Section 181 Tax Deduction: Rules, Election, and 2025 Sunset

The Section 181 tax deduction lets eligible taxpayers immediately expense up to $15 million in production costs for a qualifying film, television, live theatrical, or sound recording production, rather than capitalizing those costs and recovering them slowly through depreciation. For productions that commence on or before December 31, 2025, the election pulls the full tax benefit into the year the costs are paid or incurred. After that date, the provision sunsets. Productions that started in time remain eligible, so Section 181 deductions will still show up on returns filed in 2026 and later years.

Which Productions Qualify

Section 181 covers four categories. The first three have been in the statute for years; sound recordings were added by the One, Big, Beautiful Bill Act in 2025.

Film productions: feature films and other motion pictures intended for theatrical release, streaming, or other distribution.
Television productions: episodic series, made-for-TV movies, and similar programming. For a series, only the first 44 episodes qualify.¹
Live theatrical productions: a staged performance of a play, with or without music, based on a written script. The production must be presented in a venue with a capacity of no more than 3,000 seats, or in a touring series of venues where the majority meet that limit.¹
Sound recording productions: music recordings, streaming audio series, music videos, concert films, and similar audio works produced and recorded in the United States. This category has its own, much lower cap.¹

The 75 Percent Compensation Test

A film or television production qualifies only if at least 75 percent of the total compensation paid by the producer goes to services performed in the United States. That includes pay for actors, directors, producers, and production personnel, but excludes back-end participations and residuals.¹ In practice, that means keeping payroll records, contracts, and location logs that tie each payment to where the work was performed. Falling below 75 percent triggers recapture of deductions already taken.

Who Can Claim It

Any taxpayer actively engaged in producing or acquiring a qualifying production can make the election. That includes corporations, partnerships, individuals, and other entities that own the production. The Treasury regulations define an owner as anyone required to capitalize the production’s costs under Section 263A.² When several parties co-own a production, each owner deducts only the share of costs that reflects their proportionate economic interest, and the aggregate deduction across all owners cannot exceed the applicable cap.

Passive Activity and At-Risk Limits

For an individual investor who writes a check and has no meaningful role in production decisions, the Section 181 deduction is passive. It can only offset income from other passive activities. Excess passive losses carry forward, but they will not reduce wages, active business income, or portfolio income in the current year.³ An individual who materially participates as a producer or in day-to-day operations can treat the deduction as non-passive, which is far more valuable.

Section 465 at-risk rules layer on top. The deduction is capped at the amount the taxpayer actually has at risk in the production. A share financed by a nonrecourse loan where the investor bears no personal liability is not at risk and cannot be deducted. A deduction has to clear both the at-risk test and the passive activity test before it reduces taxable income.

How Much You Can Expense

Film, Television, and Live Theater

The standard cap is $15 million per production. If total costs exceed that amount, the first $15 million is still deductible under Section 181; only the excess must be capitalized and recovered through normal depreciation.² The cap rises to $20 million when a significant portion of production costs are incurred in areas designated as low-income communities under Section 45D or as distressed counties by the Delta Regional Authority.¹

Sound Recordings

Sound recordings have a much tighter limit. The deduction cannot exceed $150,000 per individual recording, or $150,000 in cumulative sound recording costs for the entire tax year, whichever is lower.¹

Which Costs Count

Deductible production costs are those directly tied to creating the work: compensation for actors, directors, crew, and production staff; set construction and equipment rentals; wardrobe; and the cost of acquiring rights to screenplays, books, or other underlying material. Only costs incurred before the production’s initial release or broadcast count. Post-completion spending on distribution, marketing, and financing generally falls outside Section 181.

Once you make the election for a production, no other depreciation or amortization is allowed on the same costs. You cannot expense part of a production under Section 181 and simultaneously depreciate it under the income forecast method or any other approach.¹

Making the Election

You make the Section 181 election by claiming the deduction as a separate line item on your income tax return and attaching a written statement with specific details.⁴ For the first year, the statement must include:

The name or other unique identifier of the production
The date production commenced
A declaration that the taxpayer is electing under Section 181
The amount of production costs being deducted
The total aggregate production costs of the production
The expected costs other co-owners will pay or incur
A statement that the taxpayer reasonably expects the production to qualify

In later years, the attached statement is shorter: just the production name, the current-year deduction amount, and updated aggregate costs. The election must be made by the due date, including extensions, for the return covering the first year in which production costs are incurred.¹

Revoking the Election

Once made, the election cannot be revoked without IRS consent, which normally requires a private letter ruling. The regulations offer a streamlined path: if you comply with the recapture rules on a timely filed return and attach a statement identifying the production and declaring the revocation, that counts as consent granted.⁵ Either route triggers recapture of excess deductions, so revocation is rare unless a production falls apart or fails to meet the qualification tests.

When Deductions Get Clawed Back

If a production that already claimed Section 181 deductions later fails to qualify, the excess amount must be included as ordinary income in the year recapture is triggered. Recapture applies when:

Aggregate production costs grow beyond the $15 million or $20 million cap
The taxpayer no longer reasonably expects the production will meet the definition of a qualified production
The taxpayer no longer reasonably expects the production will actually be set for production at all
The taxpayer revokes the election

The recapture amount is the difference between what was deducted under Section 181 and what would have been allowable under normal depreciation for the same period. If the production was never placed in service, the full cumulative deduction is recaptured.⁶ The recaptured amount also gets added back to the taxpayer’s basis in the production, so the tax benefit is spread out rather than lost.

The December 2025 Sunset

Section 181 does not apply to any production commencing after December 31, 2025.¹ The termination covers all four production types. A production that commenced on or before that date remains eligible even if substantial costs are incurred in 2026 or later, because the trigger is when production begins, not when expenses are paid. The One, Big, Beautiful Bill Act, signed on July 4, 2025, did not extend the sunset.

What Replaces Section 181 in 2026

With Section 181 sunsetting, the primary federal mechanism for immediate expensing of production costs going forward is bonus depreciation under Section 168(k). Qualified film, television, and live theatrical productions have been eligible for bonus depreciation since the Tax Cuts and Jobs Act of 2017. The OBBBA expanded eligibility to include sound recording productions.⁷

The OBBBA also restored 100 percent first-year bonus depreciation for qualifying property placed in service after January 19, 2025.⁸ For productions, “placed in service” means the date of initial release or broadcast for film and TV, or the date all necessary elements are secured for a live theatrical production.⁷

Bonus depreciation differs from Section 181 in a few important ways. It has no $15 million cap, so big-budget productions can expense the full cost. It applies automatically unless the taxpayer elects out, with no separate election statement required. And eligibility turns on when the production is placed in service, not when it commenced. The 75 percent domestic compensation test still applies as a threshold for whether a production qualifies, but the mechanics of claiming the deduction shift to the 168(k) framework. For producers planning new projects in 2026, that is where the conversation starts.

1
Office of the Law Revision Counsel. 26 U.S. Code 181 – Treatment of Certain Qualified Productions
2
eCFR. 26 CFR 1.181-1 – Deduction for Qualified Film and Television Production Costs
3
Internal Revenue Service. Topic No. 425, Passive Activities – Losses and Credits
4
GovInfo. 26 CFR 1.181-2 – Election to Deduct Production Costs
5
eCFR. 26 CFR 1.181-2 – Election to Deduct Production Costs
6
eCFR. 26 CFR 1.181-4 – Special Rules
7
Internal Revenue Service. Notice 2026-11 – Interim Guidance on Additional First Year Depreciation Deduction Under Section 168(k)
8
Internal Revenue Service. One, Big, Beautiful Bill Provisions