Tax Preparation for Film Crews is a timely article brought to us courtesy Gotham Sound & Communications’ The Gotham Gazette.
(Revised January 2012)
by Anne K. Johnson, Tax & Production Accountant
The most important tax change for film makers is this: Several years ago, Congress began to allow an immediate deduction of qualified film and television production costs in the year they were paid or incurred, if 75% of the compensation paid was paid domestically, and if the total production costs did not exceed $15 million. This allowance was set to run from 2004 to 2008, but was extended to 2011. It did not extend to 2012. So if you are making a film, and you did not begin principal photography before the end of 2011, the costs will have to be capitalized instead of immediately deducted.
In order to prepare a successful tax return, it is important to know what is deductible and how to keep records of those deductions.
For the tax year 2012, April 15th falls on a Sunday and Monday April 16th is a holiday in Washington, DC, so the deadline for filing taxes has been extended to Tuesday, April 17th.
There are several ways of keeping track of expenses:
(My immediate advice is to never throw away any receipt, whether or not you think it is deductible.)
Pay cash and keep the receipts.
Pay by check and keep the back up. For instance, the IRS won’t accept just a check for proof of anything. They want to see the bills.
Pay by credit card and keep the receipts. Make sure you write down on the receipt what the business related item is while it is fresh in your memory.
Pay on line and print out a receipt. Make sure it is itemized.
Keep a diary. The IRS accepts diary entries for proof of expenditure for certain items for which one would not normally get a receipt. These are, local transportation (although now cabs give receipts as do machines where metro cards are purchased), publications (business related) purchased from a newsstand, tips when traveling, parking meters when parking for business, cash paid tolls for business trips, business entertainment—when you take someone out for a meal, discuss business, and pick up the check. Note, here you must write down with whom you ate and what you discussed—how it was business related, and how the person you are entertaining will help you earn money in the future. Only items under $75.00 can be put in a diary. Any diary type items $75.00 or more require receipts. If you are traveling out of town for business, your own road meals can be put in a diary as well. Almost everything else requires receipts.
Another item to keep in a diary is the miles you drive for business related trips. The IRS requires this anyway.
Also, it is a good idea to prepare one’s taxes as if he/she were going to be audited, even though chances are he/she won’t be.
How and what to take for deductions:
Deductions of expenses can be taken several different ways. There are basically three forms on which one can take deductions and it depends on how one is paid and what one does for work.
|Schedule A: If work is performed for an employer, wages are paid and taxes withheld, deductions are taken on a Schedule A. Schedule A is used when the standard deduction allowed each taxpayer is exceeded. In addition to un reimbursed or un reimbursable medical expenses that exceed 7 ½ % of one’s adjusted income, state and local taxes withheld and paid, or sales tax (at least for 2011), real estate taxes, church and charitable contributions and expenses for volunteer work done for a church or charity, and mortgage interest, one can deduct ordinary and necessary business expenses that exceed 2% of one’s adjusted gross income. If all of the above expenses do not exceed the standard deduction, one does not need to itemize. Also note, written proof of charitable contributions must be kept. Write checks to churches, etc. Get letters from the church or charity for the donation.Ordinary and necessary business expenses are those that are required by an employer, would not be reimbursed by that employer, and expenses incurred to maintain and improve skills in one’s current job. Expenses incurred to learn a new job are not deductible. Also, if an employer would reimburse the expense whether or not you asked for the reimbursement, the expense is not deductible. This goes for medical expenses too.For instance, if a taxpayer is expected to keep up with what is going on in his or her field, read publications, see films, do research on the internet, watch cable, etc. and the employer will not reimburse those expenses, then those expenses are legitimate deductions. Many members of a crew must be able to relate to how other films looked, etc. It is my opinion that a taxpayer has a much better idea of what he/she needs to maintain and improve skills. Some auditors allow 80% of cable, for instance, 50% of internet access, etc. However, if one could argue that one would not have cable or internet if one were not in the film business (highly unlikely in this day and age) one might be able to take a higher percentage of the expense as a legitimate deduction.Business use of cell phones is another issue. Expenses of a home phone used for business are only deductible if the expense exceeds the cost of having the phone in the house. Only long distance calls and extra message units for business related calls are deductible. An additional line for a fax might be deductible as well. If one has a home phone and also has a cell phone, a larger amount of the cell phone expense can be deducted. It is up to the taxpayer to determine how much the cell phone is used for business. However, if the taxpayer only has a cell phone and no home phone, the IRS could argue that the basic cost of the cell phone is not deductible. Only additional charges for more minutes, long distance calls, etc. would be deductible.
