Deal­mak­ers Elite: New York

En­ter­tain­ment com­pa­nies and in­di­vid­u­als should brace them­selves for the new law’s un­in­tended con­se­quences

Variety - - Contents - Story by BRAD CO­HEN | Il­lus­tra­tions by CHRIS GASH

En­ter­tain­ment busi­ness lead­ers need to pre­pare for the un­in­tended con­se­quences of Trump’s Tax Cut and Jobs Act.


THE LEG­IS­LA­TION KNOWN as the Tax Cut and Jobs Act, along with its ac­com­pa­ny­ing pro­posed Trea­sury Reg­u­la­tions, has al­ready had a sig­nif­i­cant im­pact on the en­ter­tain­ment in­dus­try. While not ev­ery ef­fect is known, sev­eral un­in­tended con­se­quences are im­me­di­ately ap­par­ent.

SEX­UAL HA­RASS­MENT: THE TRIFECTA FROM HELL The Tax Act re-vic­tim­izes in­di­vid­u­als who have suf­fered sex­ual ha­rass­ment. First, it pre­vents com­pa­nies set­tling sex­ual ha­rass­ment claims from de­duct­ing the cost of set­tle­ments if they are sub­ject to a nondis­clo­sure agree­ment. Anec­do­tal ev­i­dence sug­gests that com­pa­nies will con­tinue to in­clude nondis­clo­sure clauses in their set­tle­ment agree­ments, likely lead­ing them to set­tle claims for less — i.e., the lost de­duc­tion may end up com­ing out of vic­tims’ pock­ets.

Sec­ond, vic­tims of sex­ual ha­rass­ment can no longer deduct their le­gal ex­penses in non-phys­i­cal con­tact sex­ual ha­rass­ment dis­putes, be­cause of the elim­i­na­tion of miscellaneous item­ized de­duc­tions. This new lim­i­ta­tion will sig­nif­i­cantly re­duce the amount vic­tims will ul­ti­mately re­ceive on an af­ter-tax ba­sis.

Fi­nally, state and lo­cal taxes, in­clud­ing prop­erty taxes, are now only de­ductible up to $10,000. So, vic­tims will likely have to pay the full amount of fed­eral AND state in­come taxes due on the en­tire set­tle­ment, with no fed­eral in­come tax re­lief for state in­come taxes paid.

As an il­lus­tra­tion, as­sume a com­pany would have pre­vi­ously been will­ing to set­tle a non-

phys­i­cal con­tact sex­ual ha­rass­ment dis­pute with a Cal­i­for­nia res­i­dent for $1.2 mil­lion. Now the com­pany may only be will­ing set­tle for $1 mil­lion be­cause it can­not deduct the set­tle­ment amount from its fed­eral in­come taxes.

It is com­mon in these cases for at­tor­neys to charge a 40% contin­gency fee. On a mil­lion- dol­lar award, the vic­tim will pay the at­tor­ney $400,000, with $600,000 left be­fore taxes. Since the vic­tim’s le­gal fees are non- de­ductible, the vic­tim will pay taxes on the en­tire $1 mil­lion, not just the $600,000. Fur­ther­more, since state and lo­cal taxes are no longer de­ductible (above $10,000), the vic­tim’s com­bined tax rate could be ap­prox­i­mately 50% (37% fed­eral and 13.3% Cal­i­for­nia) on the en­tire $1 mil­lion.

So, af­ter pay­ing the at­tor­ney $400,000 in fees and fed­eral and state gov­ern­ments $500,000 in taxes, the vic­tim will end up with a mere $100,000 out of what might have been a $1.2 mil­lion set­tle­ment. Ouch.


Prior to the Tax Act, tax­pay­ers could gen­er­ally deduct 50% of the cost of meals and en­ter­tain­ment spent on ex­ist­ing or po­ten­tial clients. Un­der the Tax Act, no en­ter­tain­ment ex­penses are de­ductible and meals may, un­der cer­tain cir­cum­stances, be con­sid­ered en­ter­tain­ment ex­penses.

