Steve Boultbee
Forum Replies Created
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If you wish to rent it to your company (or others) for a fee, then I agree that Nick’s suggestion to run it as a rental activity in a separate entity is a great one.
That way, your ability use the depreciation on the camera equipment and accessories won’t be limited by your income as it would be if you’re just deducting it as an unreimbursed employee expense.
A single-member LLC would likely be the easiest to do. The tax filings are simple as a single-member LLC is disregarded for tax purposes and its income and deductions are reported on your personal return as if the LLC didn’t exist. There may be some minimal state filings but a full-blown separate return for the LLC won’t be required – at least this is the case in California where I am.
Of course, if you do have a separate entity you need to keep a separate bank account and all invoices or purchases should be in the name of the entity. Keeping good books & records is also a must.
As Nick deduced, yes, I am a CPA. I’m making general comments based on what was provided, but make sure to run all ideas by your CPA and/or attorney so that they can give you detailed advice based on the facts of your situation.
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You should be able to write off the business use portion of the purchase price through depreciation (and related provisions).
Where this is reported will determine the tax savings. Are you a W-2 employee with the advertising agency or are you an independent contractor?
If you use the camera for the advertising agency (and are a W-2 employee) and you do not receive any sort of reimbursement for the use of the camera, then the depreciation on the camera gets taken as a miscellaneous itemized deduction for unreimubursed employee business expenses. This, along with any other miscellaneous itemized deductions, is only deductible to the extent that, in aggregate, they exceed 2% of of your adjusted gross income (AGI).
If you are paid as an independent contractor and file a Schedule C, then you’d get a better answer as the depreciation won’t get the 2% of AGI haircut. If you’re doing paid gigs on the side, you’d also be filing a Schedule C and the related depreciation is deductible against that income.
The depreciation can be accelerated by utilizing the Section 179 expense deduction which would allow for full write off in the first year. However, if the business use of the asset ever falls below 50%, then the Sec. 179 deduction must be recaptured (i.e. you pick it up as income).
You can also depreciate the asset over time (likely 5 years), but cameras are arguably what we call “listed property” and are subject to limits on the amount of depreciation allowed per year as well as a business use test similar to the Sec. 179 deduction.
While these are general rules, your specific sitution may result in different treatment.
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Software is a depreciable asset and is normally depreciated over a three year period for tax purposes. Off-the-shelf software qualifies for the Section 179 expense election which allows you to write off the entire amount in the year the software is purchased and placed in service.
The Creative Cloud subscription would be an ongoing business expense. If the cloud subscription costs more over the lenght of time that you normally upgrade the purchased version in, you have to decide if the extra cost is worth it – due to additional flexibility, features, etc. If there isn’t really much difference other than cash flow, it doesn’t make sense to spend an extra $100 to save an extra $35 in taxes.
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[Joel Servetz] “If this was done for a non-profit of any sort (charity, museum, house of worship, school, etc.) than just establish a value for your work and ask them to write you a letter acknowledging your “in-kind” donation of services. That’s your proof of the the value of your donation for tax purposes.”
The value of services rendered is NOT deductible for tax purposes. Any unreimbursed expenses incident to the services rendered would be. However, those expenses would already deductible as ordinary business expenses, so there’s no reason to take the charitable deduction for them where they’d be subject to some limits.
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Provided that this non-profit is a 501(c)(3) organization (any other non-profit will never qualify for charitable deductions), you would be able deduct the lesser of your basis in the property (i.e. your actual costs of production) or the fair market value as a charitable contribution. In your case, the lesser of the two will be the actual production costs.
Now,given that your costs of production are deductible as ordinary business expenses anyway, there’s nothing left to deduct as a charitable contribution.
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It doesn’t cost you anything to get an EIN, but you do need to decide what business structure you’re going to use before applying for one. You can even apply online at the IRS’ website. As was stated above, you’ll definitely need an EIN if you’re going to hire employees (W-2 earnings) or contractors (1099 earnings). You’ll also need to register with the California Employment Development Department to get a state employer number as well.
In California, you can operate as a single-member LLC. This will mean that you don’t have to file a separate federal tax return – all of the business’ taxable income and expense will be reported on your Form 1040, Schedule C (like a sole proprietorship). You will, however, still have to file the CA Form 568 for the LLC which takes care of the state minimum tax and the LLC fee (if applicable). So, there’s a little savings from the tax prep standpoint since there’s no separate federal filing.
If you incorporate, you’ll have to file a full corporate return – federal and state. You also have to choose between a C corp & an S corp, but most likely you’d want to be an S. You’ll also have more operational formalities with a corporation, such has keeping minutes of board meetings, etc.
I’d also suggest that you go to CA’s Secretary of State website and do a business name search so that you don’t decide on a name only to discover that it’s already taken when you file your paperwork. You’ll have to do two searches for each name – one to see if that name is taken by a corporation, and one to see if it’s been taken by a partnership or LLC. Here’s the website: https://kepler.sos.ca.gov/
Definitely sit down with your attorney & CPA so that you can decide what business form to take. Having a business plan with your expected earnings will help quite a bit, so that your CPA can run some numbers to get a good idea which is the best from a tax (and future growth) standpoint, and your attorney can advise you on which is best from a legal standpoint.
