Tax Reform Impact on Media and Entertainment Companies
As seen on Deloitte.com
Thanks to the bill formerly known as the 2017 Tax Cuts and Jobs Act, corporations are looking at a hefty tax rate cut, as the statutory rate decreases from 35 percent to 21 percent. That’s good news for media and entertainment (M&E) companies who operate as corporations as well as smaller businesses. Learn more about the strategic implications.
New tax laws, new opportunities
The new tax laws are good news for M&E companies who operate as corporations, since they have traditionally had high effective tax rates compared with other sectors. Smaller companies, such as production companies with a single owner, may also benefit as a result of new provisions that allow deductions for pass-through entities.
The new law allows companies that have deferred US taxation by reinvesting earnings overseas to bring back cash tax-free after paying a "transition tax." This increased cash flow will have a positive effect on mergers and acquisitions (M&A), debt repayment, and research and development (R&D) related to content, distribution technologies, and evolution of business models. Increased investments are also expected in new production facilities and new hires.
Deploying extra cash: A strategic decision
Many M&E companies may find themselves with extra cash as a result of the tax cut and the repatriation of earnings held overseas. As a result, an increase is expected in M&A activity as companies look to acquire other organizations with complementary businesses. However, many other possibilities exist: Companies may choose to pay down debt with the extra cash, reward employees with bonuses, or invest in new infrastructure, such as building a studio or an interactive venue.
In an industry that revolves around capturing viewers and generating exciting titles, new content reigns. Companies are expected to invest in content production and in exploring new technologies such as high definition, special effects, virtual reality, augmented reality, and artificial intelligence. The new law makes these investments especially attractive, since film, TV, and other content production costs can be expensed immediately.
