Entertainment Film Tax Credits: A CPA’s Holistic Approach to Individual State Taxes

Rick_E_Norris_An_Accountancy_Corporation_Entertainment_Film_Tax_Credits_A_CPA's_Holistic_Approach_To_Individual_State_TaxesL A Times article, Hollywood’s new financiers make deals with state tax credits, discusses the growing trend of film and TV production moving out of California because of the increased tax credits. The article displays aspects of the credits that Entertainment CPAs have known for years, such as the mechanics of declaring a tax credit against the state taxes.

In  company taxation, the article brushes on the thought processes of producers when selecting a location to shoot, whether within California, or outside California.  The bottom line in the article is that the decision sometimes comes down to “the bottom line”  since a scene can be shot almost anywhere these days.

Individual investor considerations are also mentioned when making a decision of where to shoot or just invest in an entertainment project.  But what this piece ignores is what an entertainment CPA analyzes when considering a decision for a client to invest in a film in another state.  One of the important question is what state does the individual investor reside in?  More specifically, where is this investor’s tax residency?

Now to a person not versed in taxation, it may not seem important, but to an entertainment CPA, it is vital. For example, if an individual resides in Nevada where there is no state taxation, then a film tax credit in another state would make sense on its face because it may offset taxes in that state derived from production income.

However, let’s say the investor is a California resident.  In California, a tax resident is taxed on all of their income. But does that mean this resident will be double taxed?

Not necessarily. If a California investor recognizes income in another state WITHOUT a tax credit thus paying  other state income taxes, then the California resident may be able to use the out of state tax (partially or totally) as a credit against their California tax liability.

On the other hand, if the California investor reports out of state income WITH a tax credit, then they may still wind up paying California taxes  on that income even though the credit wiped out taxes in the other state.

The real bottom line is that  a holistic approach should be taken to determine the total taxes paid everywhere in order to determine the net cash and tax effect.  CPAs should do tax projections that span different states.  The existence of another state’s credit may not matter to the bottom line.

I have discussed only the tax aspects.  What about the financial aspects of these entertainment ventures? A proper rate of return on investment calculation should be performed on an after-tax basis. In fact, a broker that pushes these type of entertainment vehicles would include a state tax credit which would show a larger return on capital.  The problem with such an analysis is that it may ignore the fact that the California investor may end up paying taxes somewhere, even with a state credit abroad.  This may have a substantial impact on the return on investment, and the decision of whether to invest.

Before making any investment in another state, determine the return in investment looking at the whole tax picture, not just the tax situation of the state providing the credit.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

 

Seinfeld and the Art of Consistency

Rick_E_Norris_An_Accountancy_Corporation_Seinfeld_And_The_Art_Of_ConsistencyA couple of decades ago, I worked on a client who was one of the first TV Producers to land a very lucrative syndication deal.  He was a very talented person who wrote, composed, and created.  He was very consistent in his endeavors and it showed.

I enjoyed reading about “The Seinfeld Strategy” in Kevin Eikenberry’s Leadership Tip.  He states that Jerry Seinfeld consistently earned tens of millions of dollars each year for over a decade by doing just one thing…being consistent.  He wrote every day.

Whether you are an artist, a business person, or both, that is truly a well-kept secret.  What is a better secret is that if you chisel away, instead of having to jackhammer your daily routine, you will persevere and enjoy the journey.  Too many try to push too hard, too fast, and burn out.

From a business perspective, if you build a daily routine, you will build results.  The routine can be as simple as writing an article like this one, or developing teaching videos that display your expertise.

Even a CPA can learn from this in the accounting profession.  There is a lot of experiences that a CPA can share that others can benefit by because we are usually the hub of a business, professional, and even an artist’s life.

So, what is your routine, and are you leading others by doing it?

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You No Longer Have to Bring the IRS to Tears for a Home Office Deduction

Rick_E_Norris_An_Accountancy_Corporation_You_No_Longer_Have_To_Bring_The_IRS_To_Tears_For_A_Home_Office_DeductionYears ago I was representing a screenwriter before an IRS audit.  We did not prepare the
return but was defending our client’s home office deduction in a place that the client no longer lived, or had pictures.  The agent baulked on allowing the deduction due to the lack of verifiable facts.  I then leaned closer to the female auditor and told her that this client had written the screen play of a famous Disney animated movie in that very same home office.  The auditor teared up and said, “My daughter loved that movie!”

