A provision in the proposed U.S. Senate tax bill would allow “qualified theatrical productions” to expense all of their initial production costs and allow investors to write off their investment once the show has its first performance.
The provision, which added film, television and theatrical productions to the accelerated bonus depreciation section of the tax bill, extends what had been available to producers and investors under Section 181 of the Internal Revenue Code. However, the provision is not assured, as the tax reform bill passed by the U.S. House of Representatives did not include this kind of theatrical tax break and the Senate and House need to reconcile the differences between the tax bills before sending a version to President Trump.
Under Section 181, a qualified theatrical production is defined by the percentage of salaries paid in the U.S. and the size of the theater, but broadly applies to regional theaters as well as Broadway theaters. Unlike the new provision, Section 181 set a $15 million cap on expenses.
As it stands, the new provision would allow productions to expense 100% of their costs in the year of the production’s “release,” meaning the first day of the show. This means that investors in the show would be able to write off their capital contribution, or the money that would otherwise be part of capitalizable production costs, when they file taxes in that year following the release.
It would also get rid of the idea of “phantom income,” meaning income related to the production that producers and investors have previously had to report to the IRS and pay taxes on, even though they have not received it yet.
“It would eliminate the reporting of phantom income for investors and producers,” said Robert Fried, a partner at accounting firm Withum, Smith and Brown, who helped work on this provision.
After the expiration of Section 181, the Broadway League began speaking with members of Congress to get this provision in the tax bill. The next step is to keep it in the final bill, which the League intends to do by asking its 700-plus members nationwide to speak to their elected officials on the importance of the provision, said Tom Ferrugia, director of governmental affairs at the League.
“Our goal is to allow it to survive the reconciliation process,” Ferrugia said.
If passed, the provision would be in effect until 2023.
Section 181 expired on January 1, 2017. It had been enacted as part of the American Jobs Creation Act of 2004 and then renewed under President Obama until the end of 2016.
There are some concerns around this provision. Hal “Corky” Kessler, an attorney at Olson & Cepuritis who worked on Section 181, notes that investors have to wait for that first day of release to begin to realize the tax break, rather than the year the money was spent, as was the case for Section 181.
That could take some time from the day of their investment.
“181 was a much easier hurdle,” Kessler said. “But if this is the best we can do, this is best we can do.”