Is it studios or independents who are the real beneficiaries?

Hollywood can be a lightning rod when it comes to the not-so-sexy topic of tax policy, which is why it’s so significant that an arcane-sounding IRS provision was renewed as part of the otherwise high powered brinkmanship of the fiscal cliff deal.

Most fortuitous for showbiz is the extension of the provision, Section 181, that allows producers to deduct up to $15 million of the expenses from movies and TV shows in the year that production starts, rather than having to wait until a project is released. When it comes to cash flow, that in and of itself is no small thing.

But one of the real sweeteners is that the provision was made retroactive to Jan. 1, 2012, and runs through the end of this year.

The rationale behind the accelerated expensing is to give producers one more reason to keep production in the U.S., but Stroock and Stroock partner Schuyler M. Moore wonders how the retroactivity encourages production and believes the true beneficiaries are the major studios. He doubts that it helps in financing. “It is absolutely Christmas, no question about it.”

Another attorney, Michael Donaldson, who reps independent filmmakers, says, “Anybody who doesn’t use it is crazy.” He takes a different view: “It really, all of the sudden, makes independent film investments rather than attractive.”

The bigger question may be how such a provision make it into legislation that otherwise was a big gulp for many an anti-tax Republican: A central piece of the fiscal cliff legislation was to raise taxes on high-income earners, including in showbiz.

There was plenty of last-minute lobbying from the MPAA, the Directors Guild of America and the Independent Film and Television Alliance, as well as various other reps for independent producers. But what may have really helped is this tax provision did not stand on its own but was part of a tax extenders package, with a whole host of deductions and credits and other benefits for everything from biofuels to mine rescue team training. The “extenders” package already cleared the Senate Finance Committee with bipartisan support, and the committee chair Sen. Max Baucus (D-Montana) made sure that it was attached to the fiscal cliff bill hashed out by Vice President Joseph Biden and Senate Minority Leader Mitch McConnell (R-Ky.).

In other words, get the small stuff in when everyone is hashing it out over the big stuff.It raises the question of whether Section 181 could ever make it on its own — particularly in a polarized Congress. The provision was originally passed in 2004, in a Republican dominated Congress, and as part of larger jobs legislation. Recent renewals have been part of more comprehensive legislation, often bills passed with a sense of urgency. The risk for the industry has been when such perks end up in the crosshairs of larger debate, as happened in 2009 when a tax provision was pulled out of stimulus legislation as some lawmakers pegged it among a laundry list of pork barrel spending in the legislation.

Some lawmakers who voted against the fiscal cliff bill characterized Section 181 as one of many giveaways in the overall legislation.

Supporters say the provision often gets mischaracterized as an incentive akin to those offered by so many states. Instead, it merely accelerates expensing that producers were likely to take further down the line. The Congressinal Budget Office estimates that the cost of the provision will be $430 million in 2013 and 2014, with money starting to come back to the government in 2015. (It is not breakeven for the government as either way you cut it it is still a deduction.)

So is it good policy? The provision was not intended to convince a producer to keep a shoot in the U.S. all by itself but to have it available to combine with state tax incentives. It has been difficult to measure the payoff, as the deductions are made on individual and business tax returns.

“We regard it as being successful for what it was intended to be,” said Jean Prewitt, CEO of the Independent Film & Television Alliance. She said the provision has been especially helpful to independent producers “concerned about cash flow and concerned about production financing.” She added that it was “always the case that it would be part of the final tax bill that came through” — although as everyone knows there were genuine questions of whether the country really would go off the cliff with no legislation at all.

Kathy Garmezy, associate executive director of government and international affairs at the DGA, said that “we always made the argument that we saw this as a supplement to state incentives, that this was the additional arrow in the quiver.”

Groups that have otherwise been critical of incentives are a bit more measured when it comes to this provision.

Joseph Henchman, attorney and policy analyst with the Tax Foundation, which has been critical of state tax incentives, said via email that “expensing is good tax reform, and it’s good policy when it’s generally available to all businesses. When only some can access it and others can’t, it’s in the eye of the beholder. Not the most egregious thing in the bill.”

The real challenge, he suggested, is ahead: tax reform. That’s why it was probably so important that Section 181 was renewed now vs. further down the line, as congressional efforts to remake the tax code are likely to focus on all sorts of deductions, loopholes and credits. As he notes, “In the last big tax reform in 1986, narrow, industry-specific incentives were the first to go.”

Like many a movie action hero who survives in a film’s climax chase, Section 181 made it through in the nick of time.

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