We got the full deduction.

The IRS just waived a magic wand by listing  some tips on the new law that offers an easier way to deduct a home office without substantiating expenses.  Here are the facts:

This simplified option does not change the rules for who may claim a home
office deduction. It merely simplifies the calculation and recordkeeping
requirements. The new option can save you a lot of time and will require less
paperwork and recordkeeping. 

Here are six facts the IRS wants you to know about the new, simplified
method to claim the home office deduction.

1. You may use the simplified method when you file your 2013 tax return
next year. If you use this method to claim the home office deduction, you will
not need to calculate your deduction based on actual expenses. You may instead
multiply the square footage of your home office by a prescribed rate.

2. The rate is $5 per square foot of the part of your home used for
business. The maximum footage allowed is 300 square feet. This means the most
you can deduct using the new method is $1,500 per year.

3. You may choose either the simplified method or the actual expense
method for any tax year. Once you use a method for a specific tax year, you
cannot later change to the other method for that same year.

4. If you use the simplified method and you own your home, you cannot
depreciate your home office. You can still deduct other qualified home
expenses, such as mortgage interest and real estate taxes. You will not need to
allocate these expenses between personal and business use. This allocation is required
if you use the actual expense method. You’ll claim these deductions on Schedule
A, Itemized Deductions.

5. You can still fully deduct business expenses that are unrelated to
the home if you use the simplified method. These may include costs such as
advertising, supplies and wages paid to employees.

6. If you use more than one home with a qualified home office in the
same year, you can use the simplified method for only one in that year.
However, you may use the simplified method for one and actual expenses for any
others in that year.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any
tax advice contained in this e-mail (including any attachments) is not intended
or written to be used, and may not be used, for the purpose of (a) avoiding
penalties under the Internal Revenue Code or state tax authority, or (b)
promoting, marketing, or recommending to another party any transaction or
matter addressed herein.

 

 

Staying Abreast of Stripper Tips Tax Deductibility

Rick_E_Norris_An_Accountancy_Corporation_Staying_Abreast_of_Stripper_Tips_Tax_DeductibilityWhat!?  I couldn’t believe the recorded message.  A Fortune magazine writer left me a message requesting my opinion on the tax treatment of some rappers deducting tens of thousands of dollars on strippers.  After a few comedic quips, I actually answered his questions.  I forgot the whole interview took place until this: Fortune Magazine, April 29, 2012.  My friend Seena text-ed me from an airport in Atlanta stating that my comments had appeared in Fortune.

But what does this short blurb say or not say about tax deductible items?  It is true that the entertainment industry does offer tax deductions that other industries may not offer just by it’s nature.  For example:  Most industries would be challenged to deduct movie tickets and pay per view movies.  Yet, for a producer these expenses are a necessity.  Or, take a stuntman, they can make a good case for deducting gym expenses.  However, an accountant was denied such deductions in recent memory.

Generally, tax deductions must be ordinary and necessary to the conduct of your business.  Sometimes, you cannot deduct an expenditure (completely) in the year you spent the money because it may have a “tax life.”  An example would be a building, furniture, and automobiles.  There are some elections you can make that can even allow you to deduct some of these though in the first year.

These concepts should be something that you should be thinking about during the tax year, not after it when you are preparing your tax return.

In the case of the rappers they were drawing a nexus between then tipping the strippers and the rappers’songs they were dancing to.  I heard that they felt it was necessary to tip the strippers in order to get their songs played.

In law, there is such thing as public policy.  Sometimes, the spirit of the law trumps a literal application of it.  The IRS and the tax court may say that these kind of expenses are against public policy, not to mention, unsubstantiated.  You also may be required to show a connection between the expense and its ultimate generation of income or publicity.  In other words, if audited, you may get caught with your pants down.  Be careful.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

A Revelation: Bad Strategy of the Four Horsemen(Part 1 of 4)

Rick_E_Norris_An_Accountancy_Corporation_A_Revelation_Bad_Strategy_Of_the_Four_Horsemen_Part_1_Of_4Knute Rockne compiled four sophomore football players in the Notre Dame backfield who became football lore.  The Four Horsemen of Notre Dame destroyed almost any defense they faced from 1922 to 1924, only losing twice to Nebraska.