Other expenses one might deduct, as long as they are ordinary and necessary and would not be reimbursed could be purchase of supplies, use of a computer and other equipment, cameras, tools, etc., reading of business publications, watching films and performances and going to museums for research, continuing education to improve skills in the field for which one is currently being paid.
Note, supplies that are used up, such as batteries, small tools, film, sound stock, etc. can be deducted in full in the year they are purchased. Equipment purchases can also be deducted in full as long as the total of all deducted equipment purchases does not exceed $250,000. Remember, if one writes off all of his/her equipment purchases instead of depreciating them over several years, the deduction is used up in the year taken. So if you think that you may have a higher income in future years, it might be better to depreciate the equipment so that the deduction can be spread out over more years when one might earn higher income. Equipment purchases, regardless of how they are deducted, must be listed individually with the date of purchase, the cost, the method of depreciation, and the description of the equipment included.
If one is teaching, $250 of one’s teaching expenses are deductible regardless if one itemizes or not, as are all medical insurance premiums for a self employed person. The $250 educator’s deduction was extended, but could be removed in the future.
Note, generally business entertainment is only 50% deductible. However, if you are providing meals for a film shoot, for instance, the cost of providing working meals is fully deductible.
|Schedule C: If one receives 1099’s for payment, where no taxes are withheld, expenses against that income can be deducted on a Schedule C and are not limited to exceeding 2% of adjusted gross income. It is assumed that one is self employed in his/her own business if one receives 1099’s. If the work is performed in one’s home, part of the home expenses are deductible if two requirements are met. First, the part of the home must be used exclusively for business, not part of a bedroom or living room, but a separate room. One could divide a room if necessary, but a desk in a bedroom is not a home office. Secondly, the cost of a home office cannot be used unless there is a net profit on the business. A portion of the rent, utilities, insurance, cleaning, etc. can be deducted based on the percentage of the home that is used.Other expenses a self employed person might deduct would be business use of a vehicle, insurance, business interest, business entertainment, travel, etc.font-family: Times New Roman; color: black”> Of course, in addition to paying federal and state and local taxes on the net profit of the self employment income, one must pay his/her own social security self employment tax. The amount due is 13.3% of the net profit (down 2% from 2009, until Congress raises it again).|
|Schedule E: The third way of taking deductions is on a Schedule E. If a film crew member rents his/her equipment to a film company, and if the crew member is being paid wages (where taxes are withheld) separately from the rental fee, the rents can be reported on a Schedule E. The net profit on a Schedule E is not subject to self employment tax, just income tax.|
What Else is Deductible?
Purchase and repairs and maintenance of the equipment are deductible. Purchases may be depreciated over several years or expensed in the year of purchase as stated above. Only expenses incurred renting or purchasing the equipment one rents out are deductible on the Schedule E. That might include insuring the equipment, transporting the equipment, etc. Other business expenses must be taken on the Schedule C if applicable or as itemized deductions on a Schedule A.
Costs of transportation are limited. Commuting from home to office and back are generally not deductible. There are a few exceptions. If one is using his/her car for the benefit of the employer, the costs associated with driving that car to and from the place of employment would be deductible. Again, it is important to keep a mileage log. Also, if the expenses for running the car for the employer such as gas, parking and tolls are reimbursed or would be reimbursed whether one asks for the reimbursement or not, those expenses cannot be deducted on taxes. If the employer pays a rental fee for the car, that fee should be reported on the W2 as part of wages and would not be reported on a Schedule E. If the rental is reported separately on a 1099, one could probably take the expenses on a Schedule E. If one is hauling heavy tools to the place of work, the use of one’s car or the transportation expenses (in cabs) would be deductible. Transportation between jobs, from home to do research, purchase equipment, go on job interviews, take a business related class, or any other business related trip would deductible. Again it is important to keep a diary, and list the expenses for which one would not ordinarily get receipts.
