By John Aaron, WIFV Board Member –
House Ways and Means Committee Chairman Richard Neal has offered an amendment to the tax bill currently being considered by Congress. His amendment specifies a new category of deductible expenses for “qualified sound recording productions” under IRC Sec. 181. These costs are subject to a $150,000 limitation, seemingly as a separate cap within the overall dollar limitation discussed below. [see bill Sec. 138510. Treatment of certain qualified sound recording productions, p. 728 and following.]
The Sec. 181 production expense deduction election is subject to an overall $15 million dollar limitation (or $20 million for productions in certain designated areas). For an article on how current law benefits producers, see https://www.productionhub.com/blog/post/the-return-of-section-181-how-filmmakers-can-capitalize
Under existing Internal Revenue Code Section 181, producers may elect to currently expense certain productions costs rather than taking a smaller amortization deduction of those costs annually over a period of years. The election, as it exists today, applies to “any qualified film or television production, and any qualified live theatrical production”. The proposed language expands this to read “qualified film or television production, any qualified live theatrical production, and any qualified sound recording production’’.
“Sound recordings” are defined under U.S. Code Title 17, section 101 as “works that result from the fixation of a series of musical, spoken, or other sounds, but not including the sounds accompanying a motion picture or other audiovisual work, regardless of the nature of the material objects, such as disks, tapes, or other phonorecords, in which they are embodied”. As I understand it, the qualified sound recording costs are those incurred for inclusion within the film, television or live stage presentation. The disqualified costs appear to be associated with the cost of producing separately released items such as soundtrack albums and the like.
It is unclear to me why this provision was included. The current regulation (26 CFR § 1.181-2 – Election to deduct production costs) allows for the deduction of “direct aggregate production costs” up to the $15 million (or $20 million) dollar limit. I suspect it is intended to affirm that “integral” sounds qualify as “production” costs, but “stand-alone” sounds do not. However, it’s curious that a new subcategory with its own dollar cap was created as distinguished from simply expanding and clarifying the definition or eligible costs within the overall cap. We’ll have to wait for revised regulations to clarify how sound recording costs in excess of $150,000 are treated and the effect of the sound recording costs on the overall cap.