Tax Planning Archives | Page 4 of 9

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

L 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.

Tax Scams Can Hit All Year, Especially During Tax Season

Imagine getting a call or e-mail from an “IRS Agent” who claims that you owe them a lot of money and will have your bank account levied? Just reading that sentence may raise the heart rate of some of you.

Here are some warnings from the IRS and some steps you can take to protect yourself:

Be vigilant of any unexpected communication purportedly from the IRS at the start of tax season.
Don’t fall for phone and phishing email scams that use the IRS as a lure. Thieves often pose as the IRS using a bogus refund scheme or warnings to pay past-due taxes.
The IRS doesn’t initiate contact with taxpayers by email to request personal or financial information. This includes any type of e-communication, such as text messages and social media channels.
The IRS doesn’t ask for PINs, passwords or similar confidential information for credit card, bank or other accounts.
If you get an unexpected email, don’t open any attachments or click on any links contained in the message. Instead, forward the email to phishing@irs.gov. For more about how to report phishing scams involving the IRS visit the genuine IRS website, IRS.gov.

Here are several steps you can take to help protect yourself against scams and identity theft:

Don’t carry your Social Security card or any documents that include your Social Security number or Individual Taxpayer Identification Number.
Don’t give a business your SSN or ITIN just because they ask. Give it only when required.
Protect your financial information.
Check your credit report every 12 months.
Secure personal information in your home.
Protect your personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for Internet accounts.
Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact and are sure of the recipient.
Be careful when you choose a tax preparer. Most preparers provide excellent service, but there are a few who are unscrupulous. Refer to Tips to Help you Choose a Tax Preparer for more details.

For more on this topic, see the special identity theft section on IRS.gov. Also check out IRS Fact Sheet 2014-1, IRS Combats Identity Theft and Refund Fraud on Many Fronts.

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Don’t Be Surprised By Taxes Come April 15th

Surprises are usually fun. I remember the Dean Martin show in the 1960s. In the middle of his show he would go to a door and casually open it to let in a cameo appearance by a celebrity. It was fun because it was a surprise, not a shock.

During the year you should keep an eye on your tax withholdings. If you under-withhold taxes you could be subjected to penalties. Here are some examples that can change what happens in April:

Wages and Income Tax Withholding

New Job. Your employer will ask you to complete a Form W-4, Employee’s Withholding Allowance Certificate. Complete it accurately to figure the amount of federal income tax to withhold from your paychecks.
Life Event. Change your Form W-4 when certain life events take place. A change in marital status, birth of a child, getting or losing a job, or purchasing a home, for example, can all change the amount of taxes you owe. You can typically submit a new
Form W–4 anytime.
IRS Withholding Calculator. This handy online tool will help you figure the
correct amount of tax to withhold based on your situation. If a change is
necessary, the tool will help you complete a new Form W-4.

Self-Employment and Other Income

Estimated tax. This is how you pay tax on income that’s not subject to withholding. Examples include income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets. You also may need to pay estimated tax if the amount of
income tax withheld from your wages, pension or other income is not
enough. If you expect to owe a thousand dollars or more in taxes and meet
other conditions, you may need to make estimated tax payments.
Form 1040-ES. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you need to pay estimated taxes on a quarterly basis.
Change in Estimated Tax.
After you make an estimated tax payment, some life events or financial
changes may affect your future payments. Changes in your income, adjustments,
deductions, credits or exemptions may make it necessary for you to refigure your estimated tax.

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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.

How Long Should You Keep Your Tax Records?

My mom showed me an old tax return filed the year I was born. It was for tax year 1957 filed in 1958. There wasn’t much to the return, but the one thing that caught my attention was a receipt for a medical deduction that my dad had kept with the return…a vasectomy. (Was I really that bad?)

I don’t recommend you necessarily keep tax receipts for the rest of your life, but here are some tips provided in part by the IRS:

• You should keep copies of your filed tax returns as part of your tax records. They can help you prepare future tax returns. You’ll also need them if you need to file an amended return. (Of course there is a statute of limitation rule that eliminates any refund if you file too late.)
• You must keep records to support items reported on your tax return. You should keep basic records that relate to your federal tax return for at least three years. Basic records are documents that prove your income and expenses. This includes income information such as Forms W-2 and 1099. It also includes information that supports tax credits or deductions you claimed. This might include sales slips, credit card receipts and other proofs of payment, invoices, cancelled checks, bank statements and mileage logs.
• If you own a home or investment property, you should keep records of your purchases and other records related to those items. You should typically keep these records, including home improvements, at least three years after you have sold or disposed of the property. This may also support your depreciation deduction which have a life much greater than a normal deduction.
• If you own a business, you should keep records that show total receipts, proof of purchases of business expenses and assets. These may include cash register tapes, bank deposit slips, receipt books, purchase and sales invoices. Also include credit card receipts, sales slips, canceled checks, account statements and petty cash slips. Electronic records can include databases, saved files, emails, instant messages, faxes and voice messages.
• If you own a business with employees, you should generally keep all employment-related tax records for at least four years after the tax is due, or after the tax is paid, whichever is later.
• The IRS doesn’t require any special method to keep records, but it’s a good idea to keep them organized and in one place. This will make it easier for you to prepare and file a complete and accurate return. You’ll also be better able to respond if there are questions about your tax return after you file. We recommend using a paperless system for most records that can be attached to your accounting software. This method saves space and keeps the supporting tax documents at your fingertips.

