Life in Hollywood, below-the-line

Life in Hollywood, below-the-line
Work gloves at the end of the 2006/2007 television season (photo by Richard Blair)

Sunday, April 14, 2013

Tax Time

“Oh what a tangled web we weave when first we practice to deceive”

Tomorrow is April 15, Tax Day, which means you’ve already filed your taxes and can forget about the miserable ordeal for another eleven months... or if you didn’t – procrastination being hard to avoid sometimes -- you filed an extension which will allow you to complete your tax return sometime in the next six months.  

If you haven’t done either, you’re in Deep Shit.

Either way, you might want to click on over to The Black and Blue, where Evan Luzi has prepared a multi-part tutorial on dealing with the reality of taxes as a free-lancer in the film industry.  It’s worth reading for anyone just getting started in the biz, or who (for whatever reason) hasn’t yet learned how to cope with the anxiety, confusion, and numbing tedium of tax time.  You might not be making enough money right now to take full advantage of his advice, but that day will probably come sooner than you think, and it’s better to have some idea how to proceed than to be left flailing blindly in the dark futility of ignorance. 

I had my say about taxes in a post a couple of years ago, but there's at least one thing I didn't mention that Evan raised: incorporation.  From what I've seen, incorporation can make sense for DP's and others who earn a consistently high annual income, but isn't much use for those of us with a more modest annual gross. The last time I looked at it, incorporating required all kinds of fictive nonsense such as keeping minutes of board meetings that never actually happen.  Those people I know who went the route of incorporation signed on with an accounting firm who (for a fee, naturally) handled all of that ugly, tedious minutia  -- and for them, it seemed to be worth it.  

But not for me.

I live by one basic rule at tax time:  don't get greedy – which means don’t go crazy claiming absurdly dubious deductions, and above all do NOT attempt to hide any income.  You might get away with non-reporting cash income for a while, but the IRS can throw you in jail if they catch on, in which case all that playing fast and loose with the truth will have been a Very Bad Idea.  The best-case scenario is that you'll survive the resulting financial strip-search just owing them money, but from what I hear, once audited, you remain on the IRS shit-list forever.  You’ll have to be squeaky-clean every single year from then on to avoid another audit.

It’s not worth it.  Just accept that you’re going to pay some taxes, and when reporting your income, tell the truth, the whole truth, and nothing but the truth.  If you just can’t resist playing games with the IRS, do so with your deductions. If you go too far and trigger an audit, they’ll disallow those questionable deductions and ding you for the taxes owed plus a fine -- but that’s only money.  At least you won’t wind up in prison for claiming your family vacation to Hawaii as a “business expense.” 

If you want to avoid any risk of being audited, just play it straight.  Report all your income, then deduct what’s allowed and ignore those expenses that aren’t.  You'll have nothing to worry about.

It took me three years to start making a halfway decent income in this business, at which point I absolutely hated the idea of giving any of my hard-earned money back to the government in the form of taxes.  For a while, I played a very aggressive deductions/expenses game with my tax returns, but what money I saved came at a price -- I was constantly worried about getting called in for an audit.  Eventually I tired of carrying all that anxiety, and went to a small accounting firm in Hollywood recommended by a fellow free-lancer.  Although that firm is no longer around (the owner died), my tax returns are still prepared by one of those lawyer/accountants I met way back then.*

And I sleep a lot easier.

This only applies once you’re in a position to itemize deductions, of course.  Not everybody is, but if and when you are (and assuming you don’t use some computer tax preparation program to do it yourself), ask around to find a tax preparer you can trust -- someone who knows how to take full advantage of the tax code for your benefit without lying, cheating, or otherwise putting you at legal risk -- then save yourself the headaches and pay that person to do the heavy lifting at tax time.  Just be sure to choose somebody who knows what they're doing and will represent you if you should get audited.** Missing a day’s work (and thus suffering a leaner paycheck) while sweating under the hot lights of an IRS inquisition is nobody’s idea of fun.

When it comes to taxes, I try to follow my mom’s old-school advice that “honesty is the best policy.”  None of us enjoys paying taxes, but they’re a part of modern life, and the price of living in a relatively civilized society. 

So do yourself a favor and read what Evan has to say.  Come next April 15, you just might save yourself some money -- and sleep a little bit better for another year.

* While talking to her about my return this year, she informed me that she'll sell her house in a couple of months and move to Paris.  Looks like I'll be in the market for a new tax preparer next year...

** A gaffer friend of mine made the mistake of using a tax preparer who talked a good game, but didn't come through.  Not only did the guy fail to include a crucial form listing business expenses with that year's tax return, when the IRS flagged it for an audit, he didn't even bother to show up for the appointment.  The first my friend heard of this was when a letter from the Feds arrived hitting him with a twenty thousand dollar penalty.  He then had to hire another accounting firm to re-file and placate the G Men, which ended up costing him two thousand dollars.

Better two thousand than twenty, but the lesson here is to choose your tax preparer wisely...


Evan Luzi said...

Hey Mike,

Thanks for featuring my tax series on your site! I really appreciate it. Glad people are getting use out of the posts, even if the topic is pretty dry and boring.

One thing I'll mention about incorporating is that it'd be worth your readers to look into LLCs. I recently formed one and you don't have to keep minutes or anything like that because the IRS considers the business a pass-through entity -- basically, the income the business makes, it considers my personal income.

Now if you decide to incorporate as an S-corp or C-corp with a board and shares and all that, there's a lot more hoops. But the LLC lets you remain a sole proprietorship while keeping a legal separation between your business life and your personal life.

Like you said, it's not for everyone, but I thought it's worth a mention.

Finally, you make a great point about not being greedy and being honest. It's the only way I can think of filing my taxes without being crippled by the anxiety of an audit. As long as you are truthful, there's nothing to worry about.

Great post, Mike!

- Evan

Michael Taylor said...

Evan --

I'm sure you're right. When I looked into incorporation (twenty years ago...), the whole process was much more cumbersome, and as I recall, the LLC thing wasn't happening. There are more options for incorporation these days.

Thanks for taking the time to write such a thorough series on a subject that isn't terribly exciting, but that affects us all -- even if most of us would rather ignore it...