United States » Laws and Regulations » Tax Info for Entertainment Business Types Part-I

Tax Info for Entertainment Business Types Part-I

Laws and Regulations

Tax Tips - Entertainment

Capitalization of Motion Picture, Master Recording, and Video - Entertainment Tax Tips

When a taxpayer produces or creates a product (video, film, recording, etc.), the taxpayer will generally incur a great portion of the expenses before the product is ready to produce income. When this happens, the taxpayer is usually required to capitalize those expenses and recover (deduct) them over the period of time that the product is producing income. Several different provisions apply depending on whether the taxpayer is already in the business and the specific business the taxpayer is in.

Internal Revenue Code Section 195
Expenses for investigating, creating, or acquiring a new business are nondeductible capital expenses. This applies to all expenses before the day the active trade or business begins. These provisions apply to someone starting out in the industry - before offering a completed product for sale, production, or distribution.

IRC Section 263A
These rules apply to people who are already in the trade or business. This code section requires the capitalization of expenses to produce a creative work. The total costs of creating the assets are required to be capitalized. This includes cost of researching, preparing, producing, recording, etc. It also includes an allocation of indirect costs such as utilities, tools, clerical, rental of equipment, etc.

Prior to the enactment of Section 263A, it was unclear what indirect costs were required to be capitalized for tax purposes with regard to self-constructed assets.

  • Most companies do capitalize general and administrative overhead, as well as interest, to be consistent with the Generally Accepted Accounting Principles (GAAP) requirements of SOP 00-2
  • The uniform capitalization rules of Section 263A of the Internal Revenue Code require that certain costs relating to self-constructed assets be capitalized
  • The uniform capitalization rules of Section 263A apply to real and tangible personal property. Section 263A specifically states that these assets are considered tangible personal property for this section

As with any other business venture, if a project is abandoned, the taxpayer can claim a deduction for the unrecovered basis. Abandonment requires that the taxpayer show an intent to abandon and makes an affirmative act of abandonment in such a manner that the asset is not retrievable.

Example One:
Putting a script on the shelf for a while, with the possibility of selling it at a later date, is not abandoning it.

Example Two:
Not attempting to promote a master recording is not abandoning it, since it may still be released in the future.

Business Expenses - Entertainment Tax Tips

Cable TV, Movies and Theatre tickets

Internal Revenue Code section 274 places strict limits on deductions for items which are "generally considered to constitute amusement, entertainment, or recreation." Such items are thus deductible only where there is a clear tie to particular work.

Appearance and Image

Taxpayers in the entertainment industry sometimes may incur expenses to maintain an image. These expenses are frequently related to the individual's appearance in the form of clothing, make-up, and physical fitness. Other expenses in this area include bodyguards and limousines. These are generally found to be personal expenses as the inherently personal nature of the expense and the personal benefit far outweigh any potential business benefit.

No deduction is allowed for wardrobe, general make-up, or hair styles for auditions, job interviews, or "to maintain an image".

Avoiding Problems - Entertainment

Business Expenses Reimbursed By Employer
A reimbursement or allowance arrangement is a system by which you substantiate and pay the advances, reimbursements, and charges for your employees' business expenses. How you report a reimbursement or allowance amount depends on whether you have an accountable or a nonaccountable plan.

These rules apply to all ordinary and necessary employee business expenses that would otherwise qualify for a deduction by the employee.

Accountable Plan
To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules:

  • They must have paid or incurred deductible expenses while performing services as your employees
  • They must adequately account to you for these expenses within a reasonable period of time
  • They must return any amounts in excess of expenses within a reasonable period of time

Amounts paid under an accountable plan are not wages and are not subject to income tax withholding and payment of social security, Medicare, and Federal unemployment (FUTA) taxes.

Nonaccountable Plan
If the expenses covered by the arrangement above are not substantiated, or amounts in excess of expenses are not returned within a reasonable period of time, the amount is treated as paid under a nonaccountable plan.

This amount is subject to income tax withholding and payment of social security, Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period.

Accelerated Depreciation vs. Income Forecast Method
The Internal Revenue Code and Case law requires the use of income forecast or straight line method of depreciation. Refer to the section on Intangible Property in Publication 946 (2007), How To Depreciate Property, for more information

Unless you are a professional bookkeeper, you probably don't like to spend valuable business time keeping records. But keeping good records can actually help you save money.

Why should I keep records?
Good records will help you monitor the progress of your business, prepare your financial statements, identify source of receipts, keep track of deductible expenses, prepare your tax returns, and support items reported on tax returns.

Everyone in business must keep records.  Keeping good records is very important to your business.  Good records will help you do the following:

  • Monitor the progress of your business
  • Prepare your financial statements
  • Identify source of receipts
  • Keep track of deductible expenses
  • Prepare your tax returns
  • Support items reported on tax returns

Monitor the progress of your business
You need good records to monitor the progress of your business. Records can show whether your business is improving, which items are selling, or what changes you need to make.  Good records can increase the likelihood of business success. 

Prepare your financial statements
You need good records to prepare accurate financial statements.  These include income (profit and loss) statements and balance sheets.  These statements can help you in dealing with your bank or creditors and help you manage your business. 

