Hollywood Set Builder Gets Independent Contractor Ability to Schedule C Deductions

Tax Court Movie ProductionThe Tax Court just granted Independent Contractor status to a W-2’d employee. The circumstances are very familiar to all those who have ever worked in Hollywood.

In this case, Jorge Quintanilla was a production worker who worked on approximately 150 commercials shot in Southern California over two tax years. The different productions varied from one day to a month in duration. In addition, the exact job titles varied from assignment to assignment. As is very common with Hollywood productions, producers hired the same payroll company to hire out Mr. Quintanilla and that company gave him a W-2 at the end of the year, showing him to be an employee, with regular employment taxes deducted and paid.

Mr. Quintanilla, when filing his taxes, filed stating that he was an independent contractor and he filed a Schedule C form showing self-employment along with deductions for the expenses that were necessary for him to spend in order for him to fulfill his responsibilities in building sets.

The IRS objected, stating that as an employee, he could only deduct his expenses on Schedule A, with its inherent restrictions, one of which is limiting expenses to the amount that exceeds 2% of Adjusted Gross Income.

The Tax Court looked not at the W-2 versus a 1099 (employee versus independent contractor payer forms) but to the actual relationship between Mr. Quintanilla and his “employers”. The Court considered the following factors in determining whether a worker is an employee or independent contractor:

• The degree of control exercised by the principal over the worker;
• The worker’s investment in his workplace;
• The worker’s opportunity to make a profit or suffer a loss;
• Whether the principal can discharge the worker;
• Whether the work is part of the principal’s regular business;
• The permanency of the relationship;
• The relationship the parties believed they were creating; and
• The provision of employee benefits.

In analyzing the facts, the Tax Court found that even though Mr. Quintanilla received a W-2 for his services, he was in fact an Independent Contractor and could still file a Schedule C that deducted all of his costs associated with performing his duties from the income he received.

NOTE: The “Protecting Americans from Tax Hikes” Act, enacted last month, includes a related provision on motion picture industry employment taxes. New Code Sec. 3512 provides that, for remuneration paid after 2015, motion picture payroll service companies (MPPSCs) that qualify as “motion picture project employers” can be treated as the employer of their film and television production workers for Federal employment tax purposes.

Person Doing TaxesAs a result, all remuneration paid by a motion picture project employer to a worker during a calendar year is subject to a single FICA wage base and a single FUTA wage base, without regard to the worker’s status as a common law employee of multiple clients of the motion picture project employer during the year. This will most likely mean that more and more people who may have been independent contractors before will be considered by production companies as employees as production companies seek to utilize this safe harbor.

Bottom line for these new “employees” in the entertainment industry… Just because you will now get a W-2 does not mean you are not still an Independent Contractor for income tax purposes. Check with your tax adviser. You may still be able to deduct your expenses on Schedule C!

SEC’s Investor Advisory Committee Objects to FASB Materiality Proposals

FASB SEC RULESThe Security and Exchange Commission’s (SEC) Investor Advisory Committee (IAC), in a January 21, 2016 letter to the Financial Accounting Standards Board (FASB), objected to two recent FASB proposals that would give companies more control over what does and does not get disclosed in financial statement footnotes by letting management and auditors determine materiality based on a subjective legal test rather than a mathematical percentage test.

The two proposals were issued in September 2015 as Proposed Amendments to Statement of Financial Accounting Concepts (CON) No. 2015-300, Conceptual Framework for Financial Reporting Chapter 3: Qualitative Characteristics of Useful Financial Information, and Proposed Accounting Standards Update (ASU) No. 2015-310, Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material. The proposals call materiality “an entity-specific aspect of relevance based on the nature or magnitude or both of the items to which the information relates in the context of an individual entity’s financial report.” Information is material “if there is a substantial likelihood that the omitted or misstated item would have been viewed by a reasonable resource provider as having significantly altered the total mix of information.”

The IAC’s concerns are that these proposals would give management too much discretion about the information investors get. They are concerned that this test could be used to give even less information than is currently required… and there are many who believe the current standard does not require enough disclosure as it is.

The FASB plans to hold a roundtable that will discuss all of its disclosure projects, including the guidance for footnote disclosures for fair value measurements, pension liabilities, and income taxes in mid-2016.

2015 Tax Preparation Rates Released

Wallace Associates Group today released its 2015 Tax Year (Due April 15, 2016) tax preparation fee schedule. This year’s schedule is the same as last year… meaning no increase, even thought this year introduces significant reporting changes as several key Affordable Health Care bill (Obama Care) impact 2015 tax return forms.

This year’s tax preparation fee schedule can be found here.

