Odd that.
I don’t want to bitch (too much) about my dean, but it’s mostly cluelessness and general university policy to look for ways to avoid giving out unnecessary raises. They all (administration) understand how long books take to write (99% are former academics themselves), so they figure that “unproductive” years are a good way to keep costs down. In the long run, they’re discouraging books and encouraging the writing of articles, which is stupid but it takes young faculty a while (me, a few years) to figure out ways to game the system. Once I figured it out, I was riding high, tossing off a few articles every year, and taking five years to complete my books rather than the three or four it would have taken if I worked on the books alone. They make up the rules, so I had to outwit them, not complain that their rules didn’t make a shred of sense.
But back to my fictional Mike White. Isn’t the IRS discouraging artists’ productivity by rejecting the simple and obvious premise that sometimes research and experimentation that leads eventually to income-producing work often takes a while to complete? To simplify, imagine an author like, oh, James Michener who wrote these long, intricate books on various locations around the world (I never read Michener) that might have taken 5 years to research properly but resulted in a big bestseller every five years. Some artists work slowly but that doesn’t mean they’re not working their asses down to a nubbin. Why should Michener’s receipts for expenses (traveling to these exotic locales) be usable only in the year he earned income? How do people with irregular incomes deal with this problem? Maybe Michener arranged for his publisher to pay him in increments, $20,000 annually rather than a $100,000 advance in Year One and then royalties in Year Five? Could he have deducted research expenses incurred for Book Number Two while he was collecting royalties on Book Number One? Or would the IRS question why he was deducting expenses for a trip to Hawai’i when he hadn’t written a book on Hawai’i yet? “What does an expensive trip to Hawai’i have to do with your last income-producing book on Greece, Jim-boy?”
I suppose the IRS (and university admins) are just seeking to prevent lazy jagoffs from claiming falsely that they’re hard at work but actually they’re just living the high life and accumulating receipts to reduce their income to untaxably low levels.
In other words, I can see where a guy like Mike White could legitimately claim that he’s always at work, investigating luxury hotels around the world, and every few years this work results in a lucrative TV series about luxury hotels around the world. I imagine the tax accountants in Hollywood have found clever ways to game the system so don’t cry for Mike White, Argentina—maybe this question is more for less successful artists who nevertheless have high expenses in years when they can’t show any immediate results. Without clever accountants, such folks are pretty much screwed.
Again, you can’t deduct expenses except against revenue. Which means that properly a real business accrues the expenses in this year and offsets them against future revenues in some future year. If the revenues happen, the expenses were probably legit and properly deductible. Net of a relevance test; in this case did the luxo vacation in location A at resort chain B result in a subsequent sold episode about either A or B? if so, legit. if not, not.
If the revenues never happen at all, neither do the deductions.
Does anyone actually believe that Mike White is employed by or receives money directly from The White Lotus production budget.
He is listed as the Principal of Rip Cord Productions, one of the companies listed as producing The White Lotus. More likely, Rip Cord Productions receives revenue from The White Lotus and pays its employees in various ingenious ways to minimize the Principal’s taxes, as well as reimbursing the Principal for any expenses associated with his job.
While Mike White is “only” worth about $10M, his income is in the realm where it id almost certainly configured to minimize tax burden.
Good point. I imagine such a setup eliminates the basis of my OP.
I came up with another example, maybe a better one: Robert Caro, who’s been working on his multi- volume LBJ bio for decades, producing a new installment about one every eight years.
Absent any fancy accounting tricks, like setting up some corporation called LBJ enterprises paying Caro a regular salary, would he get away with telling the IRS “I work like a dog for seven years, researching LBJ’s life, spendjng much more than i earn, and in the 8th year i produce a big bestseller. Please allow all my deductions to count against the miserable income i make during my non- productive years”?
If he’s incorporated, that is bog standard correct and legal accounting.
If he is not, that’s illegal and won’t work at all.
A lot of the rules are set up to disallow tax deductions for the richer folk to indulge in their hobbies and have taxpayers subsidize them. If your marginal tax rate is 40% and your hobby is pottery, then being allowed to deduct your expensive kiln against an engineer’s salary (let’s pick on Engineers) would mean the taxpayers bought 40% of that kiln. Hence the requirement that the expenses are charged against the particular business you run. If you didn’t sell enough pottery so that the profit covers the cost of the kiln, then it really isn’t a business. Same goes for the aircraft for your skywriting business, or the computer server installation for your consulting business, or the fancy sewing machines for your… etc.etc.
One of the typical targets I remember like this from the news was the “hobby farm”. There were so many loopholes to try and support the family farm, that some people would have a few acres being “farmed” to claim the assorted deductions that came with operating a farm. For every rule, there’s a reason why it’s there - even if it’s now obsolete.
I’m reminded of Balzac’s adage "the law is a net that catches all the little flies but sets the big flies free. "
If i can afford to incorporate , it seems i can get away with all sorts of stuff that the IRS will nail me for as an unincorporated person. I mean, the same exact stuff
Not really. You xan incorporate for a coupke hundred $.
What you’re fussing about is people running a business vetsus not people not running a business.
“Deductions” aren’t about stuff that’s magic.
I discussed incorporating once with my accountant (a very clever and inventive high powered CPA who took me on as a client because we were close personal friends–otherwise, her clientele were all high-powered multi-millionaires.) She discouraged me from incorporating–More trouble than it was worth, she said (presumably for my piddling six-figure income, much of which was salaried.) You know, I assume, that corporate high muckity-mucks routinely deduct all sorts of shit–meals, personal appearance stuff, wings of their houses that serve as “offices,” car expenses, and so on–that are 100% personal in all but their official designation for the IRS, and the IRS doesn’t blink at this practice.
