As a professional juggler, Michael Rayner has a lot of work-related tax deductions each year, including $700 for the cheeseburgers he spins atop parasols, 30,000 travel miles and $220 for liability insurance, just in case one of the pins or flaming torches he flips into the air should somehow stray into the audience.
His wife, actress and voiceover artist Moira Quirk, also has a wealth of business-related deductions, the most significant of which is the 10% commission she pays her agent. And they write off 25% of the mortgage and expenses for their North Hollywood house for their respective home offices, which include a recording booth for her and rehearsal and juggling supply storage areas for him.
Now, the massive tax bills passed by the House and the Senate (429 and 479 pages, respectively) earlier this month have thrown the future of these write-offs into question, casting a cloud of fear and uncertainty over the financial fates of Rayner and other workaday entertainment pros. The panic has been amplified by a widely shared Facebook posting erroneously asserting that deductions for unreimbursed business expenses were being eliminated for small businesses and the self-employed.
“I’ve already sent a letter out to my tax guy,” says Rayner. “I don’t think he even knows what’s in [the bills] yet. There are so many weird caveats once you get deeper and deeper.”
From actors to art department draughtsmen, people in the biz count on business deductions to keep their personal books balanced, whether they’re traditional write-offs like phone, travel and lodging expenses, the cost of headshots, or the vintage Sylvester Stallone doll Rayner uses in his act, purchased on Ebay for $75.
“Our members don’t start on a level playing field with other middle- and working-class people to begin with because we spend anywhere from 10 to 30% of our income on ordinary and necessary business expenses,” says tax attorney Sandra Karas, the treasurer for Actors’ Equity, the labor union representing actors and stage managers. “Some guy who works at Walgreen’s who makes $30,000 working full-time doesn’t have any [of those] expenses.”
For Rayner, there’s good news and bad news, according to a group of entertainment business managers surveyed by Variety. Since almost all of his work (save for things like a recent appearance on CBS’ “The Late Late Show with James Corden”) is done as an independent contractor, his business expenses will still be deductible under the proposed new laws, which apply to income earned after Dec. 31, 2017. But most of Quirk’s work (apart from audiobooks) is done for film, TV and videogame productions, which hire her as an employee, and employees will no longer be able to deduct unreimbursed expenses – including agent fees.
There is a solution: form an S-Corporation (a.k.a. a “loan out corporation” or a “pass-through business”) that contracts with the studios for their work. With this set-up, people are technically an employee of their own corporation, not the studio or any other entity paying for their services, and are thus able to deduct business expenses.
Jack Gill says experienced stunt coordinators such as himself are typically hired via loan-outs, which will enable them to continue to write off the cost of rehearsal props (rubber guns, rifles and knives) and body pads, martial arts instruction, driving school and the occasional motorcycle and car used to practice stunts. But what about the up-and-comers without loan-out corporations trying to gain a foothold in the industry, for whom this equipment and training – and its affordability – is probably even more vital?
Business manager Evan Bell of Bell & Co. says he used to recommend that individuals form loan-out corporations if they were making $125,000 a year or more. Now, he’s recommending it for all his show business clients.
It’s easy and relatively cheap – a person can go to web sites like LegalZoom.com and Incfile.com and establish a corporation for less $500.
“The drawback is that you’ll need two sets of books, and if you do it yourself, you’ll pay me for doing two tax returns – your personal and your corporate,” says Bell. “But, with the new law, all of my fees are still deductible if you have a loan-out.” Otherwise, tax preparation fees will no longer be a write-off.
But studios won’t hire execs, administrators and other traditional 9-to-5’ers through loan-out corporations, business managers say. The same goes for many below-the-line film and TV workers (those in the crafts, grip and electrical departments and other production support roles), according to supervising location manager Ilt Jones (“Transformers,” “Kong: Skull Island”).
“In theory, if you pay someone as an independent contractor and that person flakes out and doesn’t pay their taxes, the studio could be held liable by the IRS,” explains business manager Peter Mainstain, co-founder and managing partner of Tanner Mainstain Glynn.
“This is iniquitous in my opinion because they are basically saying that people like high-priced actors and influential above-the-line people are trustworthy and the rest of us are not,” says Jones.
In the TV news business, all but the biggest stars are denied the privilege of using loan-out corporations. So that means that, under the proposed tax laws, Bell’s media personality client earning a $4 million annual salary will no longer be able to deduct the 30% they pay in commissions – 10% agent, 10% management, 5% attorney and 5% business manager – resulting in close to $700,000 in additional taxes, a 66% increase over what they would pay under the current law. If an anchor or on-air personality pays a retainer for a personal publicist, that will no longer be deductible, either.
But even if someone is allowed to use a loan-out corporation, that doesn’t necessarily make it economically feasible, argues Karas. She says that in addition to the $2000 to $2500 annual cost of maintaining corporate compliance, there are likely to be additional business taxes and fees in the various cities and/or states people work in.
“I just did a tax return for someone who had to file in four states in addition to her own, and she only earned 12k last year, all-in, from show biz,” says Karas.
Also, while those with loan-out corporations pay into the unemployment insurance system, they can’t collect for themselves when they’re out of work.
“We have some members who live for more than a half a year on unemployment some years,” points out Karas.
As the tax bill moves into the joint conference committee, Actors’ Equity is encouraging members to contact their representatives. Meanwhile, its sister union, SAG-AFTRA, is urging Congress to save the Qualified Performing Artist (QPA) tax deduction, which allows lower income performing artists to write off qualified business expenses, including advertising, travel, and agent and manager commissions, as an above-the-line (non-itemized) deduction.
To qualify, one must earn $200 or more in wages from at least two employers and have business expenses exceeding 10% of their income from their work as performing artists. They must also have an adjusted gross income of $16,000 or less – a number that hasn’t changed since the QPA was enacted in 1986 – and not be married and filing separately.
The income limit on the QPA deduction may seem too like it’s too low to be feasible for all but the most work-famished of starving actors, but the biz can be boom or bust even for veteran TV series regulars like Evan Handler (“Californication,” “Sex and the City”).
“Some years I earn in the [top] 1% and some years I earn in the bottom of the middle class,” admits Handler. “I don’t have a business manager. I never have. I have an accountant who works in New Jersey that I’ve never met.”
Handler is relieved to hear that his loan corporation, created in 1998 primarily so he could establish a retirement plan, will allow him to keep his business deductions. But he’s still worried about how he’ll be affected by other changes in the offing, such as those for mortgage interest deductions, which differ in the House and Senate versions of tax bills.
It’s not all sunshine, yachts and roses for the 1%, either.
“If you’re a high-income taxpayer, you’re going to lose,” says Mainstain.
One of Mainstain’s clients has stock options that will vest next year, incurring some significant state income taxes, which will no longer be deductible on his federal return if the new tax laws are enacted.
“We’re talking a seven-figure difference in his net take-home pay,” says Mainstain.
According to Bell, the new laws will also remove the ability to deduct “activities” to entertain business associates, which is a very popular write-off for many in the industry, including Bell, who pays $30,000 a year for his New York Knicks season tickets. However, 50 percent of the cost of client meals will still be deductible.
Handler says at this point it’s impossible for him or anyone else to know the full extent of the tax reform bills potential impact given their complexity, their haphazard writing-in-the-margins assembly and the need to reconcile the differences between the House and Senate versions.
“What is clear to me is that I’m screwed,” laments Handler. But what concerns him more, he says, is “the movement in the country in the last year away from any investment in inviting people in to establish themselves as future contributors to our culture. This is another step in that direction.”