Unique Tax Issues in the Entertainment Industry
As seen on McCormickTaxGroup.com
We have many clients in the entertainment industry, including professional athletes, actors, authors, etc. Entertainment-related businesses have some specific federal taxation issues that I thought might be an interesting topic to discuss.
Athletes. The nomadic nature of a professional athlete’s job can create complications for tax planners. For example, professional athletes, who are frequently traded from one team to the next, can run into trouble when trying to prove their place of residency for tax purposes. An athlete, like other taxpayers, is subject to tax in the state of his or her residency. However, other states in which the athlete conducts business may tax the athlete as a non-resident (for example, when an athlete plays an away game in another state). Participating in athletic events in a foreign country can further complicate things. Sometimes non-resident taxes can be avoided if, for example, the athlete’s tax home has entered into a reciprocal agreement with another jurisdiction that would otherwise impose non-resident taxes on the athlete. In other cases, the athlete may take a tax credit for non-resident taxes paid to other jurisdictions.
As a general rule, an athlete who works only with a professional team is considered to have that team’s hometown as his tax home. An athlete’s tax home also becomes important when an athlete tries to compute his/her deductible business expenses for travel and lodging. The athlete may not deduct the costs of lodging and meals while in the hometown but may deduct his/her expenses when traveling away from the hometown as part of his employment. When the athlete, for personal reasons, maintains his/her residence at a distance from the team’s hometown, travel between those two locations is nondeductible. An individual athlete who is not connected with a team can deduct travel expenses incurred in travel on temporary assignments. The athlete must demonstrate a permanent residence, a duplication of living expenses while traveling, and return trips to the permanent residence when not working. For example, a golfer playing in a tournament away from home may deduct expenses incurred for laundry, cleaning and transportation.
Authors and royalties. Full-time, professional authors generally are paid through advances and royalties, and frequently they are considered self-employed workers. Therefore, self-employed authors must know how to report their income on their tax returns. First, they are subject to the self-employment tax, which is essentially the employer’s side of the Federal Insurance Contribution Act (FICA) taxes for Social Security and Medicare added to the employee’s side. For the 2013 tax year, for example, a self-employed taxpayer is responsible for a 15.3 percent self-employment tax. This is comprised of a 12.4 percent for Social Security tax on the first $113,700 of net self-employment income and a 2.9 percent Medicare tax. In contrast, a taxpayer who has an employer other than him or herself is responsible only for paying the employee’s side of these taxes (6.2 percent for Social Security and 1.45 percent for Medicare). In addition, authors often receive income from royalties paid in exchange for permission to use their copyrighted property. Royalty income is not considered compensation for services. Nor is it considered capital gains income. Authors who receive income from royalties are generally considered to be engaged in a trade or business and therefore must report them on Schedule C, Profit or Loss from Business.
