Federal Taxes on Income from Investment

[MidwestTech]

What is the name of your state (only U.S. law)? Illinois

There is a company that is interested in producing a movie. This company is a limited liability company (LLC) containing only one member. To avoid using real names, let's call this company ACME, LLC.

ACME, LLC, is currently soliciting investments into ACME, LLC. In return for their investments, investors would receive portions of the film's profits in perpetuity. These investors would NOT become members of the LLC.


The written agreement is entitled "Financing Agreement - Revenue Participation Rights". The first sentence of the
agreement is as follows:

The following agreement (the "Agreement"), dated as of (DATE), sets forth the understanding between ACME, LLC ("Producer"), on the one hand, and (INVESTOR NAME) ("Financier"), on the other hand, in connection with Financier's provision of funds to Producer for the purpose of producing, completing, delivering, and marketing the motion picture presently entitled "MOVIE NAME" (the "Picture"), which will be produced by Producer.


My question concerns federal income taxes. Which federal tax forms do I use to report income that I receive from
this investment? Schedule C? Schedule E? Line 17 of Form 1040? Line 21 of Form 1040?

Thanks for any info.

 

[LdiJ]

What is the name of your state (only U.S. law)? Illinois

There is a company that is interested in producing a movie. This company is a limited liability company (LLC) containing only one member. To avoid using real names, let's call this company ACME, LLC.

ACME, LLC, is currently soliciting investments into ACME, LLC. In return for their investments, investors would receive portions of the film's profits in perpetuity. These investors would NOT become members of the LLC.


The written agreement is entitled "Financing Agreement - Revenue Participation Rights". The first sentence of the
agreement is as follows:

The following agreement (the "Agreement"), dated as of (DATE), sets forth the understanding between ACME, LLC ("Producer"), on the one hand, and (INVESTOR NAME) ("Financier"), on the other hand, in connection with Financier's provision of funds to Producer for the purpose of producing, completing, delivering, and marketing the motion picture presently entitled "MOVIE NAME" (the "Picture"), which will be produced by Producer.


My question concerns federal income taxes. Which federal tax forms do I use to report income that I receive from
this investment? Schedule C? Schedule E? Line 17 of Form 1040? Line 21 of Form 1040?

Thanks for any info.

You are getting ahead of yourself...way ahead of yourself. The odds of a movie coming out of a single member LLC and actually being profitable are pretty slim.

What usually happens in this kind of investment situation is that there are general partners (the guy asking for the investment) an limited partners (the people making the investments) and any profits (or losses) get reported on schedule K1 in the boxes representing the types of income or losses generated.

 

[Taxing Matters]

My question concerns federal income taxes. Which federal tax forms do I use to report income that I receive from
this investment? Schedule C? Schedule E? Line 17 of Form 1040? Line 21 of Form 1040?

That cannot be answered because you have not told us the details of the investment scheme that is being promoted here. All you have told us is that the investors are not members of the LLC. But you have not told us exactly how the investment works. In federal tax, the details always matter and we do not have those details here.

It is more common to see a limited partnership (LP) used for movie financing deals, btw, but similar things can be done with a LLC. It was the typical LP movie financing situation that I think LdiJ was describing. And most of these ventures never pan out to be profitable ventures for the investors. There is a lot of risk in single movie financing.

 

[MidwestTech]

That cannot be answered because you have not told us the details of the investment scheme that is being promoted here. All you have told us is that the investors are not members of the LLC. But you have not told us exactly how the investment works. In federal tax, the details always matter and we do not have those details here.

It is more common to see a limited partnership (LP) used for movie financing deals, btw, but similar things can be done with a LLC. It was the typical LP movie financing situation that I think LdiJ was describing. And most of these ventures never pan out to be profitable ventures for the investors. There is a lot of risk in single movie financing.

This is something that is being done via Crowdfunded Investing. I am planning to invest only a few hundred dollars.

The money made by the film will be the Gross Proceeds. After some people/entities are paid off, the money left over will be Adjusted Gross Proceeds. First, all of the Adjusted Gross Proceeds will go to the investors, until each investor has been paid 115% of his investment. After that, 50% of the Adjusted Gross Proceeds will go to the investors, in perpetuity.

 

[MidwestTech]

I have just obtained more information about this film investment. The guy offering the investment, says that this not a partnership at all, and that no Schedule K-1 will be issued. If an investor has income, that investor will be issued a 1099 form.

So, with that in mind, where would I report this income?

Also, you guys say that films that are produced by single-member LLCs are rarely profitable. Where did you guys get information about the track record of films produced by single-member LLCs? Is there some website or newspaper article that discusses this?

