M+E Transactions and Financing

On December 22, 2017, the President signed H.R. 1 (the “Act”). The Act is considered the most wide-ranging piece of tax legislation to be passed in over 30 years, and it enacts significant changes to the Internal Revenue Code of 1986, as amended (the “Code”). One such change is the revival of expensing for production costs. 

Under Section 181 of the Code, which expired on December 31, 2016, a taxpayer could elect to deduct the cost of any qualifying film, television or live theatrical production in the year the expenditure was incurred in lieu of capitalizing the cost and recovering it through depreciation allowances. A taxpayer could elect to deduct up to $15 million of the aggregate cost of the production under this section (increased to $20 million if a significant amount of the costs were incurred in certain low-income areas). The election to deduct production costs was required to be made in the taxable year in which the production costs were first incurred.

For these purposes a qualified film, television or live theatrical production generally means any production of a motion picture (whether released theatrically or directly to video cassette or any other format), television program or live staged play if at least 75 percent of the total compensation expended on the production is for services performed in the United States by actors, directors, producers and other production personnel.

The Act provides for the deduction of production costs that was previously available under Section 181 of the Code (with some modifications) by expanding the definition of qualified property that is eligible for a first-year 100% depreciation allowance to include qualified film, television and live theatrical productions placed in service after September 27, 2017 and before January 1, 2027. For purposes of this provision, 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).

Four significant differences between the deduction previously available under Section 181 of the Code and the depreciation allowance now available under the Act are as follows:

• the $15 million (or $20 million) limit on production costs no longer applies;
• the 100% deduction for production costs is now available in the taxable year in which the production is placed in service as opposed to the taxable year in which such costs were first incurred;
• an affirmative election to deduct such costs is no longer required; and
• the 100% deduction is available through 2022, at which time the deduction will be reduced by 20% each year until it is fully phased out in 2027 (previously Section 181 was subject to uncertain and erratic renewals for short periods).

The 100% deduction for production costs is available for costs incurred after September 27, 2017 if the production is placed in service after September 27, 2017. Therefore, if you are currently in the process of, or are considering, producing any film, television or live theatrical production, you should consider whether your production costs will qualify for the 100% deduction. In addition, careful consideration should be paid to the tax rates in effect (or expected to be in effect) at the time that you are considering placing the production into service in order to maximize the benefit of the deduction. 

Please note that your ability to deduct business losses (including your ability to fully deduct production costs) may be subject to limitations under the Code. In addition to existing limitations regarding the deductibility of losses (e.g., the at-risk limitation and passive activity loss rules), the Act introduces a new limitation that disallows “excess business losses” of non-corporate taxpayers. Any excess business loss that is disallowed pursuant to this provision is carried forward and treated as part of the taxpayer’s net operating loss carryforward in subsequent taxable years. Excess business loss for a taxable year is the excess of the aggregate deductions of the taxpayer attributable to trades or businesses of the taxpayer (determined without regard to the excess business loss limitation), over the sum of aggregate gross income or gain of the taxpayer attributable to such trades or businesses plus a threshold amount of $250,000 ($500,000 in the case of a joint return). In the case of a partnership or S-corporation, this limitation applies at the partner or shareholder level.

Please feel free to contact your Pryor Cashman attorney with any specific questions.