by Schuyler Moore
Dec 18, 2015
Section 181 of the Tax Code permitted a 100% write-off for the first $15 million of the cost of producing a film in the U.S. if the film commenced principal photography before the end of 2014. As in prior years, this section was just renewed retroactively to the beginning of 2015 in legislation just passed by Congress that is expected to be signed by the President. And once again, there is a built-in expiration date, although this time it is at the end of 2016, so there is a one year reprieve.
I certainly would never impugn the integrity of members of Congress, or suggest that they keep passing retroactive legislation with an expiration date as an annuity for annual lobbying donations, but it is rather odd that they keep doing this, since it is difficult to incentivize people to produce films in the U.S. before Section 181 is reenacted, and it is equally hard to plan for production beyond the expiration date in the face of this continued uncertainty. One indication that Congress may have discovered a gravy train is that Section 181 is only one of many tax sections that are now trapped in this bizarre annual ritual.
There are some other goodies for the entertainment industry in the new tax bill. For starters, Section 181 has now been expanded to permit the immediate deduction of the first $15 million of the cost of producing live theatrical plays in the U.S. in 2016, although most costs of producing plays are deducted currently anyway.
In addition, a new tax section states that starting in 2016, payroll companies will be treated as the only employer for tax purposes of employees working on audio-visual works as long as the payroll company:
1. Has a written contract with the employee;
2. Is obligated to pay the employee even if the payroll company is not reimbursed by the production company;
3. Is a signatory to IATSE;
4. Treats substantially all the workers as employees and not as independent contractors;
5. Pays at least 80% of all compensation to employees working on audio-visual works; and
6. Is not affiliated with the production company.
This provision means that the production companies cannot be held liable for failure to withhold taxes (if the payroll company fails to do so), and that the payroll company may withhold payroll taxes based on aggregating the compensation paid to employees during each year, including for calculating the caps on withheld payroll taxes. In the past, the IRS has argued for the opposite conclusion on both issues.
And as a final bonus, you can now immediately deduct the cost of tangible property (other than cars) used in a trade or business (not just the film industry) up to $500,000 per year (it used to be $25,000) but reduced to the extent the total cost of such property exceeds $2 million (with each of those numbers increased by increases in the CPI). Remarkably again, this change is retroactive to the beginning of 2015, so you can now deduct the cost of all that property you bought earlier this year. What a great incentive to spur (prior) business expenditures!