Jack and Jill (two unrelated individuals who are citizens of the US) found an interesting script for a movie in 2010, and they decided to produce it in Nevada. It was a "low budget" film, so they estimated production cost at $250,000. Jack has experience as a movie producer, but no experience in distribution, and he does not have any capital. Jill has capital and also has experience distributing movies. While both have had experience in these activities, neither one has ever had or been a partner in any business, so no accounting methods have been established for their movie making activities. It is now June 2011, and neither Jack nor Jill has yet filed tax returns for 2010 or 2011.
They signed a contract with each other in 2010 under which Jill lent Jack $250,000 to produce the movie. The contract stated that when Jack provided the movie, Jill would forgive the loan and also pay Jack $50,000. The contract also stated that Jill would pay to Jack 30% of any amount that Jill received for the movie in excess of $500,000. The movie was made in 2010 and 2011. The costs incurred by Jack to make the movie were: $10,000 paid in 2010 for the script, $50,000 paid each year to actors and crew, and $70,000 paid each year for props, etc. Then, following the terms of the contract, in 2011 Jack provided the completed movie which met all of the required specifications. Jill then forgave the $250,000 loan and also paid Jack $50,000. In that same year Jill sold the move to a company which distributed DVDs and received total payment of $550,000. Accordingly, she paid Jack $15,000 in 2011 representing 30% of the amount in excess of $500,000.
Jack and Jill each had substantial income from other activities, so each of them is concerned with tax consequences. They have heard about the Domestic Production Activities Deduction and wonder if their movie making qualifies.
how much may be deducted, when it is allowed, who could get the deduction, etc.