Entertainment Tax Tips: Business Expenses

Cable TV, Movies and Theatre tickets

Internal Revenue Code section 274 places strict limits on deductions for items which are “generally considered to constitute amusement, entertainment, or recreation.” Such items are thus deductible only where there is a clear tie to particular work.

Appearance and Image

Taxpayers in the entertainment industry sometimes may incur expenses to maintain an image. These expenses are frequently related to the individual’s appearance in the form of clothing, make-up, and physical fitness. Other expenses in this area include bodyguards and limousines. These are generally found to be personal expenses as the inherently personal nature of the expense and the personal benefit far outweigh any potential business benefit.

No deduction is allowed for wardrobe, general make-up, or hair styles for auditions, job interviews, or “to maintain an image”.

Entertainment Tax Tips: Capitalization of Motion Picture, Master Recording, and Video

When a taxpayer produces or creates a product (video, film, recording, etc.), the taxpayer will generally incur a great portion of the expenses before the product is ready to produce income. When this happens, the taxpayer is usually required to capitalize those expenses and recover (deduct) them over the period of time that the product is producing income. Several different provisions apply depending on whether the taxpayer is already in the business and the specific business the taxpayer is in.

Internal Revenue Code Section 195

Expenses for investigating, creating, or acquiring a new business are nondeductible capital expenses. This applies to all expenses before the day the active trade or business begins. These provisions apply to someone starting out in the industry – before offering a completed product for sale, production, or distribution.

IRC Section 263A

These rules apply to people who are already in the trade or business. This code section requires the capitalization of expenses to produce a creative work. The total costs of creating the assets are required to be capitalized. This includes cost of researching, preparing, producing, recording, etc. It also includes an allocation of indirect costs such as utilities, tools, clerical, rental of equipment, etc.

Prior to the enactment of Section 263A, it was unclear what indirect costs were required to be capitalized for tax purposes with regard to self-constructed assets.

• Most companies do capitalize general and administrative overhead, as well as interest, to be consistent with the Generally Accepted Accounting Principles (GAAP) requirements of SOP 00-2
• The uniform capitalization rules of Section 263A of the Internal Revenue Code require that certain costs relating to self-constructed assets be capitalized
• The uniform capitalization rules of Section 263A apply to real and tangible personal property. Section 263A specifically states that these assets are considered tangible personal property for this section

Abandonment

As with any other business venture, if a project is abandoned, the taxpayer can claim a deduction for the unrecovered basis. Abandonment requires that the taxpayer show an intent to abandon and makes an affirmative act of abandonment in such a manner that the asset is not retrievable.

Example One:

Putting a script on the shelf for a while, with the possibility of selling it at a later date, is not abandoning it.

Example Two:

Not attempting to promote a master recording is not abandoning it, since it may still be released in the future.

What are Tax Laws and Issues for E-Business and E-Commerce?

Internet Sales are Taxable

Misinformation about laws such as the prohibition of the taxation of Internet access (Internet Tax Freedom Act) and limiting sales tax on interstate sales have lead some to incorrectly believe that Internet sales income is not subject to income tax.

An online business may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your sales may result in capital gains, nondeductible personal losses, or you may have ordinary business income.

Income from Abroad is Taxable*

There have been recent reports about the interest of the Internal Revenue Service (IRS) in taxpayers with offshore bank accounts. The IRS’ interest, however, extends beyond offshore bank accounts. The IRS reminds you to report your worldwide income including income from foreign customers on your U.S. tax return. Civil and criminal penalties may apply for not reporting all taxable income, including income from overseas business transactions.

If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S. This is true whether or not you receive a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return) or the foreign equivalents. See Publication 525, Taxable and Nontaxable Income for more information.

Home Office Deduction

If you use a portion of your home for your online business, you may be able to take a home office deduction. In order to deduct expenses related to the business use of your home, you must carry on a “bona fide” business, as well as meet other specific requirements. Even then, your deduction may be limited. To qualify to claim expenses for the business use of your home, you must meet both of the following tests:

1.  Your use of the business part of your home must be:

• Exclusive,
• Regular, and
• For your trade or business,

AND

2.  The business part of your home must be one of the following:

• Your principal place of business,
• A place where you meet and deal with customers in the normal course of your trade or business, or
• A separate structure you use in connection with your trade or business.

For more information on home office deductions, see Publication 587, Business Use of Your Home and IRS Tax Tip 2008-53

Consequences for Evading Taxes on Foreign Source Income

Substantial civil and criminal penalties may apply if you do not properly report all taxable income from domestic and foreign sources or properly disclose, in Part III of Schedule B and on Form TD F 90-22.1, your financial interest in foreign financial accounts if you have such accounts, You will still also be required to pay the tax due, with interest, on any unreported income.

Reporting Promoters of Offshore Tax Avoidance Schemes

The IRS encourages you to report promoters of off-shore tax avoidance schemes. Whistleblowers that provide allegations of fraud to the IRS may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.