Looking for help with all this, contact yours truly, The LA CPA!

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CPA Tip: Get a Basic Understanding of Your Taxes

The media has not shown the IRS in a favorable mood, lately. However, taxes are here and you probably pay them. Many tax questions I am asked would have been answered by the questioner if they just understood the basic premise of how our tax system work. This understanding may have also helped these people in their personal financial decisions.

The IRS actually has a site that teaches about taxes. The site can be used by high school teachers in instructing their students about our tax system.

The program is a free online tool designed in partnership with teachers for classroom use. The interactive tool is a great resource for middle, high school or community college students. However, anyone can use it to learn about the history, theory and application
of taxes in the U.S.

Here are seven reasons why you should consider exploring the Understanding Taxes program:

1. Understanding Taxes makes learning about federal taxes easy, relevant and fun. It features 38 lessons that help students understand the American tax system. Best of all, it’s free!

2. The site map helps users quickly navigate through all parts of the program and skip to
different lessons and interactive activities.

3. A series of tax tutorials guide students through the basics of tax preparation. Other features include a glossary of tax terms and a chance to test your knowledge through tax
trivia. Interactive activities encourage students to apply their knowledge
using real world simulations.

4. Understanding Taxes makes teaching taxes as easy as ABC:

Accessible
(web-based)
Brings
learning to life
Comprehensive

5. It’s easy to add to a school’s curriculum. Teachers can customize the program to fit their own personal style with lesson plans and activities for the classroom. They will
also find links to state and national educational standards.

6. The program is available 24 hours a day. All you have to do is access the
IRS website and type “Understanding Taxes” in the search box.

7. There are no registration or login requirements to access the program. That means people can take a break and return to a lesson at any time.

You can use the Understanding Taxes anytime during the year. The IRS usually updates the program each fall to reflect current tax law and new tax forms.

Additional IRS
Resources:

Understanding
Taxes

IRS YouTube Videos: English | ASL

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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.

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

Years 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.

IRS Tax Notices: And Who Says People Don’t Write Letters Anymore?

Though out the year, we get emails from a handful of clients who have received a tax notice from a government agency. Believe it or not, the vast majority do not result in the client paying money. But still, it is nerve-racking for our clients, especially since they are due to an IRS oversight.

The IRS also offers some tips:

Don’t panic. Many of these letters require a simple response.

2. There are many reasons why the IRS sends correspondence. If you
receive an IRS notice, it will typically cover a very specific issue about your
account or tax return. Notices may require payment, notify you of changes to
your account or ask you to provide more information.

3. Each notice offers specific instructions on what you need to do to
satisfy the inquiry.

4. If you receive a notice advising you that the IRS has corrected your
tax return, you should review the correspondence and compare it with the
information on your return.

5. If you agree with the correction to your account, then usually no
reply is necessary unless a payment is due or the notice directs otherwise.

6. If you do not agree with the correction the IRS made, it is
important that you respond as requested. You should send a written explanation
of why you disagree. Include any information and documents you want the IRS to
consider with your response. Mail your reply with the bottom tear-off portion
of the IRS letter to the address shown in the upper left-hand corner of the
notice. Allow at least 30 days for a response.

7. You should be able to resolve most notices that you receive without
calling or visiting an IRS office. If you do have questions, call the telephone
number in the upper right-hand corner of the notice. Have a copy of your tax
return and the notice with you when you call. This will help the IRS answer
your inquiry.

8. Remember to keep copies of any notices you receive with your other
income tax records.

9. The IRS sends notices and letters by mail. The agency never contacts
taxpayers about their tax account or tax return by email.

Your CPA can help you muddle through these letters. A CPA usually deals with these letters and understands how to respond. For example, just today I received a call from a client who was assessed for a late filing fee for a return a prior accountant filed. However, I probably got the penalties abated because of a little-known exception.

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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.

Let the Federal Government Help Pay for Your Kids

If you are a working parent, you may need to pay for the care of your child or children. These expenses may qualify for a tax credit that can reduce your federal income taxes. Here are eight key points the IRS wants you to know about this credit.

1. You must pay for care so you – and your spouse if filing jointly – can work or actively look for work. Your spouse meets this test during any month they are full-time student, or physically or mentally incapable of self-care.