IRS Extends Employer/Insurance Company but not Individual Affordable Care Act Reporting Deadlines

Tax Forms Extensions and Due DatesThe IRS has extended the due dates for the 2015 information reporting requirements under the Affordable Care Act for insurance companies, self-insuring employers, and certain other providers of minimum essential coverage. However, no relief from personal reporting was granted, meaning that individuals may have to file their 2015 tax returns based on what information (statements, print-outs, etc.) they might have rather than officially filed and distributed forms.

In question are Form 1095-B and Form 1095-C. These forms contain key information that individuals need to determine their tax liability and/or credit under the Affordable Care Act. Prior to this IRS action, employers and others were required to make these forms available by February 1, 2016. The result would have been that around the end of January most employees would receive both a Form W2, (which they are very familiar with) plus either a Form 1095-B or a Form 1095-C. With this IRS extension, employers and other required entities do not need to make either of these two forms available until March 31, 2016. This means that individuals, unless they file late in the tax season, will have to complete their returns without this key information.

To somewhat protect such individual tax return filers, for 2015 tax year only, they can rely upon other information received from employers, insurance companies and the marketplace in order to determine their eligibility for the premium tax credit/tax penalty when filing their income tax returns. The individuals should keep such documentation (they do not send it in with their tax returns) since, if the information they use varies from the information sent to the IRS base on the forms they receive at the end of March, they may need to prove they reasonably relied on valid sources when preparing their tax returns.

If you have any concerns about your own personal situation, we urge you to seek out competent counsel.

It’s Not Too Late…Three Weeks Left to Make Tax Plans!

There are still three weeks left in 2015 and it’s not too late to reduce the amount of taxes you will owe at the end of the year. While there are still some “extender legislation” issues (last minute congress battles), such as charitable deductions for those age 70 ½ years or more and the above the line deductions for qualified higher education expenses, most everything else is set. Here is a list of things to consider.

  • Nail down losses on investments. Paper losses only look good on paper. If you don’t believe the investment will come back to life, sell and take the loss.
  • Self-employment and payroll issues. Make sure your withholding is correct. Penalties are waiting for those who do not adequately cover the amount they owe.
  • If you are 70 ½ years old, make sure you begin taking required distributions. You don’t want the 50% penalty you’ll pay if you don’t.
  • Make year-end gifts and charitable donations.

Make sure you discuss your situation with your tax planner. Happy Holidays!

The Fifth Amendment Does Not Always Apply

Miranda v. Arizona, 384 U.S. 436 (1966) helped create a generation of citizens that are very well aware of their Fifth Amendment rights against self-incrimination as it became repeated over and over in nearly every crime drama on television and movies. However, as Monday’s Supreme Court ruling continues to affirm, there are exceptions to the rule.

Following a line of reasoning that become a standard with Shapiro v. U.S., (S Ct 1948) 335 U.S. 1, which was further refined in Grosso v. U.S., (S Ct 1968) 21 AFTR 2d 55421 AFTR 2d 554, the Supreme Court has held that the government can compel production of self-incriminating documents so long as a three prong test is met: (1) the reporting or recordkeeping scheme must have an essentially regulatory purpose; (2) a person must customarily keep the records that the scheme requires him to keep; and (3) the records must have public aspects.

On Monday, the Supreme Court continued its support of this exception when it refused to hear an appeal brought by Eli and Renee Chabot, Chabot, (CA 3 7/17/2015) 116 AFTR 2d 2015-5270, cert denied 11/30/2015. The facts show that the IRS made a demand under the provisions of the Bank Secrecy Act for copies of bank statements of accounts the Chabot’s held in an HSBC branch in France. The Chabots refused to produce these statements claiming they had a Fifth Amendment right to not produce documents that could incriminate them as potential participants in illegal activities.

The Third Circuit ruled that the IRS was entitled to demand the documents by ruling that the records were essential to regulatory purposes, that they were required documents, and that they had public aspects. Similar cases in the Second, Fourth, Fifth, seventh, Ninth and Eleventh Circuits have had the same result. (in re Grand Jury Subpoena Dated Feb. 2, 2012, (CA 2 2013) 741 F.3d 339; Under Seal, (CA 4 2013) 112 AFTR 2d 2013-7316112 AFTR 2d 2013-7316; In re Grand Jury Subpoena, (CA 5 2012) 696 F.3d 428; In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, (CA 7 2012) 691 F.3d 903; In re Grand Jury Investigation M.H., (CA 9 2011) 108 AFTR 2d 2011-5880108 AFTR 2d 2011-5880; In re Grand Jury Proceedings, (CA 11 2013) 111 AFTR 2d 2013-794111 AFTR 2d 2013-794)

With the Supreme Court’s Monday ruling, this exception to the Fifth Amendment remains fully in place and enforceable. Basically, if there is a regulatory business purposes of a document, even if it would incriminate you, you will be required to turn it over to the IRS.

