INTRODUCTION
YOU are a little business
A few years ago, I had just completed a small home remodeling project, and my father-in-law took a look at my work. “"You did a great job on this!"†he said. "“You should go into business for yourself."â€
I looked at him and replied, “"I am in business for myself.â€" He hemmed and hawed a little bit, realizing that he had inadvertently suggested that I should go into a "“real"†profession, and he said, “"Well -- I meant you could do this, too.†"
At that moment, I felt a little bad, because my father-in-law was a great guy (he died in 2009 at the age of 96), and he always respected and supported my career choice. He understood that acting is a perfectly legitimate line of work, and that my job –-- while it does have its quirky aspects -- is as “"real"†as anybody else'’s. And bless his heart, he never uttered that soul-crushing question, "“Can you really make a living doing that?"â€
But the point I was trying to make to my father-in-law, and the point all actors should realize, is that in addition to thinking of ourselves as creative performing artists,
• Every actor is also a little self-contained business.
And we have business expenses just like any other enterprise. Our marketing costs include head shots, voice demos, and mailings. “"Research & development"†includes theatre tickets, dance classes, scripts, and the like. And we have supplies to buy, such as makeup, and capital expenditures like ear prompters. And so on.
Just like any other business, an actor is allowed to deduct legitimate expenses from his or her income at tax time. We handle those deductions in a couple of different ways, as we’'ll see, but you’'re absolutely allowed to claim them.
Nobody gets it
Actors love to complain that nobody really understands how we live our lives, and that’'s true in many cases. A lot of people think we work solely as independent contractors, but much of the time, we’'re employees. Not many people realize that we have unions, and have had for many years -- Actors’' Equity will celebrate its centennial in 2013.
Among the people who don’'t understand how our business works are accountants and tax preparers. I’'d bet you a nickel that if you picked a tax preparer at random, you’'d spend a lot of time explaining your professional life to them! And by the way,
Should you use an accountant?
Maybe, maybe not. My hope is that if you have income from performing and a couple of day jobs, and maybe a little interest income from your bank account and a few dividends, and if your financial life is otherwise uncomplicated, you can use the information in this book to prepare your own taxes. If, however, you have convoluted capital gains and losses or real estate income and expenses, or if your life is currently in flux because of a messy divorce or other personal upheaval, you’'ll probably need some professional assistance.
If you do need to consult a pro, you'll still have to prepare! This book will teach you the techniques you’'ll need to get your professional expenses in order. 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.
What about computer programs and e-filing?
I’'m pretty old school, and I’'d always filed a paper return. Then for 2007, I used one of the downloadable tax preparation programs. It wasn'’t bad --– I got through my return without any trouble, and e-filing really expedited my refund. Navigating that particular program could have been better, and the way the program asked questions seemed a little oblique at times. But it was quite serviceable, so I used it again for my 2008 and 2009 taxes. The best part was that if I had to make a change, the entire return was recalculated instantly. The program could also import information from the previous year when needed to make a calculation for the current return.
The tax prep programs will also figure some of your deductions and credits automatically. Based on your answers to their questions, the programs will seek out and calculate the deductions and credits you’re eligible for. In essence, they automatically complete the worksheets and forms you’'d otherwise have to do by hand.
The IRS says that 95 million people --– 70% of filers --– now submit their returns electronically. They have a program called “Free File,†where those with an Adjusted Gross Income of $58,000 or less can file electronically for free. This income limit applies both to single and married filing jointly. Check out the program at www.irs.gov/freefile.
The IRS also has a program called “Free File Fillable Forms†that’'s available to anyone (no income restriction), where you can fill out the individual IRS forms online and submit them electronically. It’'s an electronic version of filing on paper, and when I refer throughout this book to filing on paper, the “Free File Fillable Forms†is an implicit option for you.
After all, you’'re reading this book on your computer! Electronic filing is a great convenience, but I do believe that you should have at least a basic understanding of what’'s going on with your return. So I’'m hoping that as we go along, you’'ll be clicking back and forth between this text and the IRS website to consult with the Instructions for the 1040 and the other forms and schedules we’'ll use. The IRS web site is easy to navigate.
I also like to have paper copies of the IRS forms and schedules on my desk while I go through my return, and I think you will, too. So I advise you to go to the IRS web site and print out the forms we’'ll discuss and use them as worksheets.
I think there’'s something about physically writing numbers on a piece of paper that makes the process “real†and it deepens your understanding of the process.
