Question:
I would like to get angel investors for my television pilot. Can I set up a non-profit for donations? What kind of a return can I promise if the show makes money?
Answer by Brandon Blake, Entertainment Lawyer:
Non-profit financing has become increasingly popular for television, documentary and feature film development. Often it is the concept or script that hooks investor interest, rather than a promise of big financial returns. So it makes sense that the tax deductibility of financing is interesting to many potential angel “investors.”
The good news is that with a properly organized tax-exempt organization it is possible to collect tax-exempt donations for a project that is otherwise a “for-profit” venture, provided that the content of the project, whether that is a film, television or music project, fits within the mission statement of the tax-exempt organization and that the finances and control of the non-profit and for-profit entities are kept separate.
However, it is not possible to mix tax-deductibility and a future interest in profits in the same transaction. Tax deductibility and profit are like oil and water, they just do not mix. I have reviewed a number of structures by clients hoping to be able to convert a donation into an investment at a later date, thereby getting the best of both worlds. The problem with this concept is that if the “donation” were re-characterized at a later point, then the deductibility of that donation would retroactively be taken away, creating a true mess for the investor’s accountant. Moreover, in the IRS’ zeal to eliminate tax shelters, any arrangement with a contractual right to profits later would most likely be characterized up front as an investment, not a donation.
Yet our firm has successfully set up many 501(c)(3) tax-exempt organizations that participate in the financing of documentaries, television, and feature film projects. And those projects have gone on to be commercially distributed. The key to the proper use of the non-profit in entertainment finance is to understand that donations can be used to finance any project but that profits cannot flow to the donors.
A proper structure can take several different shapes, including the use of a conduit organization to receive the donations or the creation of a viable non-profit that might assist in the development of feature film, documentary or television projects.
Other options exist as well, including the use of crowd funding websites. However, it is important to note that crowd funding websites neither provide for tax deductibility, nor do they allow for any return on profits to the investor/donors. In many ways crowd funding is currently the worst of both worlds in terms of tax treatment. The donors are required to record the funds provided as non-deductible gifts, which then reduces the donor’s lifetime limit on other such gifts to family, and at the same are blocked by the SEC from participating in any future profits from the venture.
However, there are a number of creative ways to try to create benefit for donors while still utilizing the benefits of crowd funding. One such technique is to use crowd funding in conjunction with forming a non-profit organization.
I have been working with non-profit organizations ranging in size from public universities to galleries, theater groups and documentary production companies for more than 16 years with the law firm of BLAKE & WANG P.A. (www.blakewang.com). We can assist clients in organizing solid, broad based tax-exempt 501(c)(3) organizations that gain the broadest tax-deductibility for the donors. Properly organized, a tax-exempt organization is an ideal way to unlock capital for projects that have an appeal based on the message and cause promoted, rather than the potential box office returns.