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Death and Taxes (Though It May Feel Like Death) - What Does The New Tax Legislation Mean For You?

Posted By Carrie Lynn Certa, Monday, February 4, 2019

I was always taught not to talk about politics or religion when in mixed company. I believe we should add taxes to that list because the conversations I’ve had around this topic have typically ended in confusion and frustration… those were the good conversations. But alas, the extreme changes that came out of Washington last year greatly affect us here in Hollywood. We all need to be aware of the pitfalls so as to avoid sticker shock when the bill comes due in April. So let’s first get all of that frustration and angst that we have surrounding taxes out of our system…

G*DD*MMIT F**K THIS SH*T YOU A**H*LES

and my mother’s favorite, because she didn’t like to swear – Farkleberry!

Deep, cleansing breath, everyone. Do we feel better now? Okay, let’s dive in.

Everyone is getting into the “decipher the tax bill” game. Even Snopes.com has a page dedicated to investigating the various claims. I actually reached out to the good old IRS as well as a variety of CPAs and lawyers, to review every word in this article, so you are armed with the information you need in order to have a heart-to-heart with your tax accountant about the next best steps for you. Everyone’s tax situation is unique; Are you single? Married? Filing jointly or separately? How many exemptions did you claim on your W4? Are you an S-Corp? Children? (Dogs and cats don’t count, no matter how much you love them.) And so many other things, which affect only you.

 The examples given below are highly simplified so you can see the general effects of the tax laws, so please, take this information as a guide, not gospel, and of course, definitely consult a CPA or tax expert to look at your unique situation to get the full picture. Currently, the IRS is encouraging taxpayers to do a “Paycheck Checkup” by going to IRS.gov and using their Withholding Calculator. All you need is your 2017 tax return and most recent pay stub to get started. They also strongly encourage people who claim their children or who normally receive high tax refunds, who are a part of two-income families and those who work more than one job (just to name a few) to double-check their withholdings as not to be overwhelmed come April.

First, the bad news. Big changes to personal deductions. If you are an employee who receives W2’s and itemizes your deductions, these are just a few of the big changes that affect you:

  • Business expenses incurred by an employee (i.e. computer, cell phone, mileage, meals, IMDb Pro, agent and manager fees, etc.) are not deductible.
  • Entertainment costs are no longer deductible, including membership dues. i.e. cable bills, PGA dues, Academy dues, meals, etc.
  • Research expenditures (e.g. Spielberg’s latest autobiography, subscription to EW, movies, etc.) are no longer deductible.
  • The deduction for state and local taxes paid is now capped at $10,000.

Now, some better news:

  • Standard deductions were substantially increased, to $12,000 for single filers and $24,000 for a married couple filing jointly.
  • You will no longer be penalized for not having health insurance.
  • The limit on deductible charitable contributions has been increased to 60% of the adjusted gross income (AGI).

Below are abbreviated examples of tax changes in the form of your favorite childhood math homework, word problems! Please also note, because the changes to the tax laws were so extensive and substantial, our accounting experts have been extremely wary of providing bottom-line estimates for what this means for your taxes. (Believe me, we asked and asked and asked.) The best they’re able to do right now is estimate changes to withholding totals. As you’ll see, most filers will receive more back in their paychecks but will be allowed fewer (or zero) deductions. Should you normally receive a large tax refund based on your deductions, you may need to re-evaluate your withholding as not to be paying come tax day. Once again, to assess the actual bottom-line changes to your return, consult your tax professional.

Lynn Hood is a single, union coordinator in California with no dependents who and was paid $1,500.00 in wages weekly. Last year, she claimed 1 on her W4 and was able to deduct a portion of her IA & PGA dues, the new computer she purchased with the latest and greatest POC software, her cable bill, cell phone bills (which were not reimbursed by the production) and a plethora of movies she saw when she was on hiatus. But that was so 2017. In 2018, she received more money in her weekly check (see the comparison below) but couldn’t take any of those deductions of dues, computer/software expenses and the like.

                            2017                         2018

Income              $78,000.00                 $78,000.00

Federal              $19,618.04                $17,342.52
Taxes
Withheld

What a difference a year makes! In Lynn’s case, given the relatively modest number of her deductions, she might well be better off taking the standard deduction of $12,000 than itemizing whatever deductions she’s still allowed to take. If Lynn is a homeowner, she might still want to itemize, as the home mortgage interest deduction remains in effect. But if she’s renting, that standard deduction might be the way to go.

Mrs. Clara Bow is happily married, living the life in Malibu as the creator / producer of the comedic web series The Daring Years. She was paid $3,550.00 in weekly employee wages. Goldmine! She claimed 1 on her W4… but wait, that’s not all! She also started creating a new top secret series where she filed for copyright, some legal fees were involved, and paid a friend to build the pitch deck. Quite a large out-of-pocket expense!

Wow! She received almost $6,000 more in wages in 2018! That’s fantastic but alas, all those lovely deductions are now gone. She can’t write off any of the expenses for the top secret project as she did back in olden days of 2017.

                            2017                          2018

Income            $184,600.00                $184.600.00

Federal            $ 37,694.27                 $ 31,791.24
Taxes
Withheld

Using CalcXML.com Tax Reform Calculator, in 2018 Ms. Bow, filing separately, would owe the government more than $5,000 come this April. Yikes! Let’s hope she sells that project quickly in order to pay Uncle Sam!