 

[quincy]

... Also, you guys say that films that are produced by single-member LLCs are rarely profitable. Where did you guys get information about the track record of films produced by single-member LLCs? Is there some website or newspaper article that discusses this?

Following is a link to a good article published by the Bureau of Labor Statistics (BLS) titled, "From Script to Screen: Careers in Film Production." Although it is older (2013) so the figures cited have changed, it provides a realistic look at filmmaking. You can explore the BLS site to find how filmmakers fare in various parts of the country.

https://www.bls.gov/careeroutlook/2013/summer/art02.pdf

I read recently somewhere (I can't remember where) that the majority of those who produce one film never produce another. I have read nothing that links this to single member LLCs, however. It is linked to the film industry itself.

 

[Taxing Matters]

The money made by the film will be the Gross Proceeds. After some people/entities are paid off, the money left over will be Adjusted Gross Proceeds. First, all of the Adjusted Gross Proceeds will go to the investors, until each investor has been paid 115% of his investment. After that, 50% of the Adjusted Gross Proceeds will go to the investors, in perpetuity.

I have just obtained more information about this film investment. The guy offering the investment, says that this not a partnership at all, and that no Schedule K-1 will be issued. If an investor has income, that investor will be issued a 1099 form.

So, with that in mind, where would I report this income?

It sounds to me much like bond, and thus once you recover what you paid all the additional payments received would be interest income.

Also, you guys say that films that are produced by single-member LLCs are rarely profitable. Where did you guys get information about the track record of films produced by single-member LLCs? Is there some website or newspaper article that discusses this?

It has nothing to do with how many members the LLC has. It has to do with how many films it produces. Single film financing arrangements are risky because the fact of the matter is that most films do not make much profit, if any. A lot of films lose money. Large movie studios like Warner, Disney, 20th Century Fox, etc., make money overall because they have some huge hits that cover the losses of the rest. They also have more marketing power and star power than small independent producers. Reliable film data is hard to come by, but one UK analyst, Stephen Follows, who analyzed profitability of films with a view towards both the North American and UK markets concluded that on average a film may make a profit 50% of the time. But the problem there is that represents an average. He noted that “The top 6% of movies (i.e. those which made the most profit) provided 49% of all the money made by the profitable films. And similarly, the bottom 6% of movies (i.e. those which individually lost the largest amounts of money) accounted for 53% of the money lost by unprofitable films.” Thus, his analysis shows that 50% of movies make some profit, but of those films nearly half the profit goes to just the top 6% of films. A lot of films that are profitable don't make all that much profit. And then there are the 50% of films that lose money.

Compounding the problem is that the production cost of the film is often not even the largest part of the expenses for a movie. Marketing and other costs often exceed the cost of producing a film. In a somewhat famous example, a Warner Bros. income statement for the very popular movie Harry Potter and the Order of the Phoenix claimed that while the film, which was released in 2007, had earned by 2009 gross revenues of $612 million it nevertheless ended up with an accounting loss of over $167 million. The film was a smashing success, but even so, on the income sheet the studio prepared, it showed a loss. Such is the way movie accounting goes.

Your return here thus will depend not only on how the film does, but on how the accounting works to determine what counts towards the “adjust gross proceeds” that you are looking at for your money back on this venture. You ought to hope the accounting doesn’t go like it did for that Harry Potter film or you might not ever see a return on the investment. Movie investing is particularly tricky for those not experienced in the business.

 

[quincy]

... Reliable film data is hard to come by, but one UK analyst, Stephen Follows, who analyzed profitability of films with a view towards both the North American and UK markets concluded that on average a film may make a profit 50% of the time. But the problem there is that represents an average. He noted that “The top 6% of movies (i.e. those which made the most profit) provided 49% of all the money made by the profitable films. And similarly, the bottom 6% of movies (i.e. those which individually lost the largest amounts of money) accounted for 53% of the money lost by unprofitable films.” Thus, his analysis shows that 50% of movies make some profit, but of those films nearly half the profit goes to just the top 6% of films. A lot of films that are profitable don't make all that much profit. And then there are the 50% of films that lose money.

Here is a link to Taxing Matters source material, the Stephen Follows website: https://stephenfollows.com/many-films-average-film-career/

The Follows' website is a good source of information for filmmakers so you might want to add it to your "favorites."

And here, from another good source of information for filmmakers - is a link to a report co-authored by Follows and Bruce Nash on The American Film Market website. The report is on the low-budget films that tend to be the most successful:
https://americanfilmmarket.com/what-types-of-low-budget-films-break-out/

Good luck, Midwest Tech.