This was the image that came to me while reading Richard P Rumelt’s Good Strategy/Bad Strategy and his four major aspects of bad strategy. Rumelt writes that you can detect bad strategy out of four hallmarks: “fluff, failure to face the challenge, mistaking goals for strategy, and bad strategic objectives.”

In this first part of four, I will discuss “fluff.”  “Fluff” uses $5.00 words with vague concepts.  The industry that I have spent more than 25 years, the entertainment industry, thrives on such fluff.  When leading strategic planning sessions in this industry, I explain that “creative people” are the best equipped to forge a new business strategy.  However, I have to keep one foot in the crows nest for that verbose and esoteric creative person who can lead the session into non-existing waters.  If you plan to lead a session, don’t be afraid to ask what a person means by the buzz words they use.  It usually only takes two questions to uncover a person who is speaking just to be heard.

Fluff will spread like a plague if you let it get out of hand. Others will try to outshine the fluffer with their own fluff creating an epidemic of nonsense.  A strategy session, and a strategy should always be as concise, and substantive.  You can create a strategic plan that takes months or just hours.  But, which every you choose, it must have a direction.

Innovation:There is More to Emulating Than Playing Air-Guitar

Rick_E_Norris_An_Accountancy_Corporation_Innovation_There_is_more_to_emulating_than_playing_air-guitarWhen I started playing guitar  in the early 1960s, nobody played “air guitar.” Those who didn’t want to play, didn’t, and those who wanted to play guitar copied Jimmy Hendricks, Chuck Berry, and many others in the entertainment industry.

Anita Campbell’s article Finding Innovation Through Emulation discusses innovation using this method in the business world.  She recommends picking a company you admire, copying it, and reinventing it.

This approach is fine, but limited both inside and outside the entertainment industry.  Ted Whetstone’s chapter in The Book of Business from A to Z (The 260 most important answers you need to know) takes a more holistic view.  He discusses the many types of innovation:

Disruption innovation: New technology, process, etc. that gives your company an advantage.

Product innovation: The product development cycle of concept, prototype, testing, etc.

Process innovation: Changing the production or process of delivery method.

Marketing innovation: Positioning yourself and product differently in market segments.

These points are just a thumbnail sketch but  could be a daunting task to a novice at strategic planning.  So, the place for businesses and those in the entertainment industry to start is VISION.  A business owner or an artist must establish a vision that sets them apart from the rest of the world.  By vision, we are not discussing a five year plan.  No, we are challenging the business owner and artist to look at the next twenty years and answer how they will change the way things are done in the world.

But why emulate other artists or companies when establishing a vision that will change the world?

Let’s take the Beatles for example:They were influenced by  early Motown music.  In fact, you may recall that one of their earlier albums covered three songs by Motown: Wait Mr. Postman, Money, and You’ve Really Got  a Hold on Me.  Sure, they performed their version of these songs, thus improving on them, but these songs did not limit their visions.  Instead, they acted as stepping stones to a style that the Beatles were to be known for.

In strategizing, a business owner (and artist) must stay the course of their vision, though they are emulating others.  This process infuses tactics in achieving the ultimate vision.

Surviving an Economic Downturn, or Sticking to an Idea from God

Rick_E_Norris_An_Accountancy_Corporation_Surviving_An_Economic_Downturn_or_Sticking_to_an_idea_from_godI’m sure most of your heard the story of  Art Fry who invented the “Post-it Note” in 1980.  He took an unsuccessful adhesive designed by 3M’s Dr Spencer Silver in 1968 and used it to post little notes in his hymn book.  He took an arguably failed concept and turned it into a household word.  You wonder if Mr. Fry got a message from God in using this product; Definitely an epiphany.