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“In-kind” simply means “non-cash” which can be goods or services. However, that doesn’t change the fact that services are not deductible as a charitable contribution, as has been mentioned several times. One previous poster linked to an IRS publication that confirmed this. Its authority is Treasury Regulation §1.170A-1(g):
g) Contributions of services. –No deduction is allowable under section 170 for a contribution of services. However, unreimbursed expenditures made incident to the rendition of services to an organization contributions to which are deductible may constitute a deductible contribution. For example, the cost of a uniform without general utility which is required to be worn in performing donated services is deductible. Similarly, out-of-pocket transportation expenses necessarily incurred in performing donated services are deductible. Reasonable expenditures for meals and lodging necessarily incurred while away from home in the course of performing donated services also are deductible. For the purposes of this paragraph, the phrase “while away from home” has the same meaning as that phrase is used for purposes of section 162 and the regulations thereunder.
Anything you paid for out of pocket to produce these videos for the organization is a possible charitable deduction, subject to the following paragraph.
You mention in your original post that you’re doing this work for your employer who’s a not-for-profit entity. You didn’t mention what type of not-for-profit entity they are. That’s critical to determining whether you have any contributions that are deductible. If your organization is exempt under 501(c)(3), you can deduct contributions made to that organization. If they’re exempt under a different paragraph of 501(c), your contributions will generally not be deductible.
In addition, you’re required to have contemporaneous documentation to support your deductions, regardless of how little they are. The old $250 limit is no more. This could be a letter from the organization, canceled checks, etc. Of course, the organization can’t give you a letter stating that the value of your services is deductible, as that would be erroneous.
I’d recommend that you see if you can get reimbursed by the organization for your out-of-pocket costs. You’re much better off with that than you are with taking a charitable deduction, since the charitable deduction will only get you a tax savings of about 30 – 40 cents for every dollar you spend, depending on your federal and state tax rates.
I’m interested to see what this form is that they asked you to fill out. There are accounting standards that require the organization to recognize donated services as revenue (with a corresponding expense) if those donated services meet certain criteria. Perhaps they’re trying to establish how much your services were worth for that purpose. That still wouldn’t explain why they told you that your services were tax deductible, though.
Hopefully, by establishing a value for the products you produced, you’ll be able to show the organization just how much you saved them by doing this work on your own time. Maybe in the future when they need a similar service, they’ll come to you again and you’ll be able to get some compensation for your time, especially if they’re happy with your work and your rates are less than what they’d have to pay an outside source.
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[Peter Humble] “When my clips appear in the XD cam transfer browser (transfering via USB card reader) it says the Video Format is ‘MPEG HD’ and the bit rate is 35 Mbps however when I import them to FCP the ‘data rate’ column in the browser window reads 4.3 Mbps. Is this of concern?”
The data rate column in FCP is in megabytes (MB) per second whereas the 35 Mbps bitrate of your file is in megabits (Mb) per second. Divide the Mbps by 8 to convert to MB, and you’ll get 4.375, so there’s nothing to be concerned about.
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Read the following Apple KnowledgeBase article for the answer: Maximum memory usage in Final Cut Pro is 2.5 GB
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[Nick Griffin] “Hey Steve, thanks for giving all of us vidiots such in depth and well explained tax info. I’m certain we all hope you’re enjoying the COW and learning a lot.”
You’re certainly welcome. It’s nice to be able to give a little back when I’ve learned a lot from reading the materials on this site. While I’ve been an After Effects user since college (about 10 years), and consider myself pretty familiar with the software, I quickly realize how much I don’t know when I watch the COW’s AE podcast or watch the tutorials on Andrew Kramer’s site, just to name a few.
[Nick Griffin] “As to 1099’s I have one question. While I take very seriously the requirement to send 1099’s out to my sub-contractors (individuals) every year, I’ve been ignoring and not forwarding to my accountants the one and only incomming 1099 I receive from a client.
They are a not for profit trade organization, so maybe they have to send it. Yes? No?
As an S-corp I assumed that it didn’t matter since we were already declaring the income for all of our clients. So… can I continue to ignore the form I’m sent or does it have some relevance to our corporate taxes?”
Generally, payments to corporations are not required to be put on a 1099. While they’re still subject to the 1099 reporting rules (even though their business is not-for-profit), perhaps they’re not aware that they don’t need to issue a 1099 to you. Your business doesn’t appear to be generating the type of payments that do require a 1099 be sent to a corp.
I’d say you are safe to continue ignoring the 1099 from that one entity. Since your total income is greater than the reported income from that one entity, you won’t be in any danger of the IRS sending a matching notice.
The 1099s are important to other types of entities, such as LLCs, partnerships and sole proprietors. In those cases, you need to report at least the amounts reported on the 1099s, even if the 1099s are incorrect, to avoid a notice from the IRS. The tax return preparer would then report the full amount of the 1099 and then on a separate line would adjust the income to the correct amount. We have some clients that this is necessary for – generally what’s happening is the payer is cutting a check just before year end (so their system counts it for generating a 1099), but our client doesn’t receive the check until after the beginning of the next year, so it’s reportable on our client’s tax return in the year of receipt (cash basis client), not the year the check was written. So, we have to report the 1099 and then back out the payment received in the following year. Many times the adjustment isn’t much, since we’re backing out payment received in year 3 for services performed in year 2, but we have to add in the payment received in year 2 for services performed in year 1.