The Impact Of The New Tax Bill On Hollywood

The new tax bill has several provisions that impact Hollywood, summarized below:

1. Section 181. Section 181 (which permits the deduction of up to $15 million of the cost of producing a film in the U.S.) was amended effective January 1, 2025 to include sound recordings produced in the U.S., but limited to $150,000 per year. However, all of Section 181 is currently scheduled to expire for productions that start principal photography after 2025, so this may be a short-lived provision.

2. Section 168(k). Section 168(k) was renewed to permit the immediate deduction of 100% of the cost of a film (with no cap) if (a) 75% of principal photography is shot in the United States and (b) the film is “acquired” after January 19, 2025. If the taxpayer purchases a film, it is “acquired” when a binding contract for the acquisition is entered into, and if the taxpayer produces a film, it is “acquired” on the first day of principal photography.

In contrast to Section 181, which permits deductions as production costs are incurred, the Section 168(k) deduction is permitted only at the time of the first commercial release of the film, as long as (a) the film has not previously been released and (b) the taxpayer is the “owner” of the film when it is released. In most cases, the “owner” is the distributor, so the distributor, not the producer, is entitled to the deduction. In a questionable restriction, the regulations state that the “owner” does not include a distributor “that acquires only a limited license or right to exploit a production.” Thus, if domestic rights are licensed to one distributor and foreign rights are license to another, the IRS may take the position that neither distributor is entitled to the deduction.

Even if one distributor acquires all rights to a film, it is not clear if anyone gets the deduction if the distributor doesn’t pay a minimum guarantee for the rights. In that case, the distributor has no up-front cost to deduct, and the producer is not the “owner” of the film at the time of release.

In all events, Section 168(k) won’t work to raise financing for independent films because (a) the producer will usually not be entitled to the deduction, (b) most individual investors won’t be able to take the deduction due to the passive loss rules, and (c) the deduction will be offset by income on release of the film. I have no doubt that some hucksters will attempt the magical disappearing debt and income gambit, but they will run into the same buzzsaw of tax audits and litigation that Section 181 deals have run into.

3. Exemption for Overtime Pay. Given the long work hours on a standard shoot, people may be interested in the exemption for overtime pay. For 2025-2028, there is an above-the-line deduction for overtime pay if (a) the recipient is an employee, (b) the overtime pay is required by federal law, and (c) the employer reports the overtime pay on the annual Form W-2. The exemption is capped at $12,500 per year for single filers and $25,000 for joint returns, and it is phased out for taxpayers with income in excess of $150,000 for single filers and $300,000 for joint returns.

4. …And No Tariffs. As I previously predicted, the tax bill does not attempt to impose a tariff on films produced outside the U.S., since it would be utterly unworkable.