3.5.2. Negative Pickup Contract
Negative pickup refers to a syndicate of investors that acquires the rights to own and produce a film. Before producing the film, the syndicate enters into a contract with a distributor in which the syndicate agrees to deliver the completed film by a specified date to the distributor, and the distributor will pay a fee to be able to show the film. The syndicate will typically finance the production of the film by securing a non-recourse loan from a third party. It will use the distribution contract to secure the loan.
After the film is completed, the syndicate will deliver the negative and printed version of the film to the distributor. The distributor will promote and show the film and receive most of the film’s sales. The distributor will pay the syndicate the fee upon picking up the negative of the completed film, which will be used to pay off the loan. In addition, the syndicate will receive a percentage of the film’s receipts.
While the film is being produced, no income is being generated. The syndicate may elect to expense up to $15 million of the production costs and deduct them as they are incurred. This is called bonus depreciation. All additional production costs must be capitalized. The election of bonus depreciation, however, applies only to “qualified” film or television productions. To be qualified, at least 75% of the total compensation for the production must consist of compensation for services performed inside the U.S. by actors, directors, production personnel, and producers.
As intellectual property, a film or television series is an intangible asset. An intangible asset is a long-term resource that has commercial value but no physical existence. Capitalized production costs can use only one of two methods of amortization: the straight-line method and the income forecast method. Accelerated depreciation is not an option. The straight-lin