While not everyone may be happy with the results of the newly enacted Tax Cuts and Jobs Act (especially residents of high-income tax, high real estate tax States), the entertainment industry is fortunate that the inclusion of new tax laws will be beneficial to both producers and investors alike. In fact, we would go as far as to say, that the entertainment industry was a definite winner in the new tax legislation.
The first provision, which while not included in the House Bill or the original Senate Bill, was included by Senator Orrin Hatch in a subsequent 12th-hour amendment to the original Senate Bill. The provision then survived the joint committee negotiations of the House – and the Senate – and was included in the final tax bill that was signed into law by the President on December 22, 2017.
Two Ways the New Tax Laws Impact Theatre and Entertainment
The new tax law provides a 100% first-year depreciation deduction for the adjusted basis of certain assets placed in service after September 27, 2017. What is unique and advantageous to the entertainment industry in this section is that property eligible for the 100% first-year depreciation allowance now includes the basis of a qualified film, television or live theatrical production placed in service after September 27, 2017. The basis of the property eligible to be expensed should include all production costs. The law further goes on to provide that a production is considered placed in service at the time of initial release, broadcast, or live staged performance (i.e., at the time of the first commercial exhibition, broadcast, or live staged performance of a production to an audience). Unlike the prior Section 181, this new definition allows us to match and control the timing of the deduction.
The immediate expensing provisions mean the effective elimination to investors and producers of having to report phantom income, and more closely aligns the reporting of taxable income with actual profits earned by the production.
The Broadway League worked in conjunction with the Motion Picture Association to have the theatre and movie language included in the bonus depreciation section. Withum was proud to provide the inclusion of the technical tax section language impacting theatrical productions to the Senate that now makes this deduction possible.
As with the prior production, cost expensing under Internal Revenue Code Section 181, consideration should still be given on a production by production basis as to whether the election should be made. We are happy to continue to advise you on the merits of the election on a case by case basis.
The second provision, which should prove to be quite valuable to production entities which are organized as Limited Partnerships or Limited Liability Companies, is the new 20% qualified business income deduction. While we are still awaiting IRS guidance on certain areas of this new deduction, it appears that the income earned by individuals from investing in production entities, at least while a show is currently running, should be eligible for the 20% qualified business income deduction. This means for every $100 of income earned from a production entity, only $80 is subject to income tax. For an individual in the top tax bracket of 37%, this translates into the income generated from the production being subject to tax at the rate of only 29.6%, instead of the highest 37%.
The 20% qualified business income deduction provision may also be advantageous to the individual business owners who provide products, some services, and support to the production industries.
The combination of the production cost expensing provision along with the 20% business income deduction should prove to be significant inducements to investors to continue to fund production entities and will hopefully spur additional economic activity in the production arena.
With all new tax legislation, there are certain areas that will require interpretation. Whether guidance is provided by the IRS or through other means is yet to be seen. As always, we will be here analyzing the law, creating interpretations and staying abreast of all of the latest developments.
To further discuss how the new tax laws impact theatre and entertainment, fill out the form below and a member of our Theatre, Entertainment and The Arts Services team will respond.