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On May 13, 2020, reality TV star Maurice “Mo” Fayne was arrested and charged with federal bank fraud by the U.S. Department of Justice in connection with his alleged misuse of loan proceeds obtained through the Paycheck Protection Program (PPP). Fayne submitted his PPP application in April, on which he claimed his company, Flame Trucking, had 107 employees and a monthly payroll of about $1.5 million. Fayne obtained over $2 million in funding from the program under the pretense of using the funds to support his trucking company. Instead, Fayne allegedly spent the money on $85,000 in jewelry, including a Rolex Presidential watch, a Rolls-Royce Wraith, and $40,000 in child support.
Continue Reading TV Star Arrested for Misuse of Stimulus Funds

For many entertainment businesses, the recent congressional stimulus has proved to be a smash hit. The IRS, however, is a tough critic and is looking to claw back some of that money by disallowing deductions associated with such stimulus funds. On April 30, 2020, the IRS released Notice 2020-32 (the Notice), which provides some clarity regarding the tax treatment of loans received pursuant to the Paycheck Protection Program (PPP). Specifically, the Notice clarifies that any expenses paid with proceeds from forgiven PPP loans are not deductible for federal tax purposes. In an earlier post, we raised the question of whether such a deduction would be allowed; now the IRS has answered, but it may not get the last word on this issue.
Continue Reading No Deductions (Yet) for Business Expenses Paid with Paycheck Protection Loans

A California federal court recently dismissed the majority of the counterclaims asserted by the Writers Guild of America (the Guild) against William Morris Endeavor Entertainment, Creative Artists Agency, and United Talent Agency (the Agencies) in a highly publicized suit over the Agencies’ right to receive “packaging” fees.

The case arose from the Guild’s decision last year to prohibit talent agents from earning packaging fees on film and television projects.  For decades, it was common practice for studios to pay talent agents “packaging” fees for acquiring and pooling talent (e.g., assembling writers, actors, and directors, as talent agencies have a substantial roster of such talent) for a given project.  These fees frequently consist of a combination of license fees paid by studios for a project and a percentage of the project’s gross receipts.  The Guild banned this practice last year, claiming that packaging fees create conflicts of interest between talent agents and the writers they represent.  In the Guild’s view, enabling talent agents to participate in the profits of a film or television project through packaging (1) lowers production budgets (thereby reducing writer compensation) and (2) lowers the agents’ incentive to increase their writer-clients’ compensation.  The Guild favors a commission-based system, where a talent agent takes a percentage of their clients’ earnings, which it believes better incentivizes talent agents to maximize their writer-clients’ compensation.  Following the Guild’s ban, the Agencies filed suit, alleging the packaging prohibition amounts to an illegal group boycott in violation of the Sherman Act.
Continue Reading Counterclaims on the Cutting-Room Floor: How a Central District Court Cut Down the Writers Guild’s Countersuit Against Hollywood’s Talent Agencies

The Coronavirus, Aid, Relief, and Economic Security Act (the CARES Act) provided the largest economic stimulus in American history in hopes of combating the economic effects of COVID-19. $349 billion was set aside for the Paycheck Protection Program (PPP), which provides loans, sometimes forgivable, to eligible small businesses. As we noted earlier, many production companies and other businesses in the entertainment industry will likely qualify to receive funds under the PPP.

But what if a company does not qualify for a PPP loan? For example, larger entities ultimately might be ineligible because of the 500-employee cap for eligible businesses. For these companies that cannot access PPP funds (or choose not to), the CARES Act provides alternative potential payroll tax relief.

The CARES Act creates a fully refundable payroll tax credit, the Employee Retention Credit (ERC), for eligible employers that do not receive a PPP loan. Companies entitled to an ERC will be able to use federal employment taxes, including withholdings, that such companies should have otherwise remitted to the IRS to fund “qualified wages” (defined below). Notably, if a company determines that its ERC will exceed qualified wages, it can request an advance of the credit from the Internal Revenue Service (IRS) through IRS Form 7200.


Continue Reading Not Entitled to a Paycheck Protection Program Loan? Payroll Tax Relief for the Entertainment Industry Is on the Way Under the CARES Act

On March 27, Congress passed H.R. 748 – the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).  The entertainment industry, like the rest of the country, now eagerly awaits the coming aid.  As production companies and other entities wade through the provisions of the bill to discover their share of the benefits, they might notice that some of the stimulus will arrive in the form of favorable changes to tax laws.

