While the major tax overhaul known as the Tax Cuts and Jobs Act never specifically addressed Section 181, a section of special note to entertainment and production companies, the passage of the two-year Congressional budget on Friday extended the provision for tax years ending December 31, 2017 allowing qualified film and television production to take certain expenses as deductions for at least one more year. Central to the provision is a limitation providing these deductions for productions with less than $15 million in aggregate cost. The law defines production as any motion picture film with special rules for television series stating that each episode is treated as a separate production, with only the first 44 episodes eligible. Additionally, at least 75% of the total compensation must be qualified compensation, which is defined as services performed by most cast and crew, and importantly, does not include profit participation and residuals.
Participation and residuals can be a tricky area for owners who work on their own productions to navigate. Most often producers are also profit participants through their ownership of the production company. These owners should evaluate their profit participation agreements and determine if they can be re-characterized as wages for services provided on the project, in order to be included as qualified compensation. Further, owners in production companies which are LLC owners should provide these services through loan out corporations to ensure they are considered wages.
Typical companies utilizing this section as authority for deduction need to understand the structuring of compensation to fully realize the benefit. Many companies have owner participation directly in production which, if not set up properly, often causes lost opportunities for some of the higher paid individuals on productions.