Songwriters came dangerously close to losing a key break that allows them to cut their tax bill by almost 50%.

When The U.S. House of Representatives submitted its tax reform bill last Thursday, it included a clause that would have effectively repealed the 2006 Songwriter’s Capital Gains Tax Equity Act.

In 2006, Congress lowered the tax rate for songwriters who sell a part of their catalogs. It did so by reclassifying income from the sale of a catalog as “capital gains” instead of “ordinary income.” Because capital gains is taxed at a lower rate than ordinary income (by as much as half in some cases), losing that classification would have a significant impact.

Which is why page 248, section 7b, of the House bill submitted last week was so concerning. Specifically, the bill aimed to “strike” a section of the current tax code (paragraph 3 of section 1221b) that enforces this lower tax rate for royalty sales.

Now we’re no tax experts. So we talked to few tax attorneys to see what they thought. Both confirmed that proposed tax code changes would have taken away this capital gains designation.

“It is a substantive change denying capital gain treatment for self-created musical compositions or copyrights in musical works the taxpayer created (or if the work was transferred in a substituted basis transaction),” said one.

They highlighted for us the key sections outlining the change in a summary of the issue prepared by the Treasury department. Key phrase:

“The proposal… repeals the elective capital treatment for musical compositions and copyrights in musical works. Thus, gains or losses from the sale or exchange of musical compositions and copyrights in musical works will not receive capital gain treatment.”

But, it looks like songwriters won a reprieve. On Monday night, the chairman of the House Ways & Means Committee unveiled an amendment to the tax reform bill seeking among other things to retain the capital gains designation. According to Business Insider and the Tennessean, this change was made in part after lobbying by Tennessee representatives Diane Black and Marsha Blackburn.

Hopefully, this amendment will stick and the new tax bill won’t affect how catalog sales are taxed. Should the tax code ever re-classify catalog sales as regular income, it would mean songwriters would pay vastly more in taxes for any catalog sales.

That would come at an unfortunate time, hampering songwriters with even more hurdles to their cash flow. Many are selling a portion of their catalog to investors for an upfront payment today while continuing to earn annually on the portion they don’t sell. It’s a smart strategy that would still be possible should the tax code change. But the capital gains benefit of doing so would disappear.

It’s important to note that none of these changes have yet become law. The Senate still needs to weigh in on it with its version of a tax bill, and there will be lots of lobbying behind the scenes to add or strip out provisions, just like any other bill.

The songwriter community–which is just starting to flex its legislative and regulatory muscle with groups like Songwriters of North America (SONA) and the Recording Academy-organized “In My District Day”–will likely watch this progress carefully. The fact that songwriters were already targeted once during this process is reason enough to justify continued diligence.

If you’re a rightsholder considering divesting even a small portion of your royalties and want to do so before the end of the year, give us a call today. We can turn around a deal for you in around 30 days and help you take advantage of the capital gains tax break next year. Just click here to schedule a time to speak with one of our experts.