  • An income statement shows the income and expenses of the business for a given period of time.
  • A balance sheet shows the assets, liabilities, and your equity in the business on a given date. 

Identify source of receipts
You will receive money or property from many sources.  Your records can identify the source of your receipts.  You need this information to separate business from nonbusiness receipts and taxable from nontaxable income. 

Keep track of deductible expenses
You may forget expenses when you prepare your tax return, unless you record them when they occur.

Prepare your tax return
You need good records to prepare your tax returns.  These records must support the income, expenses, and credits you report.  Generally, these are the same records you use to monitor your business and prepare your financial statement. 

Support items reported on tax returns
You must keep your business records available at all times for inspection by the IRS.  If the IRS examines any of your tax returns, you may be asked to explain the items reported.  A complete set of records will speed up the examination

What kinds of records should I keep?

You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should also include a summary of your business transactions. This summary is ordinarily made in your business books (for example, accounting journals and ledgers). Your books must show your gross income, as well as your deductions and credits. For most small businesses, the business checkbook is the main source for entries in the business books.

Supporting Business Documents

Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents such as invoices and receipts. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. These documents contain the information you need to record in your books. It is important to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense. For more detailed information refer to Publication 583,  Starting a Business and Keeping Records.

The following are some of the types of records you should keep:

  • Gross receipts are the income you receive from your business. You should keep supporting documents that show the amounts and sources of your gross receipts. Documents for gross receipts include the following:

    • Cash register tapes
    • Bank deposit slips
    • Receipt books
    • Invoices
    • Credit card charge slips
    • Forms 1099-MISC

  • Purchases are the items you buy and resell to customers. If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into finished products. Your supporting documents should show the amount paid and that the amount was for purchases. Documents for purchases include the following:

    • Canceled checks
    • Cash register tape receipts
    • Credit card sales slips
    • Invoices

  • Expenses are the costs you incur (other than purchases) to carry on your business. Your supporting documents should show the amount paid and that the amount was for a business expense. Documents for expenses include the following:

    • Canceled checks
    • Cash register tapes
    • Account statements
    • Credit card sales slips
    • Invoices
    • Petty cash slips for small cash payments

  • Travel, Transportation, Entertainment, and Gift Expenses
    If you deduct travel, entertainment, gift or transportation expenses, you must be able to prove (substantiate) certain elements of expenses.  For additional information on how to prove certain business expenses, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.
  • Assets are the property, such as machinery and furniture, that you own and use in your business. You must keep records to verify certain information about your business assets. You need records to compute the annual depreciation and the gain or loss when you sell the assets. Documents for assets include the following:

    • When and how you acquired the assets.
    • Purchase price
    • Cost of any improvements.
    • Section 179 deduction taken.
    • Deductions taken for depreciation.
    • Deductions taken for casualty losses, such as losses resulting from fires or storms.
    • How you used the asset.
      When and how you disposed of the asset.
    • Selling price.
    • Expenses of sale.

    The following documents may show this information.

    • Purchase and sales invoices.
    • Real estate closing statements.
    • Canceled checks.

How long should I keep records?
The length of time you should keep a document depends on the action, expense, or event the document records. Generally, you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return runs out.

The period of limitations is the period of time in which you can amend your tax return to claim a credit or refund, or that the IRS can assess additional tax. The below information contains the periods of limitations that apply to income tax returns. Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.

  1. You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
  2. You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
  3. You file a fraudulent return; keep records indefinitely.
  4. You do not file a return; keep records indefinitely.
  5. You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
  6. You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
  7. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

Are the records connected to assets?
Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition.  You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.

What should I do with my records for nontax purposes?
When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes.  For example, your insurance company or creditors may require you to keep them longer than the IRS does.

How long should I keep employment tax records?
You must keep all of your records as long as they may be neededKeep all records of employment taxes for at least four years after filing the 4th quarter for the year. These should be available for IRS review. Records should include:

  • Your employer identification number.
  • Amounts and dates of all wage, annuity, and pension payments.
  • Amounts of tips reported.
  • The fair market value of in-kind wages paid.
  • Names, addresses, social security numbers, and occupations of employees and recipients.
  • Any employee copies of Form W-2 that were returned to you as undeliverable.
  • Dates of employment.
  • Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third-party payers made to them.
  • Copies of employees' and recipients' income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V).
  • Dates and amounts of tax deposits you made.
  • Copies of returns filed.
  • Records of allocated tips.
  • Records of fringe benefits provided, including substantiation.

How should I record my business transactions?
Purchases, sales, payroll, and other transactions you have in your business generate supporting documents. These documents contain information you need to record in your books.

A good recordkeeping system includes a summary of your business transactions.  Business transactions are ordinarily summarized in books called journals and ledgers.  You can buy them at your local stationery or office supply store. 

A journal is a book where you record each business transaction shown on your supporting documents.  You may have to keep separate journals for transactions that occur frequently.

A ledger is a book that contains the totals from all of your journals.  It is organized into different accounts. 