Now to consider the beloved S-Corp tax solution, which has its own set of hiccups. The California Supreme Court recently redefined “Employee” in the case of Dynamex Operations West, Inc. vs, Superior Court. As described by Schulyer M. Moore, a partner in corporate entertainment at Greenberg Glusker, LLP:

“Under this new test, a worker is considered to be an independent contractor only if all three of the following factors are present:

(A) The worker must be free from the control and direction of the payor in connection with the performance of the work, both under the contract and in fact;

(B) The worker must perform work that is outside the usual course of the payor’s business; and

(C) The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed by the worker for the payor.

This new test casts a wide net that will result in many ‘independent contractors’ in the entertainment industry being reclassified as employees. In particular, the second factor listed above could be used to argue that almost everyone in the entertainment industry is an employee.” Also, due to additional scrutiny over the past few years by the IRS and by various states (namely California and New York), more and more studios are proactively giving W-2s instead of 1099s to individuals that have been classified as independent contractors in the past.

In other words: those of you in below-the-line categories with loan-outs may be reclassified as employees, making your loan-out null and void. Should you be deemed misclassified, the IRS can fine not only the company for the error, but you, personally, as well. I can’t urge you strongly enough: Speak to the accounting department of your employer and your tax accountant to make sure you’re in the clear.

So how does this California decision affect you lucky residents of the other 49 states? Massachusetts and New Jersey are already using this test to classify employees and other states are using it to help determine unemployment compensation.[1] More states are expected to adopt this new definition so it’s something to keep tabs on, especially if you are an employer. Frances Ellington, CPA, DBA, further advises, “If you operate a business outside California and have workers both in California and outside California, you have to apply the labor and payroll tax rules applicable to the work location. It is also important to understand the state and local income tax, payroll tax, and other business taxes in the jurisdictions where you operate.”

You can also check for your state tax information online at taxadmin.org/state-tax-agencies

To add insult to injury, if you were an employee and changed to an S-Corp/loan-out while performing the same job for that employer, the IRS will not recognize the loan-out for tax purposes.

Do we need a swear break yet? Let’s take a moment to breathe and then let out a big old Farkleberry! Better?  Lets go through one example for those of you who can use your S-corp.

The beloved bachelor, Alan Smithee, had quite a year! His indie film, the one the studio swore would fail, made bank at the box office, which allowed him to cash a check for a cool $300,000. He did it all through his S-Corp entitled Show Me the Money, Corp. (SMM) Alan paid himself through a payroll company Claiming 9 on his W4 and here’s the breakdown! 

                                       2017                          2018

SMM Income                $350,000.00                $350,000.00

SMM Paid Alan             $160,000.00                $160,000.00

Alan’s Federal               $29,249.64                  $25,161.40
Taxes Withheld

In 2017, Alan was able to personally write off his manager fees, PGA dues, brand new computer, cell phone and the like. But in 2018, he submitted his computer costs along with his cable bill and cell phone bill under SMM but couldn’t write off his manager fees or dues, neither under the S-corp nor individually. In this example, Alan has to submit his personal income taxes along with his company’s taxes. According to the Tax Reform Calculator, Alan would still owe more than $4,500 on his personal taxes. The good news is that his company can take on some of the deductions, which could possibly offset the bottom line. See all the complicated twists and turns when it comes to taxes?

There is some encouraging recent news out of Washington.  Over a year after the bill was passed, the IRS has finally gotten around to clarifying a new deduction called the Qualified Business Income Deduction.  This could prove to be a significant benefit for some of you that maintain loan-out S-Corporations. The deduction is 20% of net qualified business income from the loan-out S-Corporation, but the caveat here is that the deduction may be limited if you are in a specified service trade or business.  That category is defined as:

  • Traditional service professions such as doctors, attorneys, accountants, actuaries and consultants.
  • Performing artists who perform on stage or in a studio
  • Paid athletes
  • Anyone who works in the financial services or brokerage industry
  • Any trade or business where the principal asset is the reputation or skill of the owner

A considerable number of producers will fall within that category, based on the fifth bullet point above, meaning that many people in our industry will not qualify for the full 20% deduction on income from their loan-out.  However, not all is lost, as some of us will qualify based on personal income, which includes all sources for individuals, not just business income.) Single individuals with loan-outs will see their deductible percentage decrease if their taxable income is at least $157,500 with the deduction completely phasing out at $207,500. Married filing jointly individuals with loan-outs are limited to a taxable income of $315,000 to get the full 20% deduction, with the deduction again completely phasing out at $415,000. These amounts will adjust for inflation in the future.

Is this new tax deduction confusing and complicated?  Hell, yes. It’s so complicated that it took the IRS over a year after the law was passed to come up with the regulations for this code section.  One of our accounting experts even told us that he had picked up three new clients in the past week because “their previous accountants just said ‘I give up.  I’m retiring,’ rather than having to contend with the complexity and uncertainty of the new laws.”  Assuming that your own tax advisor hasn’t chickened out in this fashion, we strongly advise (once again) that you consult with them to see if you may qualify for this deduction. If you do qualify, you might just be able to claw back a significant amount of what you lost in deductible expenses.

Remember, these are all highly abstracted examples based on a 503-page tax reform bill that the IRS legal team is still defining. Even so, we hope this gives you enough insight into the importance of sitting down with your own tax advisor to see how this directly affects you. But taking into account what we do know, I foresee changes in our industry. (Maybe kit fees for personal computers should back into fashion?) Either way, taxes are a sure thing, so perhaps we should start talking about it within mixed company in order to help a friend or colleague to avoid the string of profanity bound to happen come in April if they’re not prepared.

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