The Bipartisan Budget Act of 2018 (the Act), enacted on February 9, 2018, extended the application of Section 181 to December 31, 2017. Specifically, the Act changed the termination date in Section 181(g) from December 31, 2016 to December 31, 2017.

Implications

This change has several implications. First, qualifying costs incurred in 2017 may now be deducted under Section 181 subject to the $15M / $20M cap. Second, costs incurred for qualifying properties that had begun principal photography on or before December 31, 2017, may be deducted as incurred under Section 181 in 2018. Third, costs deducted for projects that had not begun principal photography before December 31, 2017, must be recaptured into 2017 taxable income. Taxpayers may have recaptured such costs in 2016 believing that Section 181 had expired on December 31, 2016. Such taxpayers should consider their alternatives and determine whether the tax treatment for such costs can be altered.

As outlined in Tax Alert 2018-0167 released on January 23, 2018, it is important to understand the interaction between Section 181 and bonus depreciation. While Section 181 now applies to 2017 costs, it is still subject to the $15M / $20M cap. Bonus depreciation permits the deduction of 100% of eligible costs but it only applies to qualified property acquired and placed in service on or after September 27, 2017. Thus, the cost for qualifying property that was acquired before September 27, 2017, will, to the extent it exceeded the $15M / $20M cap, be recovered through depreciation under Section 167. Although bonus depreciation permits a full 100% basis recovery, there is still a timing benefit in making the Section 181 election because it permits qualifying costs to be deducted when incurred versus when the property is placed in service as required for bonus depreciation.

The chart below summarizes the tax treatment for costs incurred for qualified Section 181 property in 2017.

Cost recovery for qualifying Section 181 property for costs incurred in 2017

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ENDNOTES

¹ If principal photography commenced before Dec. 31, 2017, may continue to deduct costs in 2018.

² Property must be placed in service (i.e., commercial exhibition).

³ If Section 181 election is not made, property will be subject to bonus depreciation unless