How to Avoid Tax Problems – E-Commerce and E-Business

Home Based Business Tax Avoidance Schemes

Scam home-based businesses and tax avoidance promotions have gained popularity over the last few years for a variety of reasons, including:

1. Popularity of the Internet,
2. Desire of individuals to reduce the amount of taxes they pay,
3. Unscrupulous promoters selling tax avoidance and audit assistance packages,
4. Taxpayers being advised they can deduct all or most of their home and other personal assets as business expenses.

Personal Expenses or Business Expenses

Most taxpayers with home-based businesses accurately report their income and expenses, while still enjoying the benefits that a home-based business can offer. However, some individuals have received advice that they can operate any type of unprofitable “business” out of their home and claim personal expenses as business expenses. Nondeductible personal living expenses cannot be transformed into deductible business expenses, regardless of how convincing marketing materials may seem.

The following are a few examples of items that are generally not deductible as business expenses:

1. Deductions improperly claimed as home office expenses. Simply placing a calendar, desk, file cabinet, telephone or other business item in each room does not convert the room into a home office.
2. Deductions for payments to a child for performing household tasks that would typically be expected of the child (e.g. for answering telephones at home, washing cars at home, etc.) that are improperly claimed as salary payments to the child.
3. Deductions for education expenses paid for your child that are improperly claimed as a business expense for an employee.
4. Deductions improperly claimed for personal and commuting use of a car or truck when the vehicle is used for both personal and business purposes.
5. Deductions improperly claimed for personal expenditures, such as home furniture, home entertainment equipment, children’s toys, recreation vehicles, etc.
6. Deductions improperly claimed for personal expenditures for travel, meals, and entertainment claiming .that “everyone you may encounter is a potential client.”

Don’t Be A VICTIM OF A TAX SCHEME!

Some promoters are targeting home-based businesses including online auction sellers for abusive tax schemes.

Tax Tips For E-Business and E-Commerce

Online Garage Sales

If your online sales are the Internet equivalent of an occasional garage or yard sale, you generally do not have to report the sales if you did not receive more than you originally paid for the item you sold. In a garage sale, you generally sell household items you purchased over the years and used personally. If you paid more for the items than you sell them for, the sales are not reportable. Losses on personal use property are not deductible, either.

Home-Based Online Businesses  If your online garage sale turned into a business and/or you have recurring sales and are purchasing items for resale with the intention of making a profit; you may have started an online business.

Online Sales Trade or Business

If you are operating a viable online business you may be entitled to deduct business expenses. Do you have an established business and you are augmenting your sales with online sales? Then, remember to include the online sales in your business income. View an IRS video on Business Income.

Online Sales of Appreciated Assets

Examples of appreciated assets often include art, antiques and collectibles. If you have online sales of property where the sales price is more than your cost or adjusted basis, you usually will have a reportable gain. These gains may be business income or capital gains.

Online Sales of Depreciated Business Assets

If you sell business assets or close your business you may have capital gains, ordinary gains and depreciation recapture to report. An example is the sale of an automobile used for business.

For tax information if you sell or close your online business view the IRS video entitled Closing a Business.

Don’t Be A VICTIM OF A TAX SCHEME!

Some promoters are targeting home-based businesses, including online auction sellers, for abusive tax schemes.

What is Electronic Business & Electronic Commerce?

Electronic Business is a term representing the impact of computers, telecommunications, electronic payment systems, computer software, data networks, and other technologies on business transactions and business practices.

E-Business is more encompassing than just E-Commerce and includes the internal operations of a business, such as purchasing, accounting, and internal information management technologies.

It is useful to think of E-Business as having four primary components:

1. Electronic Business Infrastructure,
2. Electronic Business Processes,
3. Electronic Services, and
4. Electronic Commerce.

Examples of E-Business processes, services and infrastructure include:

• Electronic Accounting and Tax Books and Records
• Electronic Recordkeeping Requirements
• Electronic Document Management Systems
• Point-of-Sale Systems
• Electronic Payments
• Standard Tax Audit File (XBRL)

Electronic Commerce is economic activity, which can be defined as “the value of goods and services sold online.” The term “online” includes the use of the Internet, Intranet and Extranet, as well as proprietary networks that run systems such as automated exchanges of trade documents and payments).

An E-Commerce transaction is any business transaction completed over a computer network, including the internet, or by e-mail and includes the sale of goods or services.

Examples of E-Commerce markets include:

• Online Auction Sellers
• Online Retail & Services
• Online Bartering
• Online Gambling
• Online Gaming
• Online Business-to-Business

IRS Open House September 25th for Veterans and Persons with Disabilities

IRS Special Edition Tax Tip 2010-11

The Internal Revenue Service will host a special nationwide open house in 100 offices across the country on Saturday, Sept. 25 to help taxpayers –– especially veterans and people with disabilities –– solve tax problems and respond to IRS notices. IRS staff will be available on site or by telephone to help taxpayers work through issues and leave with solutions.

Here are five things you need to know about the special open house.

