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Q: Tax Advice ( No Answer,   5 Comments )
Subject: Tax Advice
Category: Business and Money > Accounting
Asked by: monster1-ga
List Price: $50.00
Posted: 21 Oct 2006 15:37 PDT
Expires: 22 Oct 2006 17:24 PDT
Question ID: 775663
I represent a teen actress making $200,000 a year part time. Let's
assume we set her up as a sub S corporation in CA. I would like a
detailed report on all tax deductions available including; manager
15%, agent 10%, retirement, education, housing at the set, etc. What
should her draw be and what dollars would go where to maximize her
income and minimize tax payments?

Clarification of Question by monster1-ga on 21 Oct 2006 16:18 PDT
Is money deducted for a Coogan account taxable now or can it be set up defered
until dispersed at 18?

Clarification of Question by monster1-ga on 22 Oct 2006 08:13 PDT
I really appreciate your comments abezon! There are two things I am
attempting to show.
First, what the optimum tax benefit under a sub S would be with making
assumptions for the variables, assigning them reasonable numbers,
versus a W-2.
Second, the net cost of paying a manager 15% versus 10% since it is a
deduction if sub-S, thus the government is paying part of it.

Clarification of Question by monster1-ga on 22 Oct 2006 16:39 PDT
That was great and it is just the answer I am looking for! I would
like to pay for this now but it is posted as a comment. Can you repost
as an answer?
Thank you again.
There is no answer at this time.

Subject: Re: Tax Advice
From: abezon-ga on 21 Oct 2006 21:57 PDT
There's no way you can get specific answers for this situation, as
there are too many unspecified variables. Some general guidelines are:

The S-corp can write off all "ordinary & necessary" expenses. 
Ordinary & necessary means 'helpful & not unheard of in the industry'.
These would include: management fees, agent fees, union dues, acting
lessons, temporary housing expenses for jobs away from home lasting
less than 1 year, travel to & from jobsites/auditions (home to hotel,
hotel to set), household workers/driver away from home, tips, laundry,
tutors, etc. You could probably write off some of a laptop
computer/internet if she needs it to do remote schooling. If the item
makes her working life easier, it's probably deductible. You cannot
deduct clothing unless the clothes are not suitable to street wear.
The fact that she has to look nice for the TeenPeople photo shoot is
irrelevant. I don't care what other actors are writing off, clothes
are rarely deductible. :)  Have her get 2 cell phones: 1 for personal
use at home & one for use on the set & when travelling. She can write
off the travel phone.

She can deduct a per diem amount for meal expenses while away from
home, or can write off actual meal expenses, whichever is larger. She
can also write off entertainment expenses if she pays for a business
meal with a prospective director/producer. Careful records of dates &
places are required for per diem; receipts for actual expenses. Note:
it's better for her if others pick up the tab than if she pays & takes
the write-off. Advise her not to fight for the check.

Since this is an S-corp, she needs to take a salary (not a draw).  If
she's in the US, she'll have the corp file & pay employment taxes at
least quarterly. (Forms 940 & 941) If she's working in Canada, she'll
also have quarterly Canadian taxes. [Ask around the set for a good
CGA.] If she works in one state but officially resides in another
state, she'll have quarterly state payments for both states.

You mentioned Coogan accounts, so I expect she's working in CA or NY.
A quick glance through the statutes didn't indicate that money
deposited into a Coogan account was tax deferred. They appear to be
standard trusts -- contributions are post-tax dollars; the trust files
a tax return every year & someone pays taxes on any income earned
within the trust.

Have I convinced you that she needs a good accountant yet?  ;)  The
tax pro fees are also deductible.

