The issue of hospitality tax may not be sexy, but it's certainly important. Below is a quick overview of important tax issues that Hollywood people should know about.
1. Article 181. Fuhgeddaboudit for film financing. In theory, Section 181 would allow him to deduct his first $15 million in film production costs in the United States. However, this deduction is only available for limited types of income that most individuals do not have, and the benefit is at most one year of tax deferral. And if you are offered Section 181 as a leveraged tax dodge (“I can deduct 4x his investment!!”), run! It's all black (instead of gray) on the tax scale.
2. Section 168(k). Fugeddaboudit too. In theory, Section 168(k) allows for an unlimited deduction of production costs for films released in the United States. However, this deduction is phased out by 20% each year, and in 2024, only 60% of your expenses will be deductible. More importantly, section 168(k) is subject to the same problems as section 181 discussed above.
3. Employee vs. Independent Contractor. Almost universally, and especially in California, where strict laws exist, all individuals who provide services on a non-rental basis (discussed below) should be treated as employees. The risk for payers who do not withhold tax on payments to individuals is extremely high, as all “responsible parties” are personally liable, and bankruptcy does not relieve that liability.
Four. loan out. Loan-outs (when an individual provides services to a third party through a wholly owned company) are still respected as independent contractors, but this means that the individual has first-class talent such as a writer, director, actor, producer, etc. Only in case. . Most movie companies don't respect loans for below-the-line staff, and loans don't work for movie executives. The lender must be a corporation (not an LLC), and an S corporation is usually the best choice to minimize the 3.8% Medicare surtax and the risk of double taxation.
Five. Unreleased movie. Last year, many articles were published about completed studio films being shelved and never released. The author of the first article assumed it was for some nefarious tax reason, and all the other articles parroted that theory, even infuriating Congress. But that's not the case. They're doing it for another reason, because studios don't get a tax deduction for putting a movie on the shelf unless it's sold to a third party.
6. investment contract. I don't know why, but most investments in movies are made in some form, rather than donating to a company to gain ownership of the company (as is done in every other industry). is structured as an investment contract. The tax implications of this approach are that (a) the production company is taxed upon receipt of the investment (the transaction is treated as a sale of profit interest), and (b) the investor may not be able to deduct the investment until the contract is terminated. It means that it has a gender. However, the deduction may still be a capital loss and is only deductible against capital gains. Most people ignore these issues, and production companies typically treat the investment as a reduction in film costs.
7. presale deposit. It is common for sales companies to pay a deposit during production. Such payments are generally taxable, just like payments under investment contracts, but again most people ignore them and treat the deposit as a reduction of the cost of the film.
8. national production subsidies. Many states offer generous subsidies for film production, usually in the form of state tax credits that are sold. Both the IRS and courts have determined that the proceeds from the sale of these tax credits are immediately taxable, and most people ignore that and treat the proceeds as a reduction of their movie bill. Notice a theme here?
9. Capital gain on sale of film. A common question is whether profits from movie sales qualify as capital gains. Generally, the gain may be a capital gain if (a) the transaction involves the transfer of exclusive rights for the full term of the copyright in at least one medium of exhibition in at least one country; and (b) the rights are Only if owned for a long time. At least one year. It is certainly useful to refer to this transaction as a “sale” and in any case it will result in the “recapture” of the previous deduction as ordinary income.
Ten. Select entity. Depending on what the entity is, here are my votes on the best entity to use for tax purposes:
a. lending: S Corporation.
b. Film production or distribution: LLC
c. Foreign individuals or companies doing business in the United States (including investments in U.S. LLCs): Delaware C Corporation. And while we are at it, US LLCs should never accept foreign individuals or partners as members. Otherwise, the LLC will be liable for the foreign members' U.S. and state taxes.
11. California source rules. Did you know that California is a tax haven for studios? That's true. Because even if all the property and employees were here, only about 5% of the gross revenue would be taxed in California due to California procurement rules that allocate revenue to where the movie is seen. . An open question is whether non-Californian talent working on films in California can apply the same rules to minimize California taxes (my vote is yes).
For anyone brave enough to read this (or anyone who needs help with insomnia), I have a tax paper with the creative title, “Taxation of the Entertainment Industry.” We are happy to send this to you for free. Please send an email to smoore@ggfirm.com with the subject line “Taxes.”