2. You must have earned income. Earned income includes earnings such as wages and self-employment. If you are married filing jointly, your spouse must also have earned income. There is an exception to this rule for a spouse who is full-time student or who is physically or mentally incapable of self-care.

3. You must pay for the care of one or more qualifying persons. Qualifying children under age 13 who you claim as a dependent meet this test. Your spouse or dependent who lived with you for more than half the year may meet this test if they are physically or mentally incapable of self-care.

4. You may qualify for the credit whether you pay for care at home, at a daycare facility outside the home or at a day camp. If you pay for care in your home, you may be a household employer. For more information, see Publication 926, Household Employer’s Tax Guide.

5. The credit is a percentage of the qualified expenses you pay for the care of a qualifying person. It can be up to 35 percent of your expenses, depending on your income.

6. You may use up to $3,000 of the unreimbursed expenses you pay in a year for one qualifying person or $6,000 for two or more qualifying person.

7. Expenses for overnight camps or summer school tutoring do not qualify. You cannot include the cost of care provided by your spouse or a person you can claim as your dependent. If you get dependent care benefits from your employer, special rules apply.

8. Keep your receipts and records to use when you file your 2013 tax return next year. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your return.

Alternatively, you can register for your employer’s “Cafeteria Plan.” These plans allow you to deduct your childcare expenses from your wages.

For more details about the rules to claim this credit, see Publication 503, Child and Dependent Care Expenses.

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Staying Abreast of Stripper Tips Tax Deductibility

What!? 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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CPA Tip: Tax Scam Alerts from the IRS

The IRS actually tries to help taxpayers. Here they list the biggest tax scams the hook taxpayers who do not have their guard up. Be careful of who you are giving your information to, and what you put down on your tax return.

Identity Theft. Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Combating identity theft and refund fraud is a top priority for the IRS. The IRS’s ID theft strategy focuses on prevention, detection and victim assistance. During 2012, the IRS protected $20 billion of fraudulent refunds, including those related to identity theft. This compares to $14 billion in 2011. Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should immediately contact the IRS so the agency can take action to secure their tax account. If you have received a notice from the IRS, call the phone number on the notice. You may also call the IRS’s Identity Protection Specialized Unit at 800-908-4490. Find more information on the identity protection page on IRS.gov.

Phishing. Phishing typically involves an unsolicited email or a fake website that seems legitimate but lures victims into providing personal and financial information. Once scammers obtain that information, they can commit identity theft or financial theft. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. If you receive an unsolicited email that appears to be from the IRS, send it to phishing@irs.gov.

Return Preparer Fraud. Although most return preparers are reputable and provide good service, you should choose carefully when hiring someone to prepare your tax return. Only use a preparer who signs the return they prepare for you and enters their IRS Preparer Tax Identification Number (PTIN). For tips about choosing a preparer, visit www.irs.gov/chooseataxpro.

Hiding Income Offshore. One form of tax evasion is hiding income in offshore accounts. This includes using debit cards, credit cards or wire transfers to access those funds. While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements taxpayers need to fulfill. Failing to comply can lead to penalties or criminal prosecution. Visit IRS.gov for more information on the Voluntary Disclosure Program.

“Free Money” from the IRS & Tax Scams Involving Social Security. Beware of scammers who prey on people with low income, the elderly and church members around the country. Scammers use flyers and ads with bogus promises of refunds that don’t exist. The schemes target people who have little or no income and normally don’t have to file a tax return. In some cases, a victim may be due a legitimate tax credit or refund but scammers fraudulently inflate income or use other false information to file a return to obtain a larger refund. By the time people find out the IRS has rejected their claim, the promoters are long gone.

Impersonation of Charitable Organizations. Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds. Taxpayers need to be sure they donate to recognized charities.

False/Inflated Income and Expenses. Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. In many cases the taxpayer ends up repaying the refund, including penalties and interest. In some cases the taxpayer faces criminal prosecution. In one particular scam, taxpayers file excessive claims for the fuel tax credit. Fraud involving the fuel tax credit is a frivolous claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims. In this scam, the perpetrator files a fake information return, such as a Form 1099-OID, to justify a false refund claim.

Frivolous Arguments. Promoters of frivolous schemes advise taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These are false arguments that the courts have consistently thrown out. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages. Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, scammers use a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 to improperly reduce taxable income to zero. Filing this type of return can result in a $5,000 penalty.

Disguised Corporate Ownership. Scammers improperly use third parties form corporations that hide the true ownership of the business. They help dishonest individuals underreport income, claim fake deductions and avoid filing tax returns. They also facilitate money laundering and other financial crimes.

Misuse of Trusts. There are legitimate uses of trusts in tax and estate planning. But some questionable transactions promise to reduce the amount of income that is subject to tax, offer deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits. They primarily help avoid taxes and hide assets from creditors, including the IRS.

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