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.

Must See- Once I Was a Beehive

Last night was a rare night for me. For nearly two hours I forgot about emails, I forgot about assignments, I forgot about all the day-to-day frustrations of life–  Because for nearly two hours I was too busy laughing and crying to even be able to think about them. I owe that break to the movie Once I Was a Beehive.Once I Was A Beehive FB Cover FINALThis movie is brilliantly written. The humor is actually funny (not some overworked formula or shock humor). The opposite happens as well. I cried because it touched true emotions. And amazingly, the timing between the two (laughing and crying) was directed/edited with such phenomenal timing that I just sat back, relaxed and enjoyed the phenomenal ride.

In the current world of re-packaged, formulaic, repeat copy after copy of the same idea movies, Once I Was a Beehive stands out as a “must see” movie.

Once I was a Beehive is showing this weekend at the Laie Palms Cinema. If you can’t find it at a theater near you, contact your theater manager and ask them to get it. You’ll be glad you did. Then you too can spend two hours laughing and crying, instead of thinking about everything else going on in your life.


New Hawaii Tax Credits for Film Production

With such epic failures as the solar tax credits getting stuck in committee earlier this year, we were not expecting much to happen with film tax credits in Hawaii either. But that didn’t stop the State and County Film Offices and the Hawaii film industry from trying. The clear data and testimony that was continuously submitted by industry experts and companies affected by film tax credits were impossible even for legislators to ignore. The film industry is good for the State of Hawai’i and tax credits are an essential part of the mix. With all the evidence securely supporting it, the legislature approved and the governor signed a bill, now known as Act 88/89 that increases and adjusts Hawai’i’s film tax credit.

The new law, which went into effect July 1st, creates a refundable tax credit based on the amount of money actually spent in Hawaii producing qualified film, television, commercial, or digital media projects. The law increases the tax credit from 15% under prior law to 20% of qualified production costs spent in Oahu and from 20% under prior law to 25% if spent in the neighbor islands of Hawai’i, Kauai, Lanai, Maui and/or Molokai.

The specifics of Act 88/89 include additional key elements. It increases the limit per production from the previous $8,000,000 cap to $15,000,000. It allows productions to qualify for the tax credit even if their work is scheduled only for Internet distribution. It includes State and County location and facilities fees to be included as qualified expenditures and it locks everything up until December 31, 2018.

The importance of the fact that Act 88/89 goes out 5½ years into the future without needing to be renewed cannot be understated. The majority of states, including believe it or not California, have consistently been tinkering with the formulas on an annual basis and as a result they have been losing film business. Big productions are like big ships. They are hard to get moving and take time to do so and once they get moving they are hard to stop. As a result, producers look to long term stability of tax credit programs when making the decision on where projects will be filmed. Don’t believe me? Just take a look at Georgia.

Georgia put together a stable film tax credit program a decade ago and has pretty much left it alone. The result, after California in the number 1 spot and New York in the number 2 spot, Georgia comes in at the number 3 spot, creating an annual $3,100,000,000 (yes…that is billions) industry. Georgia’s legislature has put one interesting twist on their credits. Their credit is 20%, but they will add an additional 10% if you put the state’s peach logo, not just a standard film credit, in the credits thereby ensuring a very visible promotion of Georgia tourism as part of every production.

The Hawaii film industry generated roughly $250 million in direct spending in the islands in 2012, according to the Hawaii Film Office. Because dollars spent by a production require other dollars to be spent (for example, when a production orders catering from a local company, the caterer needs to spend money to other businesses to acquire food, etc.) the total economic impact is greater than the actual spend. The State Film Office estimates the actual economic impact of the $250 million spent by production companies in Hawaii to be $398 million dollars. According to the state film commissioner, Hawai’i’s film tax credits also created 2,500 new full time equivalent jobs last year. Now that’s good for Hawai’i.