Sec. 181: Will 2025 be the series finale?

Update: The law commonly known as the One Big Beautiful Bill Act (OBBBA), H.R. 1, P.L. 119-21, enacted on July 4, 2025, did not extend Sec. 181, but Section 70434 of the act adds “qualified sound recording productions” as a new category of qualified productions generally eligible for up to $150,000 of expensing for such productions commencing before 2026 (new Sec. 181(a)(2)(C)). A qualified sound recording production is a sound recording produced and recorded in the United States (Sec. 181(f)). H.R. 1 also reinstates and permanently extends 100% bonus depreciation for qualified property acquired after Jan. 19, 2025, as well as adds qualified sound recording productions as qualified property eligible for bonus depreciation (similar to qualified film, television, and live theatrical productions).

Editor: Mary Van Leuven, J.D., LL.M.

The impending expiration of Sec. 181 (providing special expensing rules for certain film, television, and live theatrical productions), the continuing phasedown of bonus depreciation (under Sec. 168(k)(6)), and the interplay with the new corporate alternative minimum tax (corporate AMT) create significant planning opportunities in 2025 for taxpayers in the film, television, and live theater industries.

Background

Under Sec. 181, for costs incurred prior to 2026, a taxpayer can elect to deduct up to $15 million ($20 million in the case of productions in certain low–income communities or distressed or isolated areas) of the aggregate costs of producing a qualified film, television, or live theatrical production in the year the costs are paid or incurred, rather than capitalizing the costs and recovering them through depreciation over a number of years once the production is placed in service. A qualified production is placed in service at the time of initial release or broadcast or initial live staged performance (Sec. 168(k)(2)(H)). Depreciation of a qualified production is typically a combination of bonus depreciation and the income–forecast method (both discussed below).

For purposes of Sec. 181, a qualified film or television production is one for which at least 75% of the total compensation is for services performed within the United States by actors, production personnel, directors, and producers, not including participations and residuals (i.e., costs that vary by contract with the amount of income earned in connection with the production) (Sec. 181(d)). In the case of a television series, only the first 44 episodes are taken into account, and both the production–cost limitation and the 75% domestic qualified compensation requirement are determined on an episode–by–episode basis.

A qualified live theatrical production means any live staged production of a play (with or without music) that meets the 75% domestic qualified compensation requirement, is derived from a written book or script, and is produced or presented by a taxable entity in a venue with an audience capacity of not more than 3,000 or in a series of venues the majority of which have an audience capacity of not more than 3,000. In addition, qualified live theatrical productions include any live staged seasonal production that is produced or presented by a taxable entity no more than 10 weeks annually in any venue with an audience capacity of not more than 6,500 (Sec. 181(e)).

Eligible production costs include the costs paid or incurred by an owner in producing the production that are required (notwithstanding Sec. 181) to be capitalized under Sec. 263A, or would be required to be capitalized if Sec. 263A applied to the owner (e.g., participations and residuals paid for property rights, compensation paid for services and property rights, premiums paid to obtain a completion bond for the production, etc.). Production costs do not include costs paid or incurred to distribute or exploit a production (such as advertising and print costs), costs incurred to prepare a new release or broadcast of an existing production, or costs that the production owner has already deducted or began amortizing prior to the tax year for which the owner makes a Sec. 181 election (Regs. Sec. 1.181–1(a)(3)).

Depreciation of productions

As discussed above, while Sec. 181 provides a small reprieve with a deduction for a limited amount of costs incurred in the production phase of film, television, and live theatrical productions, the remainder of the capitalized production costs is generally depreciated using the income–forecast method (see Sec. 167(g)), a straight–line method (see Regs. Sec. 1.167(b)-1), or a unit–of–production method (see Regs. Sec. 1.167(b)-0(b)).

Under the income–forecast method, a taxpayer generally determines its depreciation deduction for a production by multiplying the capitalized production costs (after reduction for any costs expensed under Secs. 181 and 168(k), discussed below) by a percentage equal to the production’s actual income for the tax year divided by the total projected income for the production estimated to be generated within 10 years of the production being placed in service (with the full recovery of any remaining capitalized costs in the 10th year). Note that a taxpayer that uses the income–forecast method for depreciating production costs is generally required to apply the lookback method, which requires the taxpayer to pay or receive interest by recalculating depreciation deductions (and the resulting increase or decrease in tax) using newly revised forecasted total income from the production and applies to any “recomputation year” (i.e., generally the third and 10th tax years after the tax year the production was placed in service, unless the revised forecasted total income is within 10% of the income earned from the production before the close of the potential recomputation year).

Under the straight–line method, capitalized production costs (after reduction for any costs expensed under Secs. 181 and 168(k), discussed below) are generally depreciated over the production’s estimated useful life, which may be difficult to determine and has been the subject of controversy.

