We have many clients in the entertainment industry, including professional athletes, actors, authors, etc. Entertainment-related businesses have some specific federal taxation issues that I thought might be an interesting topic to discuss.
Athletes. The nomadic nature of a professional athlete’s job can create complications for tax planners. For example, professional athletes, who are frequently traded from one team to the next, can run into trouble when trying to prove their place of residency for tax purposes. An athlete, like other taxpayers, is subject to tax in the state of his or her residency. However, other states in which the athlete conducts business may tax the athlete as a non-resident (for example, when an athlete plays an away game in another state). Participating in athletic events in a foreign country can further complicate things. Sometimes non-resident taxes can be avoided if, for example, the athlete’s tax home has entered into a reciprocal agreement with another jurisdiction that would otherwise impose non-resident taxes on the athlete. In other cases, the athlete may take a tax credit for non-resident taxes paid to other jurisdictions.
As a general rule, an athlete who works only with a professional team is considered to have that team’s hometown as his tax home. An athlete’s tax home also becomes important when an athlete tries to compute his/her deductible business expenses for travel and lodging. The athlete may not deduct the costs of lodging and meals while in the hometown but may deduct his/her expenses when traveling away from the hometown as part of his employment. When the athlete, for personal reasons, maintains his/her residence at a distance from the team’s hometown, travel between those two locations is nondeductible. An individual athlete who is not connected with a team can deduct travel expenses incurred in travel on temporary assignments. The athlete must demonstrate a permanent residence, a duplication of living expenses while traveling, and return trips to the permanent residence when not working. For example, a golfer playing in a tournament away from home may deduct expenses incurred for laundry, cleaning and transportation.
Authors and royalties. Full-time, professional authors generally are paid through advances and royalties, and frequently they are considered self-employed workers. Therefore, self-employed authors must know how to report their income on their tax returns. First, they are subject to the self-employment tax, which is essentially the employer’s side of the Federal Insurance Contribution Act (FICA) taxes for Social Security and Medicare added to the employee’s side. For the 2013 tax year, for example, a self-employed taxpayer is responsible for a 15.3 percent self-employment tax. This is comprised of a 12.4 percent for Social Security tax on the first $113,700 of net self-employment income and a 2.9 percent Medicare tax. In contrast, a taxpayer who has an employer other than him or herself is responsible only for paying the employee’s side of these taxes (6.2 percent for Social Security and 1.45 percent for Medicare). In addition, authors often receive income from royalties paid in exchange for permission to use their copyrighted property. Royalty income is not considered compensation for services. Nor is it considered capital gains income. Authors who receive income from royalties are generally considered to be engaged in a trade or business and therefore must report them on Schedule C, Profit or Loss from Business.
TV and film production – Depreciation. The Tax Code provides a depreciable deduction under Code Sec. 181 for certain costs incurred for the production of qualified television and film projects begun after October 22, 2004 and before January 1, 2014. For qualified productions commencing after 2007, the election applies to the first $15 million of production costs ($20 million if the costs are incurred in certain low-income communities or distressed area). Expensed amounts are subject to recapture if qualified film or television production status is lost before or after production is placed in service. The deduction applies to production costs that are paid or incurred by the owner in producing a production that are required (but for Code Sec. 181) to be capitalized under Code Sec. 263A, or that would be required to be capitalized if the Uniform Capitalization rules applied to the owner. In the case of a purchase prior to initial release or broadcast, production costs are all costs that are paid or incurred by the purchaser/owner in acquiring the production prior to its initial release or broadcast. Qualifying Production Activities Income. The Tax Code also provides a deduction under Code Sec. 199 for so-called “qualifying production activities income” (QPAI). QPAI is equal to a taxpayer’s domestic production gross receipts (DPGR), reduced by the cost of goods sold that are allocable to DPGR, and other deductions, expenses and losses that are properly allocable to DPGR. The Code Sec. 199 deduction is available generally to domestic productions in many industries, notably manufacturing, but it is also available to certain film productions. DPGR from qualified production activities include the gross receipts from any lease, rental, license, sale, exchange or other disposition of any qualified film the taxpayer produces.
Film production tax credits/incentives. Film productions can attract jobs and revenue to a locality. Because of this, many states offer tax credits and/or rebates to filmmakers as a means of incentivizing production of film or television projects within their state boundaries. Taxpayers can research these opportunities and take them into account alongside the federal incentives.
One of the things I love about tax law is that every business is unique with particular tax considerations. From actors and athletes to Doctors, Lawyers and every day working people. Make sure your tax professional understands your business and is capturing every possible benefit the Code allows so that your bottom line does not suffer.