I’m 99% sure that it was discouraged because the income was mostly salaried. Corporations don’t get salaries and they aren’t employees. Let’s say for example, I’m an electrician employed by a large apartment complex and I receive salary/wages. In addition to that I have a side business doing private jobs. The expenses associated with the private jobs can only be deducted from the income from those private jobs , although I might be able to deduct this years expenses form future revenue. If I only earn a couple thousand a year in the side business , it might not be worth incorporating for tax reasons.
Now that building complex could decide to hire my business to provide services rather than hiring an employee - but that has certain disadvantages to the complex.. For example, maybe my business has so much work, I can’t get to them until next week.
The obvious solution is for Mike White to set up a church dedicated to the worship of Dionysus.
Serious question: why wouldn’t the production company treat these “research” trips as R&D expenses which can indeed offset current revenue? There is no requirement that R&D work ever makes it into a revenue generating product.
Realistic scenario: if Mike White called up any luxury resort (especially a Four Seasons as were used in the first three White Lotus seasons) and said he was thinking af setting a series there how many places wouldn’t put him up gratis? Travel agents (at least get used to) get all sorts of free trips and cruises in order to encourage them to book clients there.
@GailForce: As @Doreen said. If you have a business, it often makes tax sense to incorporate. If you have a job, it almost never does. How much you earn in that job does not matter.
Actually, I know there are lots of rumors to that effect. Most of which are both false and obsolete.
Most of those deductions (properly termed Employee Business Expenses taken on Form 2106) were abolished by trump as part of paying for his 2019 tax changes which slashed taxes on billionaires, gave Joe Sixpack a hundred dollar cut, relabeled the “personal exemption” as part of the “standard deduction” making it seem like that had been increased when it had not, and most of all handed the entire bill to people making between about $200K & $5M mostly in salary. Those people got hammered. I was one of them.
And yes, Form 2106 was a hotbed of cheating. Not anymore since it no longer exists.
That the seriously wealthy have ways to minimize tax is no secret. Likewise owners of businesses that make millions in profit per year, not just thousands or tens of thousands.
F2106 was not that. The largest way the ownership people get away with it is simply putting fantasy numbers on the forms, secure in the knowledge that for decades now IRS has been instructed to only audit returns of the little people.
Either pre- or especially post-trump, do not confuse what the laws / regulations say with how they are enforced. Those are different questions requiring different answers. Be clear about what you’re asking and answering.
If what you really want to do is rant about inequality in tax treatment, IMO FQ is not the place for that.
Definitely not interested in ranting, just seeking clarity in which policies are carefully considered and which are more arbitrary in nature.
And actually I feel FQ is a good place for this inquiry, if only because the information you just provided about Form 2106 was very much to the point. My last conversation about incorporating took place maybe a decade ago with my accountant, and I’ve since retired, making moot any tax advantages I might want to seek. I can do my taxes now on the back of an envelope, but now I am remembering one part of those conversations about incorporating in the early 2010s. I think my accountant/friend told me that incorporating to take advantage of breaks my freelance business might earn wasn’t worth it to her–in the event of an audit, she would have to do a lot of extra work on my behalf that she did for her big-money clients but she didn’t want to do for me because I wasn’t paying her much for her services. (Basically, I took her out for a nice dinner in some top-end NYC restaurant.) She said I’d do almost as well to put my freelance expenses on to Schedule C and skip the whole incorporation business. But she didn’t tell me that I was wrong in seeking to be treated like a multi-million dollar business–I just needed to be making five times as much as I was earning as a freelance writer to make it worth her while. And now thanks to you, I understand that even that route is no longer viable.
Happy to help and I apologize for the hostile tone I took at the end there.
As an aside, I always thought that the primary purpose for incorporating a single person business such as a freelancer was to shield your personal assets from liabilities of the corporation, not for tax purposes.
Can be both. The liability shield is not nearly as impenetrable as folks would like to believe it is. And the smaller and more single-person the business is, the flimsier the liability shield.
OTOH, the tax benefits are real. IF you have the sort of business that the OP posited: one that has wildly varying income year to year, but needs constant investment for those occasional payoffs from your multi-year effort. Accrual basis accounting makes it easy to match up expenses and revenues across years; cash basis accounting makes it all but impossible. Individual taxpayers are pretty much required to use cash basis accounting. LLCs & subchapter C corporations can opt for accrual basis accounting.
Subchapter S corps are by definition cash basis accounting pass-through entities and are effectively transparent to the IRS. Any taxes owed are owed by the owner(s) as individuals.
The CEO of one of the companies I worked for had a helicopter, a helicopter pilot, a city crash pad and a personal chef to make his commute from his island home more tolerable (actually even feasible). All paid for by the company.
A year after he left, the state and then federal tax authorities imputed all those costs as compensation to the CEO. Of course, the company paid all the additional tax assessed.
I always thought that being a travel writer or a painter who does landscapes of foreign cities would be a great job. But I was assuming that you could deduct some/most of your travel expenses.
I’d assume Rick Steves could deduct a lot… even if he takes a holiday where he’s not taping for PBS, he can’t help but be checking out whatever city he’s in for a future show.
You can. … If it’s an ongoing business.
The OP’s strawman was he never earns another penny from making new shows. He just claims he’s going to sell one eventually with no actual intent to do so. Meanwhile deducting his ongoing fully recreational travel expenses from his taxes every year. That strawman is BS; that isn’t legal as much as people might wish it was (for them).