How a U.S. Factory Survived the Recession by Susan Kuchinshas report interviewed Essential Sealing Products.  Essential survived the great recession and foreign competition by innovating.  There are some points to consider when innovating:

  1. Focus on your customer’s needs: As a CPA, my industry must continue to evolve.  Long-gone are the days when tax and monthly financial statements absorbed most of our time.  Clients need more in running their businesses.
  2. Look at your own supply chain, not just the customer relationship: In the article, Essential eliminated vendors that could not keep up with their schedule or quality.  The customer demanded more, and so did Essential.  As in a CPA case, we push any professional alliances we have to provide quality service as we do.  If they can’t, our clients are not happy, and we can’t use them.
  3. Thin out your Customers:  I remember working for an entertainment business management firm in 1988.  They retained a client that required a lot of work but was past his prime earning capacity.  He could not pay for the level of service that he demanded from the firm.  The owner of the firm felt obligated to this client because he had referred other clients over 10 years prior.  I truly believe in loyalty, but even that has a limit in any company, especially a labor intensive CPA firm.
  4. Apply Strategic Planning Concepts to Your Company: There are many, many books that can help you design a strategic plan: Blue Ocean Strategy, Good to Great, Built to Last, The Innovator’s Dilemma, just to name a few.   Read and implement their concepts, or find someone who could.

As a CPA firm, we see many new start-ups.  When they present a concept to me asking for a business plan or strategic plan, I usually as  one question about their venture.  “So what?”  I ask them what makes them different from anyone else.  If all they can say is the price or service, I tell them to innovate more.  CPAs see lots of these vanilla types of companies but have a unique viewpoint as to how they work.  At, least CPAs who know strategic planning.

Don’t ask your CPA to compute an ROI or an IRR without knowing where you are going.  It is a waste of your money and time.  Maybe God will speak to you from a hymn book about not permanently sticking to the pages.

 

Music Royalties: Never Leave Money on the Table

Rick_E_Norris_An_Accountancy_Corporation_Music_Royalties_Never_Leave_Money_On_The_TableI remember about six years ago when a relatively unknown organization, Soundexchange, contacted us (CPA entertainment business managers) about signing up one of our music artist clients.  They said that our client was not collecting all  music royalties through ASCAP, UMG, EMI, etc. Instead, there were an increasing amount of royalties being left on the table from certain digital transmissions like streaming.

I was skeptical.  However, according to some industry opinions, the public’s method of listening is changing.  This is confirmed in the most recent growth of digital music in the last 3-4 years.  According to How Artists get Paid for Internet Radio: An interview with Mike Huppe, President of Sound Exchange by Chris Castle, “More and more people are accessing music through digital devices, mobile devices and through streaming content rather than downloading it.  The article also informed me that “Soundexchange pays performers directly, regardless if they are recouped through their record deal.”  (“Recoupment” is the method of recovering monies advanced to the artist before any royalties are paid out to them.)

So, what does this mean to you?

  1. Make sure you have good representation in your contracts.   You can lose a substantial amount of money because of a poorly-worded contract.
  2. You don’t have to be a CPA entertainment business manager to know what you don’t know.  Even though you are an artist, you should at least know the basics of your industry.  There are a number of good reference books that speak of the music industry.  After that, leave the rest to your attorney and CPA entertainment business manager.
  3. If you receive substantial royalties payments, don’t be afraid to hire an auditor that specializes in music royalties.  You must keep the payers honest.

Music artists and writers have the best copyright laws in our nation’s history.  Don’t squander it by sticking your head in the sand.

Business and the Artist: The Butterflies of our Society

Rick_E_Norris_An_Accountancy_Corporation_Business_And_The_Artist_The_Butterflies_of_Our_SocietyYou’ve probably heard of the story about an old man and the cocoon.  He watched the cocoon for days, and then it started to move.  The butterfly struggled, so the old man slit the cocoon to let the butterfly out.  The butterfly emerged underdeveloped with weak wings.  The reason was that the butterfly needed to forcefully squeeze through a small whole to open circulation to its wings.  The man deprived it of this process.  The struggle for life gave it life.

I have worked as an entertainment business manager  since  1985.  For the last 15 years I have helped artists strategically position themselves in new business ventures.  What I have found is those who do not start out with easy financing (parents for example), tend to have a better chance of success.  From a CPA business manager prospective, the adage, “easy come, easy go”  has  somewhat predicted the ventures.  Even though our firm works as consultants, I usually take an emotional stake in my projects because I want to see them succeed.  Most entertainment CPA business managers don’t do what we do, but come in after the business is funded.  We have found that entering after the initial planning stage is too late.