Tax savings:  Setting the s-corp salary is an art. S-corp officers
must pay themselves a "reasonable" salary. A lower salary means less
of her income is subject to employment taxes ( flat 15.3%). All income
is subject to income taxes (5-35% in addition to employment taxes). I
wouldn't try to set the salary any lower than the industry minimum
daily rates for the type of work she does. You should consult a tax
pro with entertainment S-corp experience in the area when setting her
salary, since a salary that's too low gets her audited & fined, & a
salary that's too high makes her pay too much social security &
medicare taxes. It's possible that the union minimum daily rates would
be considered a "reasonable" salary. The s-corp reports the annual
salary to her on a form W-2; the remaining profit shows up on her K-1
from the S-corp.

Although a Coogan account won't let her defer taxation on her income,
a retirement account may. I strongly suggest you & she get together
with a financial planner & set up a retirement plan (solo 401k, Roth
401k [best long-term], SEP-IRA, SIMPLE, etc). Divert as much of her
salary as possible to the retirment plan, keeping in mind her cash
flow needs between now & retirment. If she maxes out her retirment
contributions now & never withdraws $$ until retirement age, she could
have her retirment fully funded before she's 18. It's amazing what 50
year of compounding returns can do for a bottom line!

A retirment fund is also much harder for her to spend on a whim. Talk
to the financial planner about whether a pre-tax plan or a Roth 401k
is better. It might be better to use a pretax plan in years when she
works & use the non-working years as years to convert the pre-tax
plans to Roth IRAs. If the financial planner you talk to doesn't seem
to have a comprehensive multi-year plan, talk to some more planners!
The answer will of course depend on her expected income pattern. Is
this work a movie or a 5-year series contract?

You may also want to consider a non-Coogan trust. She can start
spending the Coogan account money when she turns 18. Did you spend
money wisely when you were 18? A second trust that she can't touch
until a later age and/or to pay for school might be a good safety
measure in case it takes her a while to get over any binge spending
tendencies. The investment options for a second trust are also greater
than for a Coogan trust. Your financial planner could be a bit less
conservative with the second trust's investment strategy.

One note for the parents -- there's a good chance they will not be
able to claim her as a dependent (depends on how much she saves & how
much she spends), but they could still claim her for earned income
credit if their income is low enough.

Hope this gave you a basic framework to use when you start talking to
professional accountants/tax professionals/financial gurus.
Subject: Re: Tax Advice
From: abezon-ga on 22 Oct 2006 15:57 PDT
I really appreciate your comments abezon! There are two things I am
attempting to show.
First, what the optimum tax benefit under a sub S would be with making
assumptions for the variables, assigning them reasonable numbers,
versus a W-2.
??? A W-2 from whom? The production company or the S-corp? If the
production company puts all compensation on a W-2, the actor must
declare all the income on line 7 of her 1040 as wages, then deduct
employment expenses on Schedule A. This means that the first $9,000 of
expenses essentially would be non-deductible. [miscellaneous
employment-related deductions are reduced by 2% of AGI ($4,000), &
then she has to exceed the standard deduction of $5,000 before
anything is deductible.]

OTOH, if the production company sends the S-corp a 1099-MISC, the
S-corp writes off all the same expenses, but does not have to reduce
those expenses by 2% of AGI. The S-corp then sends the actor a W-2 for
$xx,xxx, & expenses that salary & the employer's 1/2 of social
security/medicare/FUTA. The total expenses are the same whether they
are reported on the S-corp's 1120S or the actor's Schedule A/Form
2106. Thus, using an S-corp allows the actor to receive the full
benefit of her expenses & not lose the first $4,000 of expenses. In
the 28% tax bracket, that's worth $1,120 less taxes. Furthermore, the
actor is only paying employment taxes on the S-corp W-2 salary, not on
the entire net profit.

The absolute worst scenario is if the production company 1099s the
actor directly. Then she pays employment taxes on the entire net
profit. I'm going to assume $200,000 income & $70,000 of expenses
(fees, union dues, lessons). The expenses are the same no matter which
structure she chooses. I've used the 2007 tax rates.

