New changes to 2021 tax laws have far-stretching implications for the entertainment industry.
The Consolidated Appropriations Act (known as the Act) was signed into law on December 27, 2020, and provides for $284 billion in total government spending on COVID-19 relief. It also includes multiple provisions that will have a significant impact on the entertainment industry as a whole.
Business meals are now 100% fully deductible—for a limited time—and a variety of other benefits have been extended or introduced. One of the most significant of those is the Shuttered Venue Operators (SVO) grant program.
How TCJA Has Changed Under the Act
When the Tax Cuts and Jobs Act of 2018 was signed, most American businesses rejoiced. The statutory corporate tax rate was reduced from 35% to 21%, and life was good. However, one of the negative implications for the entertainment industry was a limit to what was deductible.
Under the previous law, a taxpayer could deduct 50% of any entertainment or recreational expense that was business-related. Under the new law, though only food and beverage are deductible.
In a new twist, the COVID-19 Relief Bill has not only boosted the deductions you can take in 2021 and 2022, but it also reserved $15 billion for the entertainment institutions that the pandemic has hit the hardest.
For decades, businesses could deduct 50% of meal expenses from their taxes. But under the new law, that deduction increased to a full 100%. Strongly pushed for by the White House, the improved deduction was described by proponents as “pro-restaurant.” To detractors, the provision became known as the “three-martini lunch.”
The new law will not affect 2020 tax returns. And entertainment expenses such as concert tickets remain non-deductible. But for 2021 and 2022, business meals will be a 100% write-off. Below is a rundown of all areas in which the Act will impact the entertainment industry.
Shuttered Venue Operators Grant Program
The newly signed Act has reserved $15 billion for the SVO grant program, which targets live venue operators, agents, and managers. The SVO grants can be used to cover a variety of qualifying expenses, including wages paid after March 30, 2020. Qualifying businesses must have been operational in March 2020 and experienced at least a 25% reduction in revenue in any quarter during the pandemic.
Business Meal Deductions
Any business-related meal served at a restaurant is now fully deductible through 2022. This new provision is a win for all aspects of the entertainment industry. Maintaining relationships has never been more challenging than in a post-pandemic world. And relationship building is a critical aspect in a variety of entertainment niches.
Business meals are fully deductible, up to a point. If the meal costs over $75, you must provide documentation. And if any of the meal is deemed extravagant, that amount is not deductible. Regardless of how much the meal costs, keep a detailed record of your meal, including:
- Total cost with tax and tip
- Where, when, and who was there
While you can no longer deduct business entertainment such as greens fees at a golf course, there are still entertainment expenses you can take advantage of. The following are legitimate entertainment expenses the IRS allows you to deduct from your taxes:
- Entertainment that was treated as compensation to one of your employees
- Entertaining employees with recreation expenses for holiday parties
- When you sell entertainment to customers, it is tax-deductible—for example, the costs required to put on a show or a production can be deducted from your taxes.
Qualified Production Cost Expenses
Previously, expensing of qualified costs for TV, film, and theater productions were to be done over the life of the production. For example, if shooting began in May and ended in October, qualified production costs would be expensed over those six months.
Under the new law, eligible production costs can be expensed immediately, meaning the entirety of the production’s costs can be expensed as soon as production begins. Section 181 of the Internal Revenue Code allows for these deductions and is typically renewed on an annual basis. However, in this case, the deductions under Section 181 have been extended through 2025.
PPP Loan Deductions
The Paycheck Protection Plan was one of the successes of the CARES Act. But the tax question that arose was whether expenses paid with the loans could be deducted. As the loans were tax-free income, the IRS decided that to allow deductions on expenses paid with the money would be “double-dipping” and ruled these expenses were not deductible.
Under the new law, however, the IRS’s decision was overruled, and the IRS has adopted the position of the new Consolidated Appropriations Act.
Credit for Employee Retention
Previously part of the CARES Act but set to expire at the end of 2020, the employee retention credit has now been extended for qualified wages paid through June 30, 2021. The tax credit is in respect to social security withholdings on wages paid to employees.
Who is eligible for the employee retention credit? Companies with under 500 employees that experienced a suspension in business due to COVID restrictions or suffered a 20% decline in 2020 gross receipts. The payout consists of 70% of an employee’s wages but is limited to $10,000 per employee per quarter.
Deferred Payroll Tax Withholdings
Employers had the opportunity in August 2020 to defer the withholding of payroll taxes, with the expectation that the withholdings would begin again in early 2021. But now, employers that opted to defer their withholdings have been given a reprieve from paying back these taxes until 2022.
Bottom Line on 2021 Tax Changes in the Entertainment Business
For those in film and TV production, the qualified production expense remains a critical tax benefit. And now, being able to expense the entirety of your production costs immediately, rather than throughout the course of filming, allows a business to keep valuable cash on hand.
The 100% deduction for business meals should encourage an increase in restaurant patrons. Although, whether that number becomes significant remains to be seen. Having the opportunity to build and maintain a relationship through responsible, tax-deductible dining should be a welcome option for many.
The newly signed tax law is lengthy and cannot be fully covered here. So, reach out to your tax professional for guidance on how these changes will affect your business in 2021 and moving forward.