than depreciating those costs over many years. For the film industry, a completed and released film is treated as such a ‘qualifying asset.’
This has a profound impact on the financial structure of a film. When a production company completes a film for, say, $10 million, under Section 168(k) it can immediately claim a $10 million business expense deduction. This creates a significant ‘paper loss’ for tax purposes. High-net-worth equity investors in the film can then use this loss to offset taxable income from other sources, thereby lowering their overall tax liability. This tax benefit is immediate and guaranteed, regardless of whether the film itself ever turns a profit, making film investment substantially more attractive and less risky.
The TCJA and Its Evolving Impact
The provision was significantly enhanced by the Tax Cuts and Jobs Act of 2017 (TCJA), which increased the bonus depreciation from 50% to a full 100% for qualifying productions. This supercharged its use in the independent film world, making it a primary driver for attracting equity financing.
However, the 100% bonus is not permanent. The TCJA included a planned phase-out schedule:
| Year Placed in Service | Bonus Depreciation Percentage |
|---|---|
| Before 2023 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027 and after | 0% |
This declining percentage creates a sense of urgency for producers. To maximize the tax benefit for their investors, they must ensure their film is completed and ‘placed in service’ (i.e., released or made available for distribution) before the percentage drops further. Section 168(k) often works in tandem with state-level tax credits, forming a powerful two-pronged approach that underpins the financing of a vast number of American independent films.