STRANGER THAN FICTION Are You Making These Tax Mistakes?
By Jessica Sitomer
Harold Crick doesn’t have the most loved job in America, he’s an IRS auditor. Ana Pascal, was less than thrilled to have Harold show up to her small business (a bakery) for an audit. She was unprepared and overworked, and it was just a bad situation for her.
Doing your taxes is only fun when you’re getting money back. And so many people in the entertainment industry are unaware of mistakes that they’re making and tips that could save and make them money.
Check in with Mark Bradley to see if you are guilty of the top five mistakes that people in our industry tend to make when preparing to do their income tax returns:
Mistake #5: Bogus Tax Deductions
People in our business are great talkers, and we love to spread rumors. Unfortunately, sometimes the rumors that get spread around about tax deductions are just plain wrong. Two immediately spring to mind.
First, I’ve heard some actors say, “Oh yeah, I deduct all my clothes.” This is complete nonsense. The rule is that clothing is deductible only if it isn’t suitable for street wear. If you bought a business suit and never wore it for anything but auditions and commercial shoots, it’s still not deductible, because you could wear it on the street. The only exception to this rule is dance wear. You can wear it on the street, but it’s considered specialized work wear, like a nurse’s scrubs. (Repairs and maintenance of your clothes used on the job are always deductible.)
Second, I was horrified to learn last year that a lot of young people were telling each other that they could deduct ALL their restaurant meals, as long as they dined with their peers and talked about the business! This, of course, is also total, utter, absolute nonsense. To be deductible, you must have a clear, current business relationship with the person you’re hosting and you must discuss a specific business opportunity, not just your career in general. Even if at some time in the future, your dining partner may hire you for a job, going out for dinner with your friends is essentially social in nature and should not be deducted as business entertainment.
Mistake #4: Missed deductions
The flip side of taking bogus deductions is missing legitimate ones. A couple of industry-specific deductions that shouldn’t be overlooked are items for research and expenses that are deducted from paychecks. Research is one area where it pays to be an industry professional. Many items that would simply be entertainment or personal enrichment for the general public are deductible as ordinary and necessary professional expenses. Books about the business, recordings, movies, and so forth help to keep you up-to-date in your profession. Your tickets to theatre and movies are also absolutely legitimate deductions as professional research. And don’t overlook expenses that are deducted from paychecks. Two that come to mind are Equity working dues and commissions withheld by agents.
Mistake #3: Deducting business expenses on the wrong form
People in our business have two types of income: employee income, reported to you on a W-2, and independent contractor income (self-employment), which may be reported on a Form 1099. (If you got paid less than $600 by an employer, they don’t have to send you a 1099, but you still have to report the income!) Your self-employment income and expenses should be reported on Schedule C (or C-EZ), and employee business expenses on Form 2106 (or 2106-EZ). Some folks have told me that their accountants deduct ALL their business expenses on Schedule C, even those employee expenses that aren’t attributable to their 1099 work. I think that’s completely improper, and could be dangerous. Maybe those accountants figure they could bamboozle an IRS auditor, but I’d prefer to report expenses properly.
Mistake #2: Forgetting about local transportation
A professional tax preparer friend of mine says that the most-overlooked business deduction is local transportation. Be sure to record your car mileage, bus or subway fares, parking and tolls, etc. for your local trips in pursuit of your career. Transportation to job-seeking and career-building activities is always deductible. These activities include actual auditions and interviews, but also meetings with your agent, trips for coaching and lessons, union meetings, and errands to photographers, studios and printers to get your head shots, demos, and résumés. All these activities are ordinary and necessary in the course of pursuing your career, and this is probably most of your mileage. A singer probably wouldn’t forget to deduct the cost of voice lessons, but might overlook the cost of getting there. This may be because you usually won’t have receipts for these local transportation costs. And that leads us to:
The Number One mistake industry professionals make: Failure to keep good records
The best thing to do to maximize your tax refund is to keep good records of your activities. This means that you should write everything down, and keep those records as you go along. From the example above, when you go to an audition or interview, write down your car mileage and how many quarters you plugged into the parking meter, or make note of the fare for public transportation. You won’t have receipts for these things, so contemporaneous records are essential. You can’t just make things up at tax time!
The most credible records are written in your own hand, so I keep an old-fashioned paper date book. If you prefer to keep track of things electronically, make a printout at least once a week and hand-sign and date it. Remember — as a professional in our industry, YOU are a little business, and keeping accurate records is an important part of your job!
1. While Mark’s Book is titled Actors Tax Guide, don’t let the name fool you. His system applies to all entertainment industry professionals. Give it a look, it could save you money or even make you some www.ActorsTaxGuide.com
2. If you’ve been procrastinating on preparing for your taxes, schedule a day to work on it and plan a reward for your completion.
If Ana had spent the time to create a strong foundation for her business, which includes properly tending to her taxes, she wouldn’t have found herself in a bad situation. On the bright side, she did find love, which goes to show, you can always find a silver lining.