The Tax Cuts and Jobs Act of 2017 (“TCJA”) was signed into law by President Trump on December 22, 2017. It has been hailed as the largest overhaul of the US federal income tax since 1986. While many diverse industries will realize significant changes, tax-wise, as a result of the passage of the TCJA, there are provisions that have a significant impact upon the media and entertainment industries.
Expensing of certain business assets
Bonus depreciation has been permitted for “qualified property” for several years. However, the TCJA increased the bonus depreciation allowance from 50% to 100% for those qualifying assets placed into service after September 27, 2017, and before 2023.
The definition of “qualified property” was broadened to include qualified film, television, and live theatrical productions for which a deduction would not otherwise have been allowable under Internal Revenue Code (“IRC”) §181. The term “placed in service”, for purposes of the new provisions, requires an actual exhibition of the property for which bonus depreciation is sought, as opposed to when the costs of the property are incurred. As such, the ability to expense used property will not apply to a qualified §181 property because such property only includes films and television programs which have not previously been exhibited.
Repeal of the domestic production deduction (§199)
The TCJA eliminated the §199 deduction: this deduction provided for a tax rate reduction for, amongst others, businesses in the media and entertainment industry. The repeal is effective for tax years beginning after December 31, 2017.
Limitation on deduction of business interest expense
Interest incurred in the conduct of a trade or business has, for many years, been deductible. However, the TCJA amended IRC §163(j) to impose a limitation on the deduction of interest for tax years after 2017. The expense will be limited to 30% of “adjusted taxable income” (“ATI”). ATI is computed without regard to amortization, depreciation, or depletion for the first four years (until 2012): thereafter, it is computed with those deductions.
The TCJA provides some exceptions to the application of this provision, most notably for “small businesses”, which are those with average gross receipts over the previous three years of less than $25 million.
Software development costs
In recent years, software development costs incurred by taxpayers in the media and entertainment industries were commonly expensed in the year incurred. The TCJA has equated these costs with “research and development expenditures”: under the TCJA, these costs must, after 2021, be capitalized and amortized over five years.
Reduced corporate tax rates
The TCJA reduced the tax rate imposed upon corporations to 21%. This was in accord with President Trump’s attempts to bring the U.S. tax rate on corporate entities in line with those imposed by other countries, in an effort to make U.S. corporations more competitive and attract foreign investors to the U.S. As a result, those businesses which operate in a structure other than corporate operation may now wish to consider incorporating so as to avail of the favorable rates. This provision is effective for tax years beginning after December 31, 2017.
Deduction available to owners of pass-through entities
In an effort to provide tax benefits to businesses which are not organized as corporations, the TCJA allows for a deduction of 20% of the income recognized by the owners of the pass-through entities (“PTE”) (partnerships, S Corporations, and LLCs which elect to be treated as partnerships or disregarded entities). The deduction may be limited, however, for those taxpayers who are in the higher income brackets, in which case the limitation deduction requires consideration of the wages paid by the PTE or the qualified assets which are held by the PTE. Moreover, the deduction is not available to PTE’s which are engaged in certain types of “forbidden services”: performing arts is one of these. This provision is also effective for tax years beginning after December 31. 2017.
Actor/Employees can no longer deduct job-related expenses
Prior to 2018, employee-actors were permitted to deduct unreimbursed business expenses as an itemized deduction on Schedule A (Form 1040) if they exceeded 2% of their adjusted gross income (“AGI”). The TCJA completely eliminated the deduction for unreimbursed employee expenses for tax years 2018 through 2025. In some cases, the increased standard deduction amounts may alleviate the increased tax cost as a result of this change but some trade groups have projected that some working actors could see their taxes almost quadruple as a result. This may lead to actors requesting pay increases or seeking to have some of their expenses reimbursed.
Meals and Entertainment Deductions
Prior to the passage of the TCJA, meals and entertainment expenses incurred with respect to the conduct of a trade or business were deductible, up to 50% thereof. Some expenses, such as meals provided on the business premises for the convenience of the employer, were not subject to the 50% limitation on the deduction.
Beginning January 1, 2018, the TCJA disallows in full entertainment expenses even if they are directly related to or associated with the business. The exception for the deduction of the entire cost of meals furnished on the business premises for the convenience of the employer or at an eating facility furnished by the employer has been modified as well: those expenses incurred after December 31, 2017, are now subject to the 50% limitation. After 2025, those expenses will be disallowed entirely.