Hi, I have a friend who is a film producer. He completed production of a film in early 2007. In 2008 he spent money in looking for a distributor. He found a distributor in 2008 and released his film in theater in 2008. So for 2008 he has income from film distribution. At the same time he spent money in 2008 in advertising/publicity/marketing of the film. My question is

What is IRS rule for deduction of film advertising/publicity/marketing expenses?

I would appreciate citation of any specific section or publication.

Note: I believe it may be a normal business expenditure that can be deducted. But I may be wrong and also I am looking for specific provision.

Note: I am aware of section 181 that talks about film production cost but what I need is about film post production cost.

Thanks for help

I cannot provide you a IRC citation, but normal expenses incurred in production and promotion of a film are fully deductible in the tax year in which they are incurred, provided you are a cash-basis tax payer.

Thank you. Does that mean under accrual basis the expenses are not deductible in the same year when they are incurred even if the payment are made the next year?

I have another question...

The company already filed return under C corp and had huge losses in 2007.. close to about a million. They don't expect to make profit in near future. So carry forward of losses does not make sense to them. Is there any way they can elect S corp now? My friend wants to deduct this losses from his personal income for 2007 by becoming shareholder of the corporation after converting to S corp. My friend has already file return for 2007. However for 2008 both the C corp and my friend has filed for extension.

If converting to S corp is not viable what is the alternative. Please don't suggest liquidation and adjust up to $100,000.

Thanks a lot

Chas basis means you deduct the costs the year the expenses are paid.

Accrual basis means you deduct the costs the year the expenses are incurred.

This is only an issue normally at the end of the year when some expenses incurred in the two months of the year are paid in the following year.

There IS a process by which a C corporation can convert to S corporation status, but it requires submission of specific paperwork to the IRS which (I believe) must be done before the end of the corporation's tax year. I may be wrong on this, but I do not think so.

In any event, you need to contact a local competent tax professional with experience in corporate tax returns.