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arts & the law

As a way of furthering their careers, many actors decide to produce a short or feature-length film. As anyone who has tried knows, one of the most daunting tasks facing a would-be independent filmmaker is raising the money. Potential investors know there is a slim-to-none chance they will ever see their money again.

If you're open to it, however, an alternative exists that guarantees your supporters at least a partial "return" on their "investment." What is that alternative? Making your film through a nonprofit organization.

Most actors don't realize that independent films can be produced using a nonprofit, but they should. As most of us know, the vast majority of theatre companies are nonprofits, and in many critical ways indie film is not that different from theatre. The Internal Revenue Service recognizes that, like theatre companies, independent film production companies that are organized to produce or present "dramatic, musical, motion picture, and other performances" can qualify for tax-exempt—or, more colloquially, nonprofit—status. (The IRS is the arbiter of what kinds of organizations are tax-exempt.)

What exactly is a nonprofit? It is an entity, usually a corporation, created to fulfill an educational or other charitable purpose as defined under Section 501(c)(3) of the Internal Revenue Code. The arts in general, and filmmaking in particular, are classified by the IRS as educational.

Once the corporation is created, it must apply for and obtain tax-exempt status from the IRS before it is considered a charitable, or 501(c)(3), organization. The application must detail the activities and purposes of the organization. The critical criterion for exemption, which must be described in the application, is that the organization not be "organized or operated" for private benefit or gain. That is, it must be created and operated to achieve a public, artistic purpose and not a private one. This distinction between a public and a private purpose is the fundamental difference between a nonprofit and a for-profit business.

A nonprofit can be set up to produce one film or many. It must have a board of directors that legally controls the entity. At least some of the directors—ideally, a majority—must be financially and familially independent of the filmmakers. In essence, nonprofits are intended to prevent private benefit. There are additional formalities you may want to discuss with a competent attorney. Legal service organizations may be able to provide free or low-cost legal counsel in some cities.

Nonprofits can be like magic for your supporters. The appeal of a nonprofit is that contributions—as opposed to investments—are fully tax-deductible as charitable donations by the contributors. For middle-income contributors—especially those living in high-tax states such as California and New York—the charitable deduction write-off may exceed 40 percent or more of their contribution. For example, a $10,000 contribution to your film may cost the donor just $6,000 after taxes.

Donors of film stock and other equipment and supplies are also entitled to a deduction equal to the fair market value of the items donated. Unfortunately, donated time and services are not deductible yet, though legislation recently introduced in Congress could change that.

There is a catch, best explained by another analogy to theatre: How many small theatre companies do you know that make profits on their productions? The likelihood is: not very many. Likewise, how many indie films have made money for their producers or backers?

The catch is that a nonprofit has no owners. Thus, you're not likely to get rich should your indie film become a hit—but, realistically, would you expect otherwise? Often the film itself, as well as any profits it generates, will be owned by the nonprofit organization. By law, those profits may not be distributed to the filmmakers as if they were profit participants.

Like all good catches, however, there are exceptions. People who lend intellectual property, such as a screenplay or story concept, to a nonprofit production can receive royalty payments or license fees. In some cases, a nonprofit may even be able to support an independent filmmaker's production and allow him or her to retain full or partial ownership of the film. This requires that very careful arrangements be in place to avoid self-dealing and conflicts of interest.

Arthur Rieman ( is an attorney with the Law Firm for Nonprofits ( in Los Angeles. He works exclusively with nonprofits and their founders and board members.

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