Under the old tax regime, producers could deduct the costs of large projects only gradually over the many years that they typically bring in revenue. In the final version of the tax bill, total production costs, which can exceed $100 million for big-budget blockbusters, can be deducted as soon as a new product is released to the public. The benefit is set to phase out starting in 2023.
“That is going to be a tremendous boon for TV and film-production companies, because they have so much money tied up in those projects,” said Mitchell Freedman, a CPA and wealth manager.
A quicker tax write-off may also make it easier for Hollywood to attract outside investors, said Benson Berro, a partner at KPMG, especially since there’s booming demand from streaming services like Netflix and Amazon.
Treasury Secretary Steven Mnuchin, who helped oversee the tax revamp, is familiar with these sorts of co-financing deals. A former investment banker, he helped produce dozens of films, including The Lego Movie and Mad Max: Fury Road. Mnuchin said he divested his stakes in Hollywood last year, but hasn’t disclosed whom he sold them to. A Treasury spokeswoman didn’t respond to a request for comment.
Another addition to the tax bill introduced by the Senate allows owners of U.S. content to pay an ultra-low tax rate, about 13 percent, on foreign income. The provision—designed to encourage companies to bring offshore profits and intellectual property back to the U.S.—is a triumph for an industry that licenses its products worldwide. Film and TV were responsible for $16.5 billion in exports in 2016, according to the MPAA.
“Studios just got a big windfall,” said Schuyler Moore, a partner at law firm Greenberg Glusker. By combining lower rates, immediate expensing and the “astounding” new rate on foreign derived intangible income, Moore said, “they’re not going to be paying taxes for a long time.”
On the individual side, the most lucrative break for many Hollywood luminaries could be a new 20 percent deduction for so-called pass-through businesses, whose income is taxed on owners’ personal returns. Hollywood’s biggest stars generally set up loan-out corporations, which loan out their services to film, TV and theatrical productions. The loan-out can be structured as LLCs or S-corporations, both of which can qualify for the new break.
Taking the full 20 percent deduction would effectively lower their top federal tax rate to less than 30 percent—but first they need to qualify.
Congress intentionally excluded high-income owners of service businesses from the “performing arts” and other fields from the break. Entertainers, along with thousands of other businesses across the country, are waiting for IRS guidance to define exactly what a service business is.
“I can guarantee you that we’ll find some nice loopholes,” said Mitchell R. Miller, a tax attorney based in Beverly Hills, California.