1. One hundred offices, at least one in every state, will be open from 9 a.m. to 2 p.m. local time.
2. In many locations, the IRS will partner with organizations that serve veterans and the disabled to offer additional help and information to people in these communities.
3. IRS locations will be equipped to handle issues involving notices and payments, return preparation, audits and a variety of other issues.
4. Taxpayers requiring special services, such as interpretation for the deaf or hard of hearing, should check local listings and call the local IRS Office / Taxpayer Assistance Center ahead of time to schedule an appointment.
5. A complete list of IRS offices open on Saturday, Sept. 25 is available at IRS.gov.

IRS to Hold Special Open House Saturday, Sept. 25 for Veterans and Persons with Disabilities

WASHINGTON — The Internal Revenue Service will host a special nationwide open house on Saturday, Sept. 25 to help taxpayers –– especially veterans and people with disabilities –– solve tax problems and respond to IRS notices.

One hundred offices, at least one in every state, will be open from 9 a.m. to 2 p.m. local time. IRS staff will be available on site or by telephone to help taxpayers work through issues and leave with solutions.

In many locations, the IRS will partner with organizations that serve veterans and the disabled to offer additional help and information to people in these communities. Partner organizations include the National Disability Institute (NDI), Vets First, Department of Veterans Affairs, National Council on Independent Living and the American Legion.

“Taxpayers have tremendous success solving their tax issues at our open houses,” IRS Commissioner Doug Shulman said. “I want to encourage veterans and people with disabilities to come in on Sept. 25. Just like we reached out earlier this year to small businesses and victims of the Gulf Oil Spill, we want to help other taxpayers put their toughest problems behind them.”

IRS locations will be equipped to handle issues involving notices and payments, return preparation, audits and a variety of other issues. At a previous IRS open house on June 5, over 6,700 taxpayers sought and received assistance and 96 percent had their issues resolved the same day.

At the Sept. 25 open house, anyone who has a tax question or has received a notice can speak with an IRS employee to get an answer to their question or a clear explanation of what is necessary to satisfy the request. A taxpayer who cannot pay a balance due can find out whether an installment agreement is appropriate and, if so, fill out the paperwork then and there. Assistance with offers-in-compromise — an agreement between a taxpayer and the IRS that settles the taxpayer’s debt for less than the full amount owed — will also be available. Likewise, a taxpayer struggling to complete a certain IRS form or schedule can work directly with IRS staff to get the job done.

Taxpayers requiring special services, such as interpretation for the deaf or hard of hearing, should check local listings and call the local IRS Office/Taxpayer Assistance Center ahead of time to schedule an appointment.

The open house on Sept. 25 is the third of three events scheduled after this year’s tax season. Plans are underway for similar events next year. Details will be available at a later date.

Reminder for Small Tax-Exempt Organizations

The IRS also encourages representatives of small tax-exempt charitable community organizations, many of which serve people with disabilities and veterans, to file Form 990-N before the Oct. 15 deadline. Community organizations that fail to file a Form 990-N by this date risk losing their tax exempt status. As of June 30, more than 320,000 organizations were at risk of losing their exempt status.

What Will Happen If You Don’t File Your Past Due Tax Return or Contact the IRS

It’s important to understand the ramifications of not filing a past due tax return and the steps that the IRS will take. Taxpayers who don’t file a past due tax return or contact the IRS are subject to the following:

• Penalties and Interest will be assessed and will increase the amount of tax due.
• The IRS will file a substitute return for you. But this return is based only on information the IRS has from other sources. Thus, if the IRS prepares this substitute return, it will not include any additional exemptions or expenses you may be entitled to and may overstate your real tax liability.
• Once the tax is assessed the IRS will start the collection process, which can include placing a levy on wages or bank accounts or filing a federal tax lien against your property.
• Even if the IRS has already filed a substitute return, it still makes sense for you to file your own return to make sure you take advantage of all the exemptions, credits, and deductions you are allowed. The IRS will generally adjust your account to reflect the correct figures.

How to Resolve Tax Debt Other Ways That Could Save You Money

Taxpayers unable to pay all taxes due on the bill are encouraged to pay as much as possible. By paying as much as possible now, the amount of penalties and interest owed will be lessened. They should then immediately call the number or write to the address on the bill they receive, or visit the nearest IRS office to explain their situation.

Based on the circumstances, a taxpayer could qualify for an agreement to full pay within 60 or 120 days. The IRS is willing to offer these short term agreements to full pay in order to assist in tax debt repayment. A taxpayer can request an agreement length depending on the specific situation. Penalties and interest incurred will be less through an agreement to full pay within 60 or 120 days rather than seeking to enter into an installment agreement.

If a taxpayer cannot make payment in full upon receipt of the bill, the IRS may request a Collection Information Statement (CIS) to compare individual or business monthly income with expenses and to assist in determining a payment plan.

More ways taxpayers can resolve their debt include:

• Monthly payments through an Installment Agreement,
• Temporary delay or significant hardship consideration, or
• Offer in Compromise

Also consider the following:

• Cash advances on credit cards
• Bank loans
• Liquidating savings accounts, savings bonds, stocks, etc.
• Borrowing against 401(k), life insurance, etc.
• Using equity in real estate or other assets