From an entertainment CPA business manager point of view, here are some steps I suggest you take before opening up your next venture:

  1. Research your proposed industry thoroughly: You should start by speaking to people in the industry that you trust.  Don’t be afraid to ask the difficult questions, and don’t bury your head in the sand. Try to find statistics or news of your competitors and the industry you are venturing in.  Most important, speak to your target market.  Find out what the industry is not providing to them, and what the industry is providing to them that is unnecessary.
  2. Find people in areas you lack expertise: If you have areas that are outside your expertise, bring in people who can fill those weaknesses.  They may sign on and be a major stakeholder for you once you get started.
  3. Develop a strategic plan with a long range vision: Start 20 years or more from now and describe a vision that is more than making money. Are you out to change communication and entertainment by putting it in the palms of every person like Steve Jobs?  Once your vision and horizon is set, work backwards and set milestones.  You should end on your first day of business.
  4. Consolidate a team: If there are others that will help you, line them up and get them on board.  It will show your investors that this business is more than you.
  5. Build a business plan: A business plan is not a strategy, but a management tool.  It starts today and works forward for five years.  It is essential that you include the cash flow of the first twelve months.  This is when businesses struggle to stay afloat.  Make sure your business plan milestones correspond to your strategic milestones.  Insert your team bios along with your bio.
  6. Present the package: Now you can go to your money people. Practice your dog and pony show.  A video or slide show can help bring the message across.

Like moving from a worm to a butterfly, artists must go through the “pain” before the doors open.  The more pain you endure, then better informed you will be when you meet your investors and launch the enterprise.

As CPA entertainments business managers, we have seen failed ventures that did not take these steps.  By engaging in this practice, it does not guaranty success, but will at least give you the wings to soar a little higher.

 

Business Creativity and Illusion

Rick_E_Norris_An_Accountancy_Corporation_Business_Creativity_and_IllusionAs an Entertainment CPA, I find my clients are not short of creativity.  Every year, clients retain us to create a business (and sometimes a strategic) plan for an entertainment industry venture.  Usually they google Entertainment CPA, or Business Manager CPA, or Strategic Planning Entertainment CPA, and find us.  However, we convince them that our role is not just as a mere number cruncher, but an integral part of developing the concept.

For example, a common prospective client is one who is trying to start a record company.  Usually, it is two musicians that have not posted their first hit.  One of them has parents (or potential investors) that believe in them.  They want to start a record company and collaborate with other writers and performers offering them 360 degree contracts, or some variation of it.

My response to them is always the same.  “So what?”  They then look puzzled.  I ask, “What makes you different from any other record company that is struggling to survive?  Where is your Blue Ocean?”  Then I proceed to give them a 3 minute explanation of Kim and Mauborgne’s Blue Ocean Strategy.

From an entertainment CPA point of view, the most troubling of the prospective clients are those who  base their success on one band, one writer, or one performer.  I remember one time, there were a group of people who wanted to start a record company, but it was dependent on the musical composition of only one of them.  The entire business model depended on one guy(who had a tiny bit of success) writing music for potential bands.  I asked the question, “What happens if he dies or gets really ill?”  They didn’t hire me.

Even though many see us as entertainment CPAs or entertainment business managers, we have designed business plans for more than the entertainment industry.  Strategy too, has no industry.  Many of the issues are the same.  For example, companies both inside and outside the entertainment industry usually make the same miscalculation, i.e., how much start up money they will need.  Usually, I find that clients need 2-3 times more money than what they originally project.  The reason for this is mainly the start up phase.  Most are under the illusion that once they “open their doors,”  they will reach operating capacity within a few months.  Full capacity takes years.  If you create a company with an unusually high overhead for its size, full operating capacity may not make a difference because the “monthly nut” is too high.  In other words, if you hire your friends, family, and anyone else who strokes you, your company probably won’t survive.  Keep it smart, keep it simple, and you may keep it past a year.

This is a wonderful time to start a business both inside and outside the entertainment industry.  Fortunately, as entertainment CPAs we are not emotionally involved in the project and can offer some objective advice.  But, creativity, fantasy, and ego has to take a back seat if they obscure your vision.