Thus, it is un­clear to what ex­tent ex­penses for meals with po­ten­tial or ex­ist­ing clients will be de­ductible. Un­til the IRS or Trea­sury is­sues fur­ther guid­ance on whether these meals are still el­i­gi­ble for the 50% de­duc­tion, tax­pay­ers are ad­vised to en­sure that they have a rea­son­able ex­pec­ta­tion of de­riv­ing in­come or other busi­ness from the meet­ing, that busi­ness is ac­tu­ally con­ducted at the meal, the meals are fur­nished at a restau­rant (rather than an en­ter­tain­ment venue, such as a sport­ing event), and that such meals are not lav­ish or ex­trav­a­gant. The IRS may still is­sue guid­ance deny­ing the de­ductibil­ity of such ex­penses.

Other types of meal ex­penses may still be par­tially or fully de­ductible. For ex­am­ple, of­fice hol­i­day par­ties and meals pro­vided in-house for the con­ve­nience of the em­ployer, such as craft ser­vices on set, are still (wholly or par­tially) de­ductible.

20% DE­DUC­TION FOR PASS-THROUGHS: HERE COME THE ROBOTS Fir­ing em­ploy­ees may pro­duce a greater de­duc­tion. The new Sec­tion 199A pro­vides pass-through en­ti­ties — such as lim­ited li­a­bil­ity cor­po­ra­tions, Sub Chap­ter S cor­po­ra­tions, part­ner­ships and sole pro­pri­etor­ships — with a 20% de­duc­tion for their qual­i­fied busi­ness in­come. To ac­com­mo­date busi­nesses with lit­tle or no wages, such as real es­tate com­pa­nies, the drafters of the Tax Act added an al­ter­na­tive test that pro­duced a max­i­mum de­duc­tion for com­pa­nies if they had suf­fi­cient ba­sis in as­sets in the com­pany.

This may have un­in­ten­tion­ally cre­ated an in­cen­tive for com­pa­nies to in­crease their qual­i­fied busi­ness in­come by fir­ing em­ploy­ees and pur­chas­ing tan­gi­ble as­sets, i.e., robots to per­form the work em­ploy­ees could have per­formed, to in­crease the al­low­able pass-through de­duc­tion.

The def­i­ni­tion of “per­form­ing artist” ex­cludes many from de­duc­tion ben- efits. Not all tax­pay­ers are el­i­gi­ble for the pass-through de­duc­tion. Specif­i­cally, the sec­tion ex­cludes in­come above cer­tain thresh­old lev­els for spec­i­fied ser­vice trades or busi­nesses, such as the per­form­ing arts. His­tor­i­cally, the term per­form­ing arts re­ferred to in­di­vid­u­als in front of the cam­era — ac­tors, mu­si­cians, etc. — in con­trast with be­hind the cam­era — di­rec­tors, pro­duc­ers, etc. Pro­posed Trea­sury reg­u­la­tions have in­ap­pro­pri­ately broad­ened the def­i­ni­tion to in­clude di­rec­tors and sim­i­lar job func­tions. As a re­sult of this ex­pan­sion, and con­trary to the his­tor­i­cal def­i­ni­tion of per­form­ing arts, di­rec­tors — and peo­ple in com­pa­ra­ble po­si­tions — may have their pass-through de­duc­tions re­duced or elim­i­nated.


With the elim­i­na­tion of the miscellaneous item­ized de­duc­tions for un­re­im­bursed busi­ness ex­penses, many peo­ple are go­ing to lose the abil­ity to deduct var­i­ous ex­penses in­clud­ing fees for ac­coun­tants, lawyers, per­sonal man­agers, busi­ness man­agers, agents and the like. Many of these de­duc­tions can be achieved at the cor­po­rate level. For this rea­son, loan- out cor­po­ra­tions, which can hire artists as em­ploy­ees in order to pro­tect their as­sets, are go­ing to be more im­por­tant than ever.

Who are the over­all win­ners and losers of this new leg­is­la­tion? Win­ners in­clude large cor­po­ra­tions and their share­hold­ers, in­clud­ing stu­dios and net­works, the ul­tra-wealthy, in­di­vid­u­als and busi­ness en­ti­ties whose in­come is largely de­rived from cap­i­tal or cap­i­tal ex­pen­di­tures, and res­i­dents of red states.

Losers in­clude peo­ple who earn their in­come through the pro­vi­sion of ser­vices, par­tic­u­larly in spec­i­fied ser­vice trades or busi­nesses, mid­dle and work­ing classes, and res­i­dents of blue states. It re­mains to be seen whether the Tax Cuts and Jobs Act will, in fact, end up cre­at­ing any new jobs or in­creased wages.

Brad Co­hen is a part­ner at Jef­fer Man­gels But­ler & Mitchell.

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