GOP Tax Bill: Big Gains for Studios, Not for Showbiz Rank and File (Analysis)

U.S. Capitol
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WASHINGTON — The House and maybe the Senate on Tuesday are expected to vote on a massive tax plan, giving President Donald Trump a signature legislative achievement in 2017.

It’s being hailed by media companies, broadcasters, and Hollywood studios. However, a number of rank-and-file workers are worried that it will mean a tax increase.

That’s for good reason.

Under the legislation, actors who are paid as employees will no longer be able to reap the benefits of taking deductions for unreimbursed business expenses. Other changes to the tax code likely will not make up the difference, according to the Actors’ Equity Association.

“This tax bill will eliminate the deduction of ordinary and necessary unreimbursed business expenses, which means you won’t be able to deduct things like audition travel, or acting lessons, or even your union dues,” the organization said in a letter to their members in the past few days.

Sandra Karas, an actress, tax attorney, and treasurer of the Actors’ Equity Association, said, “These are expenses they need to maintain status and viability in this industry. To take away these deductions is a kick in the teeth and a real insult.”

She did the calculations for four Actors’ Equity members, and the results were tax increases between 25% and 369%.

The impact is also likely to be felt among some crew members, writers, directors, and film and TV actors who get paid as employees, yet still have a large amount of unreimbursed expenses. Those who are independent contracts will continue to be able to deduct expenses as business income. Other guilds have yet to weigh in on the final version of the bill, although SAG-AFTRA still has a number of concerns.

Here’s an outline of the potential impact, with the caveat that accountants, lobbyists, and union officials are still examining the legislation. It’s likely that we’ll hear a lot more about this in the coming weeks and months, albeit by that time, the bill is likely to have been signed by Trump and become law.

Individuals. The bill maintains seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The current brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. So there could be immediate benefits from lower rates, depending on which bracket a person or couple falls. A summary of the new rate tables can be found here.

The tax legislation will almost double the standard deduction — from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. But that effect will be limited, Actors’ Equity’s Karas says, because it eliminates the personal exemption, $4,050 for individuals, spouses, and dependents.

Those in upper income brackets, like high-profile actors, directors, and writers, more likely will have their own loan-out corporations that will continue to enjoy deductions and even see advantages in the tax bill.

Schuyler Moore, partner at Greenberg Glusker in Los Angeles, said via email that “the bill is insanely complex. The concept that it would simplify the tax code is a complete lie.”

“The big game going forward in Hollywood will be to convert compensation into business income that qualifies for the 20% deduction,” he said. Those who have set up “pass-through” companies will be able to deduct 20% of their income.

The effect of the legislation will be especially pronounced in California and New York, where high state and local taxes will no longer pack the same punch when it comes to reducing the tax burden. That’s because there will be a $10,000 cap on the amount that can be deducted.

Not only will this mean higher taxes for a number of households, but real estate analysts say it could also have an impact on the market, as the advantages of buying a home will be more limited.
“This bill was designed to hurt East Coast and West Coast professionals,” said Robin Gilden, an expert in tax law at Mitchell, Silberberg & Knupp.

Steve White, president of the California Association of Realtors, said last week “Congress is touting this as a tax cut for middle-class families, but the reality is that thousands of California middle-class homeowners will be the first ones to face tax increases.”

The legislation does preserve something called the Qualified Performing Artist tax deduction, which allows them to deduct the expenses of  advertising, traveling, and agent and manager commissions. But the “above the line” deduction is limited to those who make no more than $16,000 in adjusted gross income, a figure that has not been raised since 1986. That was the year of the last tax reform legislation.

Independent production. Producers have enjoyed a 100% deduction on film and television production in the U.S. under a provision of the tax code known as “Section 181.” It was later expanded to include live theatrical productions.

The tax incentive, however, had its limits: It had a $15 million cap, and it had to be renewed by Congress every year. That created a lot of uncertainty, as in some years, lawmakers renewed Section 181 retroactively.

The tax bill offers a new set of incentives. It provides for 100% expensing for movies, TV shows, and theatrical productions for the next five years, with a reduced amount for the years after that. And it removes the cap.

The Independent Film & Television Alliance has yet to weigh in, but there are still concerns among some producers.

“The bill eliminates the $15 million limit under Section 181, but the deduction is not permitted until the film is released,” Moore said. “This will help studios, but not individual investors, due to the passive loss limits.”

Studios. The legislation will drop the corporate tax rate from 35% to 21%.

Such a big drop in the rate has been a huge priority for media companies, broadcasters, and pretty much the rest of industry. But Hollywood studios say it will be especially beneficial because their parent corporations have been, by and large, paying high effective rates and have not sought the kinds of overseas shelters and deductions of other companies, like Apple and General Electric.

The MPAA has praised the tax bill as a way to drive economic growth and encourage job creation. A rough analysis, based on what they paid in the most recent year, is that the MPAA’s six member companies would have saved more than $5 billion under the lower rate. The idea is that the lower rate will be more competitive with other countries and be an incentive to keep operations in the U.S.

So will this mean more production in the U.S., higher wages for workers, or more hiring in production centers like California, New York, and Georgia? No studio has publicly committed to doing so.

The sole remote exception is AT&T, which is seeking to buy Time Warner in a deal that is being challenged by the Justice Department. It has said that it would invest $1 billion in infrastructure.

There’s also plenty of skepticism over what corporations in general will do with their tax savings.

Last week, billionaire Michael Bloomberg added his voice to the chorus of critics of the tax bill as a giveaway to wealthy corporations.

He called it an “economically indefensible blunder that will harm our future,” and wrote, “CEOs aren’t waiting on a tax cut to ‘jump-start the economy’ — a favorite phrase of politicians who have never run a company — or to hand out raises. It’s pure fantasy to think that the tax bill will lead to significantly higher wages and growth, as Republicans have promised.”

Update: A SAG-AFTRA spokeswoman provided this statement, reflecting the varied impact among its members.

“We have repeatedly and regularly fought for improvements to the qualified performing artist (QPA) deductions section of the tax code  in recent years. We argued that QPA should remain in the final bill proposal and it appears that it did.  We will now continue our work to improve QPA, to make QPA more useful and accessible for more members.
“Because of the loss of itemized deductions for artists (and others) in the tax bill, we hope to be in a stronger position to demand QPA improvements.   Without question the loss of many itemized business deductions for artists and workers is highly unfortunate.  That said, we also have members with S corps and C corps, and members who were negatively impacted by the [Alternative Minimum Tax].  We do our best to fight for all members across the economic spectrum.
“As we move forward, we will keep up the QPA fight, and also work to enlighten members on how best to plan their work lives under the new tax proposal.”