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.