Alternatively, many taxpayers with streaming content depreciate productions using a unit–of–production method (after reduction for any costs expensed under Secs. 181 and 168(k)) under which streaming content is generally recovered based on recorded views of the streaming data, i.e., usage of the property or units of production. Under such a method, a taxpayer will project the “viewership curve” it expects based on projected streams, which generally start out high when released and then drop significantly. This generally results in cost recovery similar to the income–forecast method but without the potential application of the lookback method.

Bonus depreciation

Favorably, for qualified productions placed in service since the last quarter of 2017, bonus depreciation may be claimed in the placed–in–service year. Specifically, the Tax Cuts and Jobs Act (TCJA), P.L. 115–97, created new categories of qualified property as part of extending and modifying Sec. 168(k) generally for property acquired and placed in service after Sept. 27, 2017, and before 2027. The new categories include qualified film, television, and live theatrical productions that meet Sec. 181’s applicability requirements, without regard to the production–cost limitation or commencement–of–production requirement. For taxpayers producing qualified productions, the revisions made to Sec. 168(k) by the TCJA create a continued expensing opportunity for the qualified production costs of such productions not previously expensed under Sec. 181. Further, the TCJA generally increased the applicable bonus depreciation percentage to 100% for qualified property placed in service before 2023, with a 20–percentage–point phasedown per calendar year for property placed in service before 2027. In general, for qualified productions placed in service during 2025, the applicable bonus depreciation rate is 40%.

The combination of expensing under Sec. 181 for productions commencing before 2026 and bonus depreciation for any production costs not expensed under Sec. 181 that are placed in service prior to 2027 provides a favorable expensing opportunity, since the timing of cost recovery for the applicable percentage of costs may be accelerated into the placed–in–service year, with the remaining unrecovered costs (e.g., 60% if placed in service in 2025) recovered under the income–forecast method, straight–line method, or a unit–of–production method, as applicable.

Corporate AMT considerations

The corporate AMT was enacted by the Inflation Reduction Act of 2022, P.L. 117–169, effective for tax years beginning after 2022 (see Secs. 55, 56A, and 59). Corporate AMT generally imposes a 15% minimum tax on the adjusted financial statement income (AFSI) of large corporations whose three–year average annual AFSI exceeds $1 billion. AFSI is calculated based on numerous modifications made to the taxpayer’s financial statement net income or loss. These modifications are based on both financial reporting and tax rules.

At a high level, AFSI generally reflects tax rather than financial statement depreciation (see Sec. 56A(c)(13)). Under the proposed corporate AMT regulations that were released in 2024 (REG–112129–23, as corrected by 89 Fed. Reg. 104909), qualified film, television, and theatrical productions are treated as Sec. 168 property eligible for the Sec. 56A(c)(13) AFSI adjustment regardless of whether a taxpayer claims or elects to forgo bonus depreciation for these productions, but only to the extent of depreciation allowed under Sec. 167 (i.e., any portion of the cost of a qualified film production that is expensed under Sec. 181 is not part of the Sec. 56A(c)(13) AFSI adjustment). This results in any book expensing of production costs that are not capitalized and depreciated under Secs. 167 and 168(k) not being added back to FSI in calculating AFSI for corporate AMT purposes.

Planning considerations

The impending expiration of Sec. 181 and the eventual phaseout of bonus depreciation (unless extended or made permanent) has created an interesting opportunity for film, television, and live theatrical production taxpayers in 2025. It is important to note that a priority of the Trump administration and the GOP is extending or making permanent the provisions in TCJA that are set to expire. This could potentially include the extension and modification of bonus depreciation; however, what remains unclear is what such an extension may look like. Further, although expiring for productions commencing after 2025, Sec. 181 is not a provision that was enacted or modified by the TCJA. Thus, it is unclear if its future will be part of the TCJA negotiations. To take advantage of the current interplay between Sec. 181, bonus depreciation, and corporate AMT, taxpayers should plan and act accordingly in 2025. Further, although historically, Sec. 181 has been extended multiple times (eight, to be exact), taxpayers and practitioners alike should not rely on history repeating itself and instead actively expedite qualified production activities into 2025, if they are able to, to take advantage of the upfront deduction offer before the provision expires for productions commencing after 2025.

Editor Notes

Mary Van Leuven, J.D., LL.M., is a director, Washington National Tax, at KPMG LLP in Washington, D.C.

For additional information about these items, contact Van Leuven at mvanleuven@kpmg.com.

Contributors are members of or associated with KPMG LLP.

The information in these articles is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of Section 10.37(a)(2) of Treasury Department Circular 230. The information contained in these articles is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. The articles represent the views of the authors only and do not necessarily represent the views or professional advice of KPMG LLP.