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"Look, I Can Play With the Big Kids."

by Greg Mermel, C.P.A.

Published in the "Money and Taxes" column in PerformInk on July 18, 2008

I can always say that I can tell when the summer doldrums hit Wall Street, just by counting the number of telemarketing "cold calls" I get from stockbrokers. So perhaps some sort of lull has hit the legal profession; in the last few weeks, several actors have called me to say that their lawyers were urging them to incorporate. Did I agree? Was this a good idea? Inquiring minds wanted to know!

"Well," I tell them, "I can say without any fear of contradiction that the absolute right answer is 'maybe, depending on the circumstances.'" This is not what they wanted to hear. "I'd need to know a lot more about how much you're expecting to make over the next few years, where you're going to be making it, what kind of expenses you are going to have, and how patient you are with formalities and complexity." They like the expanded answer even less: they wanted a multiple choice exam, and instead they got an essay question.

Unreasonable Reasons.

Obviously, you don't incorporate because your lawyer wants to make some money. And the notion pushed by one lawyer that "the Hollywood studios don't like to bother with tax withholding" is laughable.

Incorporating will also not give you any prestige. It won't mark your status in the business, prove that you are a professional or enhance the likelihood of your getting cast. It might impress your family, and you'd love to fling it in the face of that b- - - - who beat you out for the part of Guinevere in that high school production of Camelot -- except you don't know where she is but the last you heard she was divorced with four kids and weighed 290 pounds.

But I digress.

You incorporate for one reason: money. And that reason has three sub parts. First, in some rare circumstances, you might not be hired unless you are incorporated. Second, incorporating might cut the risk of you losing money by limiting your liability. Last, it might save you money by reducing your taxes.

I've only encountered the hiring restriction scenario in academia or Europe. One client of mine was told that, for a German theater to bring him back for a fourth season, he had to either (a) become a German citizen and take a civil service exam, or (b) incorporate so they could engage his company as a consultant. He incorporated.

If fear of this scenario is your only reason for incorporating, wait. You have ample time to create a corporation if and when it is needed.

Running Red Lights.

Liability protection is an important reason for incorporating. A corporation, legally, is a synthetic person, and is responsible for its own actions. Its owners have no liability for the corporation's debts or actions, with a few exceptions. For big public companies, where the owners don't directly run the company, this is vital; such companies may have hundreds of lawsuits pending at any time.

An incorporated actor, however, is both the owner of his company and an employee of it. A corporation has the primary responsibility for the actions of its employees, but not total.

Suppose that, en route to a location shoot, you are distracted by dialing your cell phone and run an SUV full of paparazzi off the edge of a cliff. You may have performed a public service; however, your personal liability protection is diminished because you and your company are both financially liable to the victims.

The Big One.

The primary reason for incorporating is to save money on your taxes. All the others are secondary.

Despite what you may have heard, being incorporated does not change what is deductible. You still can't write off 100 percent of your expenses or any of the cost for your personal trainer. All the rules about keeping records still apply. (Sorry to disappoint you.) But what a corporation can do is give you greater tax savings from the deductions you do have.

If you are employed directly by the theatre/studio/production company, your business expenses are deductible only to the extent they are more than 2 percent of your income, and only as itemized deductions. Particularly if you don't have other substantial itemized deductions (such as home mortgage interest), you could get no tax benefit from thousands of dollars of theoretically deductible expenses.

Worse, there's the alternative minimum tax. AMT has arcane and complex rules, designed to severely limit the tax benefit "high-income" taxpayers receive from certain tax breaks, including employee business expenses. ("High-income" is in quotes, because the threshold dollar amounts haven't changed since the early 1960s; after nearly forty years of inflation, "above-average-income" taxpayers is closer to reality.)

But if you are incorporated, the theatre/studio/production company pays your corporation for your services. Your business expenses become those of the corporation and are fully deductible. Your salary is smaller since it has to come from what's left after paying the expenses, and your taxes are less.

Having a corporation, however, also costs money. You pay some payroll taxes that the theatre/studio/production company would otherwise pay. Your lawyer will charge you for creating the corporation (and so will the State of Illinois). Your accountant is going to charge you for calculating and processing payroll, and for doing payroll tax returns four times a year and corporation income tax returns once a year. You need to be sure there are savings left after absorbing all these costs, and that they are worth the effort.

And you yourself have to make an effort. Some legal niceties have to be carefully observed and consistently followed to ensure that the IRS will regard the corporation as a valid business and not merely a tax sham. If you're not willing to spend the time and follow the rules, don't bother incorporating.

Free Offer

Every year during the income tax season, I offer free copies of my “Checklist of Potential Deductions...” for those in the arts. Just call my office, or send an email to checklist@gregmermel.com.

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