How do I minimize federal income tax from film production business
Country/State/Province of question: Texas
Welcome and thank you for your question!
Please refer to Internal Revenue Code Section 181 for guidance regarding treatment of certain qualified film and television productions. Note that while this was renewed by Congress, it has since expired and as of the date of this writing, was not renewed beyond December 31, 2011. To be eligible for a special expensing election, a qualified film or television production has to begin before January 1, 2012.
In general, under Code Section 181, an owner of a film or television production that reasonably expects, upon completion, to have a qualified film or television production, can elect to treat up to $15 million, or in some cases $20 million of production costs, incurred by the owner as deductible by the owner in the tax year in which the costs are paid (or incurred for an accrual basis taxpayer). If the owner's expectations are inaccurate, the deduction is subject to recapture. Qualified expenses are those that are not considered "capital" expenses. Also, in general, at least 75% of the wages in connection to the production must be for services performed in the United States of America.
Please refer to this Code section for full detail of the regulation.
IRS Circular 230 Disclosure: Any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
Relist: Incomplete answer.Need far more options in minimizing income.
Let me provide some further clarification, and additional detail for you.
According to IRS Publication 535, "Business Expenses", film and production costs are generally capital expenses, meaning that you cannot deduct them immediately. However, thanks to Code Section 181, you can elect to deduct costs paid or incurred for certain productions that begin after October 22, 2004, and before January 1, 2012.
Here are some typical tax deductions for independent film makers:
Cultural events, distribution costs, editing costs, production costs, promotional costs, advertising, staff wages, studio supplies, travel, professional memberships, and all of the other typical business expenses, such as office supplies, insurance, mortgage interest, legal and professional fees, tax preparation costs, gas and electric, utilities, travel, business meals and entertainment, and any other expenses deemed "ordinary and necessary" to the production of income.
I would recommend keeping an accounting ledger via QuickBooks or other comparable software to record and track all of the related expenses of the business. Also be sure to retain all related receipts in case of IRS audit.
I hope this helps, and please let me know if you require further information.
Please, just a little more information. Are there any "entities" which i can set up which may reduce/shelter income. Do you have any other concepts which can effectuate this purpose
Yes, typically we recommend small businesses form what is called an "S" Corporation. This is done by incorporating, and filing a Form 2553, "S Election" with the IRS. Keep in mind that an S corporation must have fewer than 100 shareholders. The income of an S corporation passes to the shareholders and is reported on their individual income tax return for federal purposes. This prevents the double taxation of a regular corporation, whereby the corporation pays income tax and then the "dividends" are taxed again. An additional benefit is that the active shareholders of an S corporation are required only to take a "reasonable" salary. This puts a limit on total payroll taxes for the shareholders, where in a partnership or a single-member LLC, active partners/members could be liable for self-employment tax to the extent of income in the business.
Also, I found some interesting state tax benefits for you that you may wish to look into. Although Texas does not have state income tax, they provide some sales tax incentives for film production companies. Per the Texas Film Commission web page, "Film, television, commercial and video game productions are exempt from paying sales taxes on most rentals and purchases used directly in production. You are also eligible to receive a refund for sales taxes that you paid on items and services that should have been exempt." Here is the link to that page, which provides some great resources for you:
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Good advice. Just before I rate, I want to be sure you have no further tax minimizing ideas. Thanks.
Certainly, here are some general tax planning ideas:
Be certain to take advantage of bonus depreciation and section 179, which generally allows for the immediate expensing of up to $139,000 of fixed assets for 2012. Please refer to this on line resource for more information. http://www.section179.org/
Also, be sure to set-up a 401k or other tax deferred retirement plan within your company, and maximize contributions to the retirement plan to the extent possible.
Also consider whether to establish the company as a "cash" or "accrual" basis company. If you decide on the cash basis of reporting, be certain to pay down all payables at the end of your fiscal year in order to maximize deductions in that year.
And most importantly, be aware that the tax law is a fluid, ever-changing system. Tax rates change, deductions come and go; same with credits. It is important to review your business accounting with a CPA at least annually, before the end of your fiscal year, to determine if there is anything you can do prior to year end to maximize your savings (i.e. take payroll or not, maximize retirement plan or not, purchase more equipment or not, etc.). Also you may want to coordinate this annual review with a financial adviser as well.
CPA, CGMA. 10+ years experience.