A. Production Co W-2: AGI = $200,000. Net check after FICA is
$191,520. Sch. A deductions = $70,000 - $4,000 = $66,000. Taxable
income = $134,000. 2006 Tax = $31,852. Required Coogan contribution =
$30,000. In pocket cash after expenses & taxes = $191,520 - 70,000
expenses - 30,000 Coogan - 31,852 tax = 59,668. (The production
company paid $8,480 of her FICA.)

C. 1099-MISC to actor directly: $200,000 income on Sch.C, net profit =
$130,000. AGI = $120,816. Taxable income = $115,666. Income tax =
$26,718; self employment taxes = $18,368. Total taxes = $45,086. Net
in pocket = $130,000 - 30,000 Coogan - 45,086 taxes = 54,914.

S. 1099-MISC to S-corp: Assume wages = $50,000; $46,175 after FICA.
S-corp's net income = $200,000 - 70,000 expense - 50,000 wages - 1/2
employment taxes/FUTA = $71,916. Actor's AGI = $50,000 + 71,916 =
$121,916. Taxable income = $116,765. Income tax = $27,026, no
employment taxes. Net cash in pocket = $46,175 W-2 + 71,916 S-corp -
30,000 Coogan - $27,026 taxes = $61,065.

Now to get really fancy....
I. Same as C., with $10,000 to SIMPLE IRA: Gross wages = $50,000,
taxable wages = $40,000. Net after IRA/FICA = $36,175. S-corp net
income = $71,916 - 1,500 (SIMPLE IRA employer contribution) = $70,416.
Actor's AGI = $40,000 + 70,416 = $110,416. Tax = $23,806. Net cash in
pocket = $36,175 + 70,416 - 30,000 Coogan - 23,806 taxes = 52,785. She
also has $11,500 in an IRA for total assets of $64,285. Not that
earnings within the IRA grow tax-deferred.

Due to her age, the only retirement plans she can have are SIMPLE IRA
& SEP-IRA (self-employed). She may also qualify for a Roth IRA if her
net income is under $115,000.

See why your accountant is gonna earn that princely fee? 

Second, the net cost of paying a manager 15% versus 10% since it is a
deduction if sub-S, thus the government is paying part of it. 

I don't really understand the question. The manager's fee is a
deduction in all scenarios. The only difference is whether the
manager's fee is deducted on the S-corp's return, the actor's Schedule
C, or the actor's Schedule A. See scenarios S, C, & A above for how
that affects the bottom line.

In general, it's better to pay the manager $20,000 than to pay him/her
$30,000. Actor is in the 28% tax bracket, so increasing her manager's
fee by $10,000 would lower her income taxes by $2,800 (& maybe
employment taxes by $1,530), but that's still $5,670-7,200 less in her
pocket. Is the manager a professional manager or a parent? If it's a
single parent with no other income, they might want to set the
manager's fee at $15,000, so the parent gets earned income credit on
his/her return. If the parent(s) have other income, set the management
fee low enough that they don't get pushed up into a higher tax
bracket. However, anything paid to the parents as a management fee is
their money, not the actor's.

If your client is the actor, you may have an ethical/fiduciary
obligation to maximize the actor's net income/assets at the expense of
the manager/parents.
Subject: Re: Tax Advice
From: monster1-ga on 22 Oct 2006 17:04 PDT
Please post as an answer, it is more than I could expect and thank you.
Subject: Re: Tax Advice
From: cynthia-ga on 22 Oct 2006 17:13 PDT

Abenon is a registered user and NOT an authorized Researcher, so you
have received your answer for free. You can tell the difference
because his name is not "clickable." Posting contact information (even
emails) is not allowed at Google Answers, so I suggest you tell Abezon
a warm THANK YOU!! and close the question.

Welcome to Google Answers!

Subject: Re: Tax Advice
From: monster1-ga on 22 Oct 2006 17:23 PDT
Sorry about my misunderstanding, I didn't realize there was a difference.
Now I know and I will close my question.

Thank you for your comments. They have been more than helpful.

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