On December 27, 2020, President Trump signed into law the $2.3 trillion Consolidated Appropriations Act, 2021 (the Act). At over five thousand pages, the Act is an amalgamation of numerous legislative measures, including further stimulus measures to combat the coronavirus pandemic, as well as an omnibus spending bill. Below is a discussion of some of the tax provisions in the Act that may impact the entertainment industry.
Expensing of Qualified Production Costs
The allowance for immediate expensing of qualified production costs under Internal Revenue Code Section 181 (Section 181) has been extended through 2025. Section 181 allows for the expensing of production costs associated with certain qualified film, television, and theatrical productions (subject to a limit of either $15 million or $20 million) as and when incurred, as opposed to recovering such costs over the useful life of the production. In the past, Section 181 has generally been subject to annual renewal, although the last time it was extended in 2019 it applied retroactively to 2018 and prospectively to 2020. Now, Section 181 has been extended through at least 2025. The extension provides increased flexibility and planning opportunities for production companies and other entertainment business seeking to optimize the timing of their entertainment productions after being left with material timing issues after the Tax Cuts and Jobs Act of 2017 (TCJA).
For more information regarding timing issues with respect to production expenses, see the article here.
Deduction of Business Meals
Business meals provided by restaurants are fully deductible through 2022. Under prior law, including the TCJA (see IRS Notice 2018-76), business meals were deductible at only 50% of their cost. Now, however, businesses may fully deduct the cost of business meals obtained at a restaurant, provided that the meals are not lavish or extravagant under the circumstances and the taxpayer is present at the furnishing of the meal. This new law may be especially beneficial for entertainment businesses where building and maintaining relationships is an important aspect of the business (e.g., talent agencies and management companies).
Employee Retention Credit
Employers may be eligible for a tax credit with respect to social security tax withholding on certain wages paid in the first half of 2021. This credit was previously enacted earlier in 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) but was set to expire at the end of 2020. Now, the credit is available with respect to qualified wages paid through June 30, 2021. Employers are eligible for this credit if, in any calendar quarter, they experienced (a) a full or partial suspension of their trade or business as a result of government restrictions in response to COVID-19 or (b) a significant decline (at least 20% when compared to last year) in gross receipts. Most entertainment businesses would likely qualify through option (b), although businesses such as movie theaters and other venues that were forced to shut down because of social distancing measures may qualify through option (a).
The credit is equal to 70% of "qualified wages" paid to employees, subject to a limit of $10,000 per employee per quarter. Thus, the maximum amount of the credit in 2021 is $14,000 per employee. Qualified wages generally include any wages paid by a business with 500 or fewer employees. Employers that received loans under the Paycheck Protection Program (PPP) are eligible for the credit with respect to any wages that were not paid with proceeds from forgiven PPP loans.
Deductibility of PPP Loans
Expenses paid with proceeds from forgiven PPP loans are deductible, and any basis increase with respect to such forgiven loans is permitted. The immensely popular PPP was enacted as part of the CARES Act with the aim of infusing capital into small and mid-size business to help them survive the pandemic. PPP loans were forgivable (and, significantly, were tax-free income) to the extent they were used to fund certain expenses, mainly payroll. A tax issue that quickly became apparent with respect to forgiven PPP loans was whether otherwise tax-deductible business expenses paid with such loans could be deducted. The IRS ultimately ruled that expenses paid with PPP loans were not deductible, arguing that to hold otherwise would permit taxpayers to effectively "double-dip" by receiving tax-free income and receiving a tax deduction on top of that. The Act, however, supersedes the position previously taken by the IRS. The IRS subsequently abandoned its prior position and adopted the position taken in the Act in Revenue Ruling 2021-2.
For more analysis of the new PPP provisions as applied to the entertainment industry, see the article here.
Withholding of Deferred Payroll Taxes
Employers that opted to defer the withholding of payroll taxes pursuant to President Trump's August 2020 executive order are given an extended period to repay any such deferred taxes. President Trump's executive order, later outlined in IRS Notice 2020-65, permitted employers to postpone the withholding of payroll taxes on employee wages paid through 2020, provided that any payroll taxes deferred in such a manner were subsequently withheld in early 2021. The Act extends the time period over which employers may withhold any such deferred payroll tax obligations to the entirety of 2021.
Paid Family and Sick Leave Credit
Employers may receive a tax credit with respect to payroll taxes withheld from wages paid to employees on sick or family leave. Under the Families First Coronavirus Response Act, eligible employers were entitled to receive a credit against any payroll taxes withheld with respect to qualified sick leave wages and qualified family leave wages paid during the period beginning April 1, 2020 and ending December 31, 2020. This rule has been extended to qualified wages paid through March 2021.
Although the Act contains many more tax changes, the foregoing provisions are most likely to impact entertainment businesses. Venable's tax team is ready to advise and provide clarity with respect to any changes in the law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.