Valuable Tax Deduction Renewed for Film, TV & Theater IndustryBy Christopher A. Cacace
February 23, 2018
Film, television and theater producers can breathe a sigh of relief – Section 181 has just been renewed through December 31, 2017.
The film, television and theater industries were thrust into uncertainty when Congress failed to renew a valuable deduction contained in Internal Revenue Code Section 181 (“Section 181”) at the end of 2016. Throughout 2017, production companies found themselves struggling to raise the necessary funds to make up for the loss of this significant tax deduction.
While the Tax Cuts and Jobs Act of 2017 (TCJA) attempted to remedy this situation by allowing bonus depreciation for production companies, it left a big gap and was therefore not an ideal replacement. Fortunately, Section 181 was recently renewed through December 31, 2017 as part of the Bipartisan Budget Reconciliation Act of 2018 signed into law by President Trump this month.
What follows below is a background of Section 181 along with a description of how these recent changes impact your production company’s 2017 tax returns.
Section 181 – Then and Now
Section 181 permits the immediate and expedited deduction of the costs of production for film and television as well as live theatrical productions. It was originally enacted in 2004, was expanded in 2015 and expired on December 31, 2016.
Prior to Section 181, production companies in the film, television and theatrical industries were required to amortize the costs of production over the projected life of the asset. Similarly situated companies were able to either immediately deduct or amortize their qualified property costs over a shorter period of time, placing production companies at a significant disadvantage in the competition for capital among investors.
The requirement to amortize these industry production costs over the life of the asset or assets also created the problem of “phantom income,” which occurs when more taxable income is allocated than cash flow or, in other words, when taxes are due on income that is never actually received by the owners in that year. In worst-case scenarios, productions companies were faced with a tax due and no cash flows on which to pay the tax. Section 181 resolved these issues by providing production companies with a tax treatment similar to other industry-specific companies.
Section 181 required periodic renewal, and Congress did not renew it upon its expiration at the end of 2016. As we wrote in an earlier article on tax reform, this unfortunate tax situation was partially addressed by a provision in TCJA allowing production companies to qualify for “bonus depreciation” – the same expedited depreciation allowed for tangible property in other industries under Internal Revenue Code Section 168.
TCJA was signed into law in December 2017, and this new bonus depreciation provision became effective for productions placed in service after September 27, 2017 and before January 1, 2027. These dates of service relate to a deduction that otherwise would have been allowable under Section 181.
Since the TCJA changes only applied to productions placed in service and purchases made on or after September 27, 2017, there was a gap of nearly 9 months between its effective date and the expiration date of Section 181. This gap, as well as the differences in methodology between Section 181 and bonus depreciation, meant limited applicability in 2017 for many production companies.
Section 181 Renewal and Impact on 2017 Tax Returns
Section 181 was recently renewed through December 31, 2017 as part of the Bipartisan Budget Reconciliation Act of 2018, which was signed into law by President Trump on February 8, 2018. Consequently, for tax year 2017, film, television and theatrical production companies have access to both Section 181 and bonus depreciation, which intersect but are not parallel. The substantial differences in how the two sections apply are as follows:
- For productions placed in service and assets purchased before September 27, 2017, Section 181 may be elected on a timely filed tax return, but Section 181 generally has a cap of $15 million. For productions above that cap, the income forecast method of amortization must still be used.
- For productions placed in service and assets purchased on or after September 27, 2017, an election must first be made under Section 181, and bonus depreciation would then be allowed for amounts above the Section 181 limitation.
For companies using a combination of the Section 181 and bonus depreciation, tax preparation will be further complicated as asset purchases must be sorted and separately tracked for the different treatments. These separate deductions may also cause some confusion for pass-through owners as they look to prepare or interpret their IRS Form K-1.
A Final Catch
Importantly, while both Section 181 and bonus depreciation allow production companies a tax treatment that is similar to other businesses, neither provision overcomes the applicability of the passive loss rules. These rules limit the immediate use of any deduction allocated to the owners. Each pass-through owner must still evaluate whether any loss allocated is usable currently, or must be suspended.
Pass-through business owners have long been accustomed to these passive loss rules, and while the renewal of Section 181 and its interaction with bonus depreciation makes it more likely to encounter these rules, the renewal of Section 181 is still good news for pass-through business owners in the theater, film and television production industries.
About Christopher A. Cacace
Christopher A. Cacace, CPA, is the Partner-in-Charge of the Theater, Media and Entertainment Group at Marks Paneth LLP. He has a deep expertise serving theater and entertainment clients and has done so for more than 30 years. He started his career in accounting at Pinto Winokur & Pagano CPAs (PWP), which was then the pre-eminent theatrical accounting firm. He is a trusted business adviser and advises his clients on all facets of accounting and tax... READ MORE +