Expensing Drama

June 16, 2016

In December, Congress passed the Protecting Americans from Tax Hikes (PATH) Act, also known as the Extenders Bill. This bill extended a number of tax provisions that were set to expire at the end of the year for both businesses and individuals. One such provision that was extended was expensing for the film and television industry. The expensing provision was expanded to include live theater productions as well.

Expensing allows businesses to claim deductions for expenses paid in the year in which they were made, rather than having to take the deductions over a number of years. Through this, businesses are only taxed on their true profit, revenue minus costs. Under depreciation, businesses lose the ability to fully deduct the cost of an investment. This leads to an inaccurate representation of profit and increases the cost of capital.

Imagine a theater company that earns $1 million in a given year. It decides to spend $100,000 on new lighting equipment, a business investment. Under the current cost recovery system, the investment would be deducted over seven years according to a depreciation schedule. Over the course of the seven years, the deductions will add up to the $100,000 investment. However, when inflation and the time value of money are taken into account, only $83,630 is written off as a deduction.

If the theater could expense, it would be able to recover the full cost of the investment and would be the ideal treatment for business investment.

Depreciation Schedule of a 7-year Asset (MACRS)

Year

Write-off

Present Value Write-off

0

$ 14,290

$ 14,290

1

$ 24,490

$ 22,780

2

$ 17,490

$ 15,130

3

$ 12,490

$ 10,050

4

$ 8,930

$ 6,690

5

$ 8,920

$ 6,210

6

$ 8,930

$ 5,790

7

$ 4,460

$ 2,690

Total:

$ 100,000

$ 83,630

Note: 5 percent real discount rate and 2.5 percent inflation

The expensing provision that was extended last year under the PATH Act is up for renewal at the end of this year, and some have already set their sights on it. Rep. Tom Marino (R-PA), said, “If these guys aren’t bright enough to put anything together that makes money, tell them to get out of the business,” referring to the expensing provision.

It is true that the whole idea of extenders—tax policies that annually expire—is silly. It would be better to have permanent policy, even if it were not ideal policy. It is also not necessarily good policy to enact specific provisions by industry. However, it is important to distinguish between cost recovery provisions that move the code closer to the ideal of full expensing and actual subsidies.


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