For example, one major piece of the CARES Act named the Paycheck Protection Program (the PPP) involves federally backed loans for qualifying “small” businesses that certify that the loan is necessary to support ongoing operations and will be used to retain workers and/or make defined overhead payments.  The PPP further provides loan forgiveness for borrowed funds used to pay eight weeks of payroll and other qualified expenses.  While businesses in the entertainment industry often do not conjure the words “small business” in our minds, many production companies, and other entities such as talent management firms, might ultimately qualify for these federally backed loans and subsequent forgiveness.  For a deeper dive into the PPP provisions and who qualifies, see our earlier post.

Normally, debt forgiveness gives rise to taxable income.  However, any loans forgiven through the PPP will be excluded from taxable income.  Essentially, for a production company that qualifies, the federal government is not only offering free money to pay for certain expenses – it is offering tax-free money.  It is unclear whether taxpayers can receive a double benefit by deducting expenses funded by a PPP forgiven loan.  And, on a related note, states have not yet conformed to this exclusion, so the question remains whether any PPP debt forgiveness will give rise to taxable income in states such as California or New York.  Production companies should stay tuned for the resolution of these issues.


Continue Reading The Federal Government Provides Production Companies Some Much-Needed Income Tax Relief

UPDATE: Applications for loan forgiveness have been made available on the Department of the Treasury’s website as of May 15, 2020.

https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf


UPDATE: As of April 16, 2020, the initial $349 billion in funds available through the PPP has been depleted, and the SBA is no longer accepting new applications. Discussions are currently in progress to inject additional capital into the program.

Additionally, some of the ambiguity surrounding payroll costs has also been cleared up by subsequent Treasury guidance. First, certain fringes, including group healthcare coverage and retirement benefits, are included in payroll costs. Furthermore, distributive shares from LLCs or S corporations and guaranteed payments from LLCs are included as payroll costs at the partnership level. It has been clarified that partners are not eligible to file for PPP loans as self-employed individuals.


On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or the “Act”).  The Act is a $2.2 trillion swiss army knife of economic relief provisions meant to reduce the impact of the COVID-19 pandemic on various parts of the U.S. economy.  Among these provisions is the $349 billion Paycheck Protection Program (the “PPP”), an expansion of the Small Business Administration Economic Injury Disaster Loan program (the “SBA”).  The purpose of the PPP is to help small and middle market businesses pay their employees and otherwise keep the lights on during the economic slowdown.  As entertainment productions grind to a halt worldwide as a result of COVID-19, the PPP may be a welcome boon for entertainment businesses trying to stay afloat during this challenging time.

Before addressing the rules, it should be emphasized that taxpayers should file their PPP loan applications ASAP.  It is anticipated that the $349 billion allocation to the PPP will be quickly absorbed and accounted for by applications submitted by this Friday (April 3), which means that applications filed next week may be out of luck unless Congress elects to expand the size of the PPP fund.  With that as our background, we continue with a general description of the PPP.


Continue Reading FILE NOW! Eligibility of Entertainment Businesses for PPP Loans Under the CARES Act

This article is part of a series monitoring developments with regard to California Assembly Bill 5 and its impact on the entertainment industry. See our first post here.

The Talking Heads repeat the words, “same as it ever was” in their famous song, “Once in a Lifetime.” Echoing that sentiment, we have learned that

This Article is part of a series monitoring developments with regard to California Assembly Bill 5 and its impact on the entertainment industry.

California Governor Gavin Newsom recently signed into law Assembly Bill 5 (“AB5” or the “Bill”), which redefines the distinction between an employee and an independent contractor. AB5 is primarily targeted at gig economy companies such as Uber and Grubhub, whose workers had been classified as independent contractors up to this point. Proponents of AB5 argued that many gig economy workers worked full time but received none of the benefits commonly associated with full time employment—including overtime, minimum wage, and workers’ compensation. Consequently, AB5 was touted as providing increased benefits and rights to a growing gig economy workforce. An additional impetus for AB5 was the legislature’s desire to stem financial losses to the state as a result of worker misclassification, including the loss of tax revenues.


Continue Reading Assembly Bill 5: Guilds Issue Joint Statement Advocating for Continued Use of Loan-Outs