Keeping good records
As with any other business, if you want to claim your business expenses as tax deductions, you have to keep track of them. “"Well, duh,"†you say. But the point is, it’'s important to keep track of your expenses and activities as you go along. If you get a receipt for an expense (and you should, whenever possible), write on the receipt what it was for, and keep your receipts in a safe place -- a box, a drawer -- whatever works for you. You won'’t have that many of them, and if you’'ve made good notes on all of them, it won’'t be too hard to sort through them at the end of the year. And --
• You have to keep a date book!
This is essential. I don’'t care what kind you use. A lot of my friends have gone all-electronic, but I still use an old-fashioned paper date book.
Seriously though, I do recommend that however you keep your day-to-day records,
• You should definitely make a hard copy on a regular basis.
Your computer could die. Your Blackberry or I-Phone might crash, or whatever it is that Blackberries and I-Phones do. And it'’s very hard to reconstruct your activities from memory. Print out or hand-write a paper copy, and keep it in a safe place.
Another very important thing to do is
Having your stubs on hand will allow you to check your W-2s for accuracy. They’'re also a good record of the jobs you'’ve done, and they’'re the only detailed record you'’ll have of your Equity working dues withheld. I have a “Current Year†file folder where I keep my stubs, and for my freelance work in commercials, industrials, etc., I also copy the basic information (gross pay, date of the job, agent’'s commission, etc.) into a little accounting book, which is handy for checking my annual earnings statements from AFTRA and SAG. At the end of the year, I bind all my stubs together and store them away.
Keep your records for at least three years after the due date of the tax return for the year in question. For example, you should keep your 2010 records at least until April 18, 2014. I keep my pay stubs in perpetuity, because there have been times when I wanted to check on a job I did several years back.
Key concept: Contemporaneous records
In your date book, you’'ll record your activities that relate to your business expenses. For example, if you go on an audition, note where you went, and the starting and ending mileage from your trip on the date when it occurred. Also write down your parking costs. If you took public transportation, note the fare. It’s important that you record these things as they happen, because you won’'t have receipts for them. The idea is that the IRS doesn’'t want you to just make things up, and if an auditor questions your expenses,
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Another key concept: “Ordinary and Necessaryâ€
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 you’'re fine. This paragraph appears in many IRS forms and publications:
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.
We’'ll talk about specific types of expenses later on, but for now, just remember this:
Which return should you file?
The 1040. Period.
You have to use the long form to deduct your expenses, even if the rest of your financial life is completely uncomplicated. The short forms 1040-A and 1040-EZ won’'t let you report and deduct your business expenses.
When I used to work in the VITA program, some people told me they needed help because they were afraid of numbers or simply couldn’'t make sense of them. Now I’'m sure that there are a few people who are genuinely numerophobic or dysnumeric, but I think most people are just intimidated by the IRS forms.
And I agree that the forms aren’t particularly user-friendly. They’'re loaded with dozens of little boxes, and they use a tiny type face, and unless you work with them a lot, they can be pretty confusing. That’'s why I want you to obtain paper copies of the forms we’ll be discussing. Soon, you’ll be familiar with them, and they won’'t seem so scary. You'’ll also realize that you don’'t have to fill in every box on the forms.
Using IRS forms with this book
Given how complicated and unfriendly the IRS forms can appear at first glance, I recommend that you go to the IRS web site and download the forms we’'ll be talking about. Print out the forms so you can have them front of you as we go along, and use them as worksheets, penciling in entries and making marginal notes on the paper. Here’'s how to do it. Do it right now --– we’'ll get a copy of the 1040.
1. Minimize this window, open your Internet browser and go to www.irs.gov.
2. Click on “"Forms and Publications>>â€" in the box at the upper left of the IRS home page.
3. On the Forms and Publications page (see below), there is a section at the top called “"Frequently Downloaded Forms and Publications"†that has a selection of some of the forms we’'ll use: Form 1040 and Schedules A and C, with an option to access the instructions for each one. To get other forms and instructions, use the next section, headed “"Download Forms and Publications by:â€" and click on “"Form and Instruction number (PDF)",†which is the second bullet in the list. Note that you can also access IRS publications in the third bullet. For now, click on “1040†in the top section.
4. You’'ll see a PDF of the form. Print it out. On the Forms and Publications page, you can also click on “"(Instructions)"†on the 1040 line, which will give you the instruction booklet for the 1040 and its schedules. Don'’t print that out --– it’'s 179 pages! Keep the Instructions window open as you work and you can get the information you need by scrolling to the appropriate page. Again, I think you’'ll understand your tax return a lot better if you fill out each form and schedule by hand as we go along.
