As the entertainment industry continues to adjust to a new normal, a largely forgotten provision of the Internal Revenue Code may provide welcome relief to both entertainment businesses and their employees during these uncertain times. The provision would allow individuals to receive tax-free payments from their employers while still giving employers the benefit of a deduction for such payments. The tax relief in question hearkens back to an earlier national crisis: following the September 11 terrorist attacks, Congress passed the Victims of Terrorism Tax Relief Act of 2001, which was intended to provide federal tax relief to victims of national disasters. Among the tax provisions to stem from this legislation was Internal Revenue Code Section 139 (Section 139).

Section 139 permits individuals to exclude from gross income for federal income tax purposes payments from any source (including an employer) that are qualified disaster relief payments. Qualified disaster relief payments include, among other things, payments and reimbursements for reasonable and necessary medical, personal, family, living, or funeral expenses that are incurred by an individual as a result of a qualified disaster[1] and not otherwise compensated (e.g., by insurance). Significantly, employers are able to deduct such payments for federal income tax purposes. Section 139 payments are also not subject to any federal withholding obligations and, therefore, do not need to be reported on a Form W-2 or 1099.…

Continue Reading Take Two for an All-But-Forgotten Disaster Relief Provision of the Tax Code

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

As the coronavirus pandemic yells “Cut!” across the world, the entertainment industry will feel the economic impact, with theaters closing their doors, lower attendance at film festivals, delayed productions, and the like.  Business managers and entertainment businesses, however, may feel some relief as Treasury called in sick and postponed Tax Day for 91 days.  The news first broke via tweet on March 20, 2020, when Treasury Secretary Steven Mnuchin announced on Twitter that Tax Day will be moved from April 15 to July 15.  A few hours later, the IRS fleshed out Mr. Mnuchin’s announcement by publishing Notice 2020-18, which provided more details regarding the taxes covered and the taxpayers affected by the new deadline.  The move is one of several recent measures taken by the federal government as it attempts to relieve the immense economic strain being put on Americans by the COVID-19 pandemic.

This announcement comes just two days after—and supersedes—Notice 2020-17, which postponed until July 15 the payment but not the filing of federal income taxes and imposed limits of $1 million for individuals and $10 million for corporations with respect to such postponement.  Notice 2020-18 restates and expands upon Notice 2020-17 by eliminating the distinction between payment and filing of taxes for purposes of the new deadline and by doing away with any pecuniary limits on the amount of tax that may be postponed.…

Continue Reading Treasury Gives U.S. Taxpayers Relief from COVID-19’s Economic Impact by Postponing Tax Day