Whether you keep journals and ledgers and how you keep them depends on the type of business you are in.  For example, a recordkeeping system for a small business might include the following items. 

  • Business checkbook
  • Daily summary of cash receipts
  • Monthly summary of cash receipts
  • Check disbursements journal
  • Depreciation worksheet
  • Employee compensation records

What is the burden of proof?

The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them. Generally, taxpayers meet their burden of proof by having the information and receipts (where needed) for the expenses. You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Additional evidence is required for travel, entertainment, gifts, and auto expenses.

Understanding Your IRS Notice
We realize that receiving a notice from the IRS can be unnerving, but if you follow these simple steps, the process to resolving the discrepancy should be straightforward.

Do you need to see what an IRS notice or letter says, but don't have it in front of you? If you know the notice number, you can look up its purpose, basic message, possible enclosures, and other useful details. And if you have the tear-off stub from the last page, you can use the information printed on it to see some of the variable content included in that notice.

How To Identify Your Notice
The notice number prints on the top of the first page of all our notices and on the lower left-hand side of the tear-off stub included with most of them. That number identifies the message we deliver in every notice. While the contents may vary somewhat, every notice with the same number has the same basic purpose.

Understanding Your Notice or Letter

CP or Letter Number Title
CP 11 Changes to Tax Return, Balance Due
CP 11A Changes to Tax Return and Earned Income Credit, Balance Due
CP 12 Changes to Tax Return, Overpayment
CP 14 Balance Due
CP 21B Data Processing Adjustment Notice, Overpayment of $1 or more
CP 22A Data Processing Adjustment Notice, Bal Due of $5 or more, Balance Due
CP 22E Examination Adjustment Notice, Balance Due
CP 23 Estimated Tax Discrepancy, Balance Due
CP 49 Overpaid Tax Applied to Other Taxes You Owe
CP 57 Notice of Insufficient Funds
CP 88 Delinquent Return Refund Hold
CP 90/CP 297 Final Notice - Notice of Intent to Levy and Notice of Your Right to a Hearing
CP 297A Notice of Levy and Notice of Your Right to a Hearing
CP 91/CP 298 Final Notice Before Levy on Social Security Benefits
CP 161 Request for Payment or Notice of Unpaid Balance, Balance Due
CP 501 Reminder Notice - Balance Due
CP 503 Second Request Notice - Balance Due
CP 504 Final Notice - Balance Due
CP 521 Installment Agreement Reminder Notice
CP 523 Notice of Default on Installment Agreement
CP 2000 Notice of Proposed Adjustment for Underpayment/Overpayment
Letter 0484C Collection Information Statement Requested (Form 433F/433D); Inability to Pay/Transfer
Letter 0549C Balance Due on Account is Paid
Letter 668D(LP 68) We released the taxpayer's levy.
Letter 0681C Proposal to Pay Accepted
Letter 0757C Installment Privilege Terminated
Letter 1058 (LT 11) Final Notice prior to levy; your right to a hearing
Letter 1615 (LT 18) Mail us your overdue tax returns.
Letter 1731 (LP 64) Please help us locate a taxpayer.
Letter 1737 (LT 27) Please complete and site Form 433F, Collection Information Statement.
Letter 1961C Installment Agreement for Direct Debit 433-G
Letter 1962C Installment Agreement Reply to Taxpayer
Letter 2050 (LT 16) Please call us about your overdue taxes or tax return.
Letter 2257C Balance Due Total to Taxpayer
Letter 2271C Installment Agreement for Direct Debit Revisions
Letter 2272C Installment Agreement Cannot be Considered
Letter 2273C Installment Agreement Accepted: Terms Explained
Letter 2318C Installment Agreement: Payroll Deduction (F2159) Incomplete
Letter 2357C Abatement of Penalties and Interest
Letter 2603C Installment Agreement Accepted - Notice of Federal Tax Lien Will be Filed
Letter 2604C Pre-assessed Installment Agreement
Letter 2761C Request for Combat Zone Service Dates
Letter 2789C Taxpayer Response to Reminder of Balance Due
Letter 2822C VRU Acceptance of Proposal to Pay (30,60,90, 120 days)
Letter 2823C VRU Monthly Payment Plan Confirmation
Letter 2840C CC IAPND Installment Agreement Confirmation
Letter 3030C Balance Due Explained:Tax/Interest Not Paid
Letter 3127C Revision to Installment Agreement
Letter 3217C Installment Agreement Accepted: Terms Explained
Letter 3228 (LT 39) Reminder notice.
Letter 4903 (LT 26) We have no record of receiving your tax returns.
Letter LP 47 Address Information Request
Letter LP 59 Please contact us about the taxpayer levy.

What If My Notice Isn't Listed

You'll find useful information here about many of the notices we send, including the purpose of the notice, the reason we send it, and a list of enclosures we might include with it. There's also sample content for each. Since parts of our notices vary depending on account conditions, the samples may not exactly match the notices we mail. The basic message, though, will be the same.

Share This Page With Your Social Networks

Other Articles Related To Laws and Regulations

Quick Navigation

Tax Info for Entertainment Business Types Part-I