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.