Covid-19 Tax Implications for Film & Production Companies
As seen on KPM.com
In these extraordinary times with the outbreak of Covid-19, the film industry like many sectors of the economy will need to plan and prepare for the monetary implications as productions all over the world shutter. The film tax credit incentive side of the equation will be on the states that offer these programs to determine how they’ll approach the productions that were mid-production, but film industry executives also need to consider the federal tax implications for their overall businesses. Fortunately, despite the recent major changes to the US Tax Code in recent years, taxpayers still have options when it comes to costs incurred during production that might be otherwise sunk costs. With all of the uncertainty surrounding the near future, companies will need to understand all of the options available for relief.
A popular deduction that many companies took advantage of, Section 181, alleviated taxpayer costs incurred during film and television production, for productions spending less than $15 million in aggregate costs with a provision up to $20 million for those in certain distressed areas. For the deduction, 75% of the total compensation had to be qualified, meaning compensation for services performed in the U.S., excluding payment for participations and residuals. Originally enacted in 2004, Section 181 encouraged investors in film productions, allowing for deductions of costs. The budgets of these productions not exceeding $15 million in total costs applied mostly to mid-tier productions, often independent or small studio projects with outside investors using equity and debt financing. These productions often lack the backing a major studio for capital, making this enticing for smaller investors. A good number of award winning and financially successful productions were budgeted in this range and gave investors great returns. Legislators also wanted to encourage domestic investment in the industry as foreign investors crowded into the production market over the years. While geared towards smaller, more independent productions, most studios are funding in this range for certain projects, so they’ve been able to take advantage of this deduction as well. When the Section 181 provision expired in 2016, many thought this would severely dampen investment in these types of productions as studios focused more on big budget blockbusters and high budget television production, however the Tax Extender and Disaster Relief Act of 2019 extended the Section 181 provision through December 31, 2020.
Many productions have already shut down and those who haven’t, likely will as soon as they can. With uncertainty in the timing of how long the hiatus will last for not only production, but the world at large, productions may be altogether abandoned as producers and investors cut their losses on the prospect of release. Those scenarios provide the opportunity for production having already incurred significant costs. Many television pilots may not be picked up anyway so unless studios have aim to really push through a pilot, they can expect to recover some of these sunk costs. Additionally, once the election for Section 181 is made, additional costs in future tax years will be applied on a rolling basis. This means that productions making the election before December 31, 2020 will be allowed to deduct costs after 2020, despite the presumed expiration of Section 181, currently set for December 31, 2020. This provision’s extension past the original sunset date back in 2016, will help recover some of the costs due to the outbreak of Covid-19.