Basically there are two ways of figuring car expenses, actual expenses or mileage. Expenses that are calculated based on the percentage of business miles vs. total miles are gas, repairs, insurance, registration, AAA membership, interest on car loans or lease payments, and then the business portion only of parking and tolls. Depending on the business use of the vehicle, or how new it may be, it is usually a better deduction to take the expenses. Of course using the flat mileage rate is easier to calculate.
If one works out of town and is not reimbursed for meals, all meals in the travel locality are deductible. If the film company is only paying crews as locals, then the cost of lodging and transportation from the lodging to the job and travel to the locality are deductible. Again, this is only if these expenses would not be reimbursed or reimbursable.
The best way to prepare for tax preparation is to sort receipts by category, go through one’s bank statements, credit card statements and diary. Receipts should be sorted in date order and each category added up separately. Needless to say, if sorting, adding, and record keeping are done throughout the year, tax preparation time is much easier. A computer program such as Quick Books is a valuable tool for record keeping. However, back up receipts need to be kept.
If one is self employed, back up receipts should be kept for at least seven years. Copies of tax returns should never be thrown out. Receipts for major purchases should be kept for as long as the item is being depreciated and then for three to seven years after that. If one owns a home, all records related to purchasing and improving that home should be kept for as long as the home is owned and then for three years after it is sold.
One more important issue to consider is how much one is allowed to owe the IRS at the end of the year. If one owes $1000 or more, one is subject to penalties and interest. Usually if one is paid wages and has enough taxes withheld, one won’t owe taxes, and will probably get a refund. If one has a net profit from a business, rentals, stock sales, dividends, and interest, etc. and will owe money, it is a good idea to pay quarterly estimated taxes during the year. States require estimated taxes to be paid as well if there will be a balance due.
It is important to note that there are unscrupulous employers who pay people fees instead of wages when they should be paying wages. If an employer provides you with a place to work and directs what you do, that employer should be paying you wages, withholding taxes, paying half of your social security tax, workers compensation, unemployment and part of disability. An employer can withhold about .60 (that is 60 cents) a week for disability. The employer must pay the balance. Employers save themselves at least 20% additional expense by not paying wages. Not paying wages when it is required is illegal. Know your rights.
Something important to note is how to make sure enough state and local taxes are being withheld when one is working in another state from the state in which he/she lives. If you are a New York City resident, and are working in lets say New Jersey for instance, you should make sure that the payroll company is withholding New York City Tax. Also, if the tax rate for the state in which you are working is less than the rate of New York State taxes, the difference should be withheld and paid to New York State. If you are working in a state that has no state income tax, such as Florida or Texas, make sure that enough taxes are being withheld and paid to New York State and City. It is important that you check your pay stubs to make sure all the applicable taxes are being withheld. It is also important that you do not put more exemptions on your Start Form (W4 Form) than you are entitled to claim on your tax return. By doing this, you will end up owing taxes to the state you are working in. The reason for this is that you cannot take deductions against the income from the non resident state. Of course, you do not have to pay taxes to two states on the same income. So if you work in New Jersey, you can take as a credit against your New York State taxes the amount you pay to New Jersey for the work performed in New Jersey. You do however, have to pay New York City taxes on that income, so make sure New York City taxes are being withheld.
In 2009 New York instituted a new MTA tax on Schedule C filers. Make sure your tax preparer calculates this tax for you if you are self employed.
Be sure you are aware of the credits available to those in certain tax brackets.
Tax season can be less stressful if one keeps adequate records, plans for tax preparation all year, and has enough withheld or pays enough estimated taxes.
Anne K. Johnson is a professional tax & production accountant.