IRS Reminds Non-Credentialed Return Preparers of 2016 Limits On Practice

Following up on its June of 2014 announcement, the Internal Revenue Service (IRS) recently reminded non-credentialed tax returns preparers of changes that will take effect January 1, 2016. These rules affect all tax return preparers who are not Enrolled Agents, Certified Public Accountants or Attorneys (Credentialed Preparers). Credentialed Preparers are exempt since they already have annual mandatory Continuing Legal Education requirements from their licensing boards.

The program is designed to ensure that non-credentialed preparers have sufficient knowledge to adequately prepare tax return for others. It requires completion of Continuing Education courses. Those who have not completed the training by December 31, 2015 will lose the ability to assist their customers in the event something is challenged or goes wrong with a return they prepared. Even then, the ability of non-credentialed preparers to represent a customer with problems is limited.

To assist the public in determining whether the person who does their tax return will be able to assist in the future should something go wrong, the IRS will be publishing a listing, known as the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.

While we applaud the IRS for protecting the public through this procedure, thus ensuring at least a minimal ability to prepare returns and then protect customers, with other than routine tax situations, we recommend that taxpayers search out qualified Enrolled Agents, Certified Public Accountants or Attorneys to assist them with their taxation needs.These Credentialed Preparers can assist you without restriction.

IRS Releases Its “Dirty Dozen” Tax Scams

Criminals are using your fear of the Internal Revenue Service (“IRS”) and your desire not to pay taxes to steal your money and leave you with possible criminal liability, as evidenced by the recently published IRS’s “Dirty Dozen” list of tax scams for 2015.

Aggressive, threatening phone calls from scam artists continue to be a large problem, being made daily across the nation. Con artists make these calls, claiming to be auditors from the IRS, and asking for personal information that can be used to steal identities. Another twist is offers to settle to “make the problem go away”, with information as to where to send a wire or direct bank transfer, which ends up in the criminal’s account.

Two ways to not get harmed are to (1) understand the IRS will always contact you by letter and (2) it is a good idea to look up the phone number, even on something mailed to you, when calling the IRS back.

The IRS has set up a special section on IRS.gov in order to help people protect themselves. It’s a good read even for highly aware individuals because it serves as a reminder of the evil that lurks out in the world today.

Here is the 2015 list:

  • Phone Scams: Aggressive and threatening phone calls by criminals impersonating IRS agents remains an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent months as scam artists threaten police arrest, deportation, license revocation and other things. The IRS reminds taxpayers to guard against all sorts of con games that arise during any filing season.
  • Phishing: Taxpayers need to be on guard against fake emails or websites looking to steal personal information. The IRS will not send you an email about a bill or refund out of the blue. Don’t click on one claiming to be from the IRS that takes you by surprise. Taxpayers should be wary of clicking on strange emails and websites. They may be scams to steal your personal information.
  • Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. The IRS is making progress on this front but taxpayers still need to be extremely careful and do everything they can to avoid becoming a victim.
  • Return Preparer Fraud: Taxpayers need to be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest high-quality service. But there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers. Return preparers are a vital part of the U.S. tax system. About 60 percent of taxpayers use tax professionals to prepare their returns. Make sure your’s is reputable and registered.
  • Offshore Tax Avoidance: The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order. The IRS offers the Offshore Voluntary Disclosure Program (OVDP) to help people get their taxes in order.
  • Inflated Refund Claims: Taxpayers need to be on the lookout for anyone promising inflated refunds. Taxpayers should be wary of anyone who asks them to sign a blank return, promise a big refund before looking at their records, or charge fees based on a percentage of the refund. Scam artists use flyers, advertisements, phony store fronts and word of mouth via community groups and churches in seeking victims.
  • Fake Charities: Taxpayers should be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations. Be wary of charities with names that are similar to familiar or nationally known organizations.
  • Hiding Income with Fake Documents: Hiding taxable income by filing false Form 1099s or other fake documents is a scam that taxpayers should always avoid and guard against. The mere suggestion of falsifying documents to reduce tax bills or inflate tax refunds is a huge red flag when using a paid tax return preparer. Taxpayers are legally responsible for what is on their returns regardless of who prepares the returns.
  • Abusive Tax Shelters: Taxpayers should avoid using abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered.
  • Falsifying Income to Claim Credits: Taxpayers should avoid inventing income to erroneously claim tax credits. Taxpayers are sometimes talked into doing this by scam artists. Taxpayers are best served by filing the most-accurate return possible because they are legally responsible for what is on their return.
  • Excessive Claims for Fuel Tax Credits: Taxpayers need to avoid improper claims for fuel tax credits. The fuel tax credit is generally limited to off-highway business use, including use in farming. Consequently, the credit is not available to most taxpayers. But yet, the IRS routinely finds unscrupulous preparers who have enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds.
  • Frivolous Tax Arguments: Taxpayers should avoid using frivolous tax arguments to avoid paying their taxes. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000.

