Key Concept for Deductibility: "Ordinary and Necessary"

Whenever they talk about business expenses, the IRS applies the test of “ordinary and necessary.” If the type of expense you’re claiming is something that your professional peers usually incur in their work, and if the amount of the expense is in line with what others at your level in your profession can be expected to spend, then the expense can be considered "ordinary." If the expense is helpful in maintaining or advancing your ability to pursue your career, then it can be deemed "necessary." Here’s how the IRS describes "ordinary and necessary." This paragraph (sometimes with slight variations) appears in many places on IRS forms and in IRS publications:

“An ordinary expense is one that is common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.”

For example, if you or I were to hire a limousine and a driver to get to a voice job, that’s not necessary and it certainly isn’t ordinary. But the late great voice talent Don LaFontaine used to do just that. He hired a limo to take him from job to job, because he was so busy that he didn’t have time to park his car! In his case, I’m sure he could demonstrate that to pursue his career at that level, it was necessary for him to pay for that special transportation assistance. Later on, of course, Don installed a state-of-the-art studio in his house – another reasonable and increasingly commonplace expense for successful voice talents.

As you go over your professional expenses, keep in mind that to be deductible, your expenses must meet the tests of being both ordinary and necessary. Chapters 7 and 8 of The Actor’s Tax Guide discuss an actor’s deductible expenses in detail. Find it at www.ActorsTaxGuide.com.

Social Meals Aren't Business Deductions

A while back, I was appalled to learn that some actors apparently think that whenever you have dinner with your actor friends and talk about the business, it's a deductible business expense. Nonsense. Could be dangerous nonsense if you get audited.

The person you're entertaining must have the power to hire you (or provide some other clear business advantage to you) at the time of your meal, and you must discuss a specific income-producing opportunity, not just your career in general.

Let's say you have dinner with an actor friend. Even if they eventually direct a show and cast you in it, the meal in question is essentially social in nature and isn't deductible.

There's a detailed discussion of travel, entertainment, and vehicle expenses in Chapter 8 of my Actor's Tax Guide, available at www.ActorsTaxGuide.com

More on Using an Accountant: You Still Have to Prepare!

I’ve heard from more than one colleague that actors really aren't interested in working with their taxes and would just as soon give a hundred bucks to a professional preparer and be done with it. If that's your choice, fine. You’re a job creator in the tax preparation industry. But I think that being a professional actor also means being a conscientious business person, and part of that means understanding your taxes.

What I'm trying to say is, even if you do decide to use a professional, you still need to prepare! When you go into your tax preparer’s office with your stuff nicely organized, you’ll make it a lot easier for them to do your return, and in turn, you'll have a better understanding of how your return was prepared. You’ll also be able to tell if your tax preparer is a halfwit.

And you’ll probably save some money. Accountants charge for the time they spend preparing your tax return. If you bring in all your records neatly organized, their fee will be a lot lower than if you simply dump a shoebox full of receipts on their desk. One tax preparer I know said that if he has to try to decipher your date book or sort through an enormous pile of receipts, his cost would, in a word, “skyrocket.”

Another way to look at it is, do you really want to give a big chunk of your tax refund to your accountant?

You can learn about actors’ unique tax issues in The Actor’s Tax Guide, which is available at www.ActorsTaxGuide.com.

2012 Actor's Tax Guide Now Available!

The Fourth Edition of the tax guide is now available at www.ActorsTaxGuide.com. Completely updated, same low price!

Choosing a Tax Preparer Wisely

Happy 2012! Tax season is now officially in full swing. Yesterday was the deadline for employers and other payers to send you your W-2s and 1099s, and the IRS has been processing returns of early filers for a couple of weeks now. So it’s definitely time to start to get your stuff in order.

One of the main decisions you’ll need to make is whether to hire a professional tax preparer, or to do it yourself. If you choose to go with a pro, make sure he or she is competent and experienced. Ask around and find somebody who has a good track record -- AND who knows about actors and how our business works. A lot of tax preparers are totally clueless about actors! I’ve read some horror stories about tax preparers who completely screwed up the Qualifying Performing Artist rules, reported deductions improperly, and make other significant errors on actors’ tax returns.

The IRS website has a page of “Tips for Choosing a Tax Return Preparer.” It’s all pretty much common sense – check their qualifications, find out about their history, know their fees in advance, etc. -- but it’s certainly worth a look. They also have links to a YouTube video and a Podcast on the same topic. Note especially that according to rules set up last year, all paid tax preparers must now have a Tax Preparer Identification Number. Here’s the link: www.irs.gov/newsroom/article/0,,id=251962,00.html

The main thing to remember about using a pro: YOU are legally responsible for what's on your tax return, even if it was prepared by someone else!

I’ll be posting tax tips here about once a week during the tax season. You can also find mini-tips at my Twitter site every day or so: https://twitter.com/ActorsTaxGuide

The Fourth Edition of The Actor’s Tax Guide will be available soon! Get info at www.ActorsTaxGuide.com.

Nice plug from Erin Cronican!

Erin is, in her own words, an "Actor (SAG/AEA/AFTRA), Business Coach for Actors, Idealist, Baseball Fan, Cheese Whiz Lover. Kooky!" She always has good advice about the "business of the business," and she said some very nice things about The Actor's Tax Guide. Here's the link: http://4ms.me/fyJ9YA

Other links to Erin: www.erincronican.com or www.theactorsenterprise.org