By Chad Robinson, CPA, Partner and
Jennifer M. Wescott, CPA, MBA, Senior Tax Associate
Those involved in film, television, and live theatrical productions have been mourning the loss of two key Internal Revenue Code Sections with the passage of the Tax Cuts and Jobs Act (the” Act”). However, there are several new federal provisions embedded in the over 1,000-page document that are beneficial to these industries and deserve more attention.
There are two features of the Tax Cuts and Jobs Act that have drawn all of the media attention: the new flat 21% corporate tax rate and the new 20% deduction for qualified business income of pass-thru entities. These reductions in business taxes are cornerstones of Congress’ tax reform goals. Film, television, and live theatrical productions will certainly benefit from these along with other U.S. industries.
Under the Act, a deduction is allowed for 20% of the taxpayer’s qualified business income from a partnership, S corporation, or sole proprietorship. However, the deduction generally would be limited to (i) 50% wages paid or (ii) the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis of all qualified property. The 20% deduction is claimed on the individual returns of each taxpayer and is also subject to a phase out starting at $315,000 for joint filers.
The KPM Take
Pass-thru companies like loan-outs, production companies and other entertainment companies may be eligible for the benefit of this deduction, but might phase out based on a specified individual income threshold. Additionally, consideration will need to be given to choice of entity, and companies might be motivated to change their business to generate wages for owners (S corporations) vs. other structures that don’t generate wages (partnerships).
Despite hopes to the contrary, the federal tax incentive for qualified film, television, or live theatrical productions, commonly known as Section 181, was not renewed with the passage of the Tax Cuts and Jobs Act. This federal production incentive had been available through December 31, 2016 and was not extended to calendar year 2017 or later. The popular election allowed eligible taxpayers to deduct costs of qualified productions as an expense that was not chargeable to the capital account. This deduction had been capped for any production with costs exceeding $15 million and qualification depended on the percentage of services performed in the United States by actors, directors, producers, and production personnel.
Also under the Act, unreimbursed employee expenses can no longer be claimed as a tax deduction on personal tax returns. While not specifically effecting a production company per se, this will have effects on structuring how individuals will provide services in the future.
Continuing with the bad (or maybe not so bad), for taxable years starting in 2018, any disallowed loss is treated as a net operating loss. This net operating loss can no longer be carried back and the loss is limited to 80% of the annual income.
The KPM Take
The loss of Section 181 will largely be offset by bonus depreciation…more to come on that below. For the unincorporated entertainer the loss of the deductibility of unreimbursed business expenses will be a significant blow. KPM expects that more cast and crew will focus their efforts on the possible use of loan-out corporations to bring these expenses off the top at the loan-out level.
The Act also delivered another devastating blow to film, television, and live theatrical productions in addition to many other businesses. IRC Section 199: income attributable to Domestic Production Activities Deduction, known as the “DPAD” will sunset over the next two years. This provision allows for a 9 percent deduction of qualified production activities income which was calculated using domestic (U.S.) gross receipts minus allocable expenses. However, this deduction is limited to 50% of W-2 wages paid by the taxpayer during that calendar year. Although still available for 2017 calendar year taxpayers, the DPAD is repealed for taxable years beginning in 2018.
The KPM Take
No other way to put this. This is a loss to entertainment companies.
Pay attention! Qualified film, television and live theatrical productions have become eligible for the new 100% Bonus Depreciation treatment. Bonus depreciation now allows a 100% first-year deduction of the cost of new and used qualified property placed in service after September 27, 2017. Why is this exciting when the Section 179 deduction has been increased to $1 million with a phase-out threshold of $2.5 million- and this is indexed for inflation? Here are some reasons:
- Bonus depreciation applies to assets with up to a 20-year life.
- Bonus depreciation is not recapturable like Section 179 depreciation.
- Bonus depreciation is not limited.
- Bonus depreciation can create a loss.
Therefore, when productions have high capital expenditures and may have net operating losses, bonus depreciation will yield a more favorable federal tax result than Section 179. However, bonus depreciation is set to sunset between 2023 and the end of 2026.
The KPM Take
Bonus depreciation is not accepted by some states, so consult your tax adviser when weighing the benefits of which depreciation method to use. Know the rules for bonus deprecation. The benefits are fairly sizable!
The Act represents one of the largest changes to the tax code since 1986. Not everything is set in stone. There’s a lot going on under the new law, particularly as it relates to the entertainment industry. Honestly, the accounting industry is still working through some of the provisions and is still awaiting the IRS regulation interpreting the Act. At KPM, we have been working with companies like yours for over 50 years and we would be happy to guide you through the new law and your options. Contact Chad Robinson at firstname.lastname@example.org.