One of the best ways to protect yourself is to work with a professional tax preparer. To help you know what to look for, the IRS provides its Choosing a Tax Professional page. Illegal scams can lead to significant penalties and interest for taxpayers, as well as possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shutdown scams and prosecute the criminals behind them. Taxpayers should remember that they are legally responsible for what is on their tax returns even, if it is prepared by someone else. Make sure your only get help from someone who knows for sure what they are doing.

WOW… I Never Thought I’d Say “Take the Income Today!”

With great skill, confidence men divert attention to accomplish goals. Whether it was intended or not, the focus of the press on the events of Ferguson and on Obama’s new Immigration Executive Orders has diverted attention away from key tax planning strategies for December. And, I’m finding myself in a position I never thought I’d be, that being a spokesman for “Take the Income Today”.

Let me Explain

In normal years, it is usually most advantageous for people toward the end of a year to maximize deductions and minimize income in order to reduce the amount of tax paid the following April (March for corporations). It has kind of become a mantra. In fact, my last post was on cleaning up and making charitable donations. While that may still be a good idea for individuals, so long as they are able to itemize deductions, businesses this year may not want to do that.

Corporate Income Rates

2014 corporate income tax, at 15%, is a phenomenally better deal than 2015’s 25% and 34% rates. Even on a discounted cash flow basis, money that is taxed at up to more than twice the current rate would have to have a huge net present value increase in order to justify not taxing it now.

It Also Affects Future Estimated Tax Payments

Just in case the potential of more than doubling the tax rate didn’t grab your attention, corporations that make less than $1.0 million per year can avoid being penalized for underpaying estimated taxes if they pay installments based on 100% of the tax shown on the return for the preceding year, so long as they actually owed taxes the prior year. Otherwise, your only option of avoiding penalty is to pay, in advance, every quarter of 2015, the full amount of 2015 estimated tax at a much higher rate.

This could make a significant difference in your cash flow for next year. Think about it. Estimate taxes based on last year (15%), is a lot less cash paid every quarter than estimated taxes at 34%. Would you rather use that money yourself to make money during the year or would you rather give it to Uncle Sam for him to use?

Suggestion

If you are a normal corporation with taxable income of less than $1.0 million that currently anticipates a small net operating loss for 2014 and income in 2015, you may find it to your benefit to accelerate just enough income and/or defer enough deductions to ensure you create at least some taxable income for 2014.This will allow you to take advantage of the lower 2014 tax rates and a lower required estimated tax payment each quarter of 2015.

The Time to Get Ready is Now!

5 things to do now for less taxesHere is an idea. Instead of waiting until April 13th, why not get ready for filing your next year’s tax return now. Doing this today and maybe make some changes today could make a significant difference on your ultimate tax bill due next April 15th.

Here are five things to do now:

1. Check your withholdings

If you have a big refund during the 2013 tax season, now is the time to consider lowering your income tax withholdings if your income and deductions will remain similar in 2014. Alternately, if you came owed a substantial sum when you fi led for 2013 taxes, you may want to consider increasing your tax withholdings.

2. Examine your information

Now is a good time to meet with your tax preparer —waiting until February of 2015 could add increased stress when you’re getting ready to file your 1040. Your tax preparer likely has time to meet with you now. Getting an appointment in April is nearly impossible. Get together and look at your tax situation and start planning ahead.

3. Get Your books and financial statements in order

If you’re doing anything beyond working, it’s time to start getting everything in order so that you aren’t rushing at the beginning of 2015. And if you’re a small business or have rental properties be sure to get prepared to issue 1099s or prepare other forms that you’ll need to complete your taxes.

4. Set aside receipts

Don’t wait until the end of the year to start thinking about deductions – be smart and start pulling together the records immediately so that they are close at hand come tax time. It’s amazing how many pieces of paper you will lose and how many thing you will forget between now and next April.

5. Spring Cleaning in the Fall

The Time to Get Ready is Now for Tax SavingsNow’s a great time to clear the clutter as the days fall shorter. Do some fall cleaning by gathering your old clothing and household items and donating it to a charitable organization before the end of the year. Be sure to get a receipt for your donation and when you prepare your taxes you can apply a ‘fair market value’ to that donation. Your generosity may be worth $25 to $35 in tax savings for every $100 of what you donated.

Need Help Doing It Now?

Wallace Associates Group is prepared to walk you through this process. The time to get ready is now. What you do between now and December 31st can have a much more significant impact on the amount you pay April 15th than anything you do January 1st or after.