Sunday, February 20, 2005

Documents to give CPAs

Before we dive into this, let's clarify the "hobby" status problem. There are lots of urban myths about how many years in a row a person can claim to lose money on their freelance photo biz. If someone is a working professional PJ (freelance or staff), don't worry about this. The hobby exclusion is for people who are seriously playing with numbers.

If a PJ is a staffer, they are making money from the same biz on one part of the form and losing money on another part. It's an understood part of the profession. Don't lose money twice (expenses plus paying too much tax) because a relative got in trouble for claiming a worm farm was a loss for 10 years in a row. Pro PJs get the deductions every year they make any income with the profession.

I promise the government won't mind taking income taxes from stock photo profits in a few years. They can handle the cost of making those images now. Let the certified public accountant (CPA) handle the paperwork.

Why hire a CPA?
How to choose a CPA
What to give CPAs?
What are photo-related expenses?
How long to keep records

Why hire a CPA?
We've already discussed how PJs should keep records throughout the year. Some PJs try to "go it alone" with taxes. I suggest against it. CPAs know their profession, and their fees are a biz expense (read:   you get it back).

I got my tax report back for this year. I'll use it as an example. Let's see, there are pages and pages covered with tiny numbers and tiny words and drool... Wait. It's my drool. Nevermind.

Because I'm not a tax expert, I hire one. A good CPA saves PJs lots of money and keeps us out of trouble with the government. They know amortization and expenses like we know f-stops and shutter speeds.

How to choose a CPA
I'm darn lucky. I've had the same CPA for many years. She is actually a family friend and a reader of different newspapers where I've worked. She knows I'm not wealthy, so she is fair with her price.

If PJs don't know a CPA, they should look for one who can handle the majority of the paperwork. Most CPAs have software to get them through the process quickly while maximizing deductions. They also can file electronically and have returns directly deposited into the PJ's account.

Different PJs have different comfort levels when it comes to taxes. Personally, I am ultra-safe and would rather have the government owe me more money if they decide to audit. If a deduction is on the border, I don't take it. Other PJs may be happy playing closer to the edge with the numbers. Let the CPA know your risk comfort level.

To make the CPA's job easier (and save research expenses), present everything to CPAs in an organized and logical form. Use paperwork and memos to answer any question CPAs might have before they arise.

As soon as I get my W-2, I e-mail my income and expense report spreadsheets to the CPA (other PJs might use prints). Normally, the CPA faxes the results to me within a week for a signature (or we establish a PIN for electronic filing). A week later, I get a much-needed break from financial panic dropped straight into my bank.

What to give CPAs?
Let's discuss how to organize and present information to a CPA. I'm aware some PJs lean more toward the artistic side and appreciate the organic, spontaneous and mysterious nuances of their bag of receipts. CPAs don't.

CPAs live to create an orderly world from the disorganized chaos which amuses many PJs. To save initial CPA fees and everyone's time, it's best to organize expenses throughout the year into a form CPAs can translate into real-people terms (rather than PJ-speak). Staffers can look forward to a hefty refund and freelancers can minimize their out-of-pocket tax costs.

CPAs will first need a PJ's social security number and other personal identification information. This is why PJs must research and find a legitimate and trustworthy CPA. Be cautious of accountants with unusually cheap fee structures.

Next, CPAs need all information relating to a PJ's annual expenses and income. If filing electronically, they may also need bank routing information.

Income reports
Give CPAs all official tax-related paperwork. For a typical staffer, this includes any W-2 forms, 1099 forms, interest statements and any other income information generated from outside sources (forms from them).

Additionally, give CPAs a spreadsheet of freelance income. This lists the client, shoot date, payment date, amount received and notation as to whether they choose to send a 1099 form or simply expense it with the PJ's invoice numbers. This spreadsheet could also include any outstanding balances due (potential write offs) with an explanation. Group this information together by client name and total. Then, total all income.

For pro freelancers, the process is slightly different because they are required to file self-employment taxes quarterly if they go over a certain income limit. However, staff PJs should still keep an eye on how much they earn during the year because if they really work the freelance market, they could step over the threshold and need to file quarterly self-employment tax reports as well as their standard payroll taxes.

Also, give CPAs a spreadsheet of photography-related expenses (see below). Group expenses together by type as defined by the IRS and number them accordingly (line item numbers) for easy tabulation. Returns and other credits need to be included in appropriate groups (notate these with a negative number).

Include a total at the bottom of each group.

What are photo-related expenses?
Again these vary from PJ to PJ. Below are some general guidelines useful for most staff and beginning PJs. Established professional freelancers with studios and/or employees or sub-contractors need to have more detailed information.

DISCLAIMER:   Each year, ask your particular CPA for IRS tax code changes. Major changes can happen to the tax code each year. This is information CPAs know. Frequently, CPAs simply tell PJs to send them the same report as last year, and they'll handle line-item changes.

Include all new equipment purchased to produce images. This includes all accessories such as filters, tripods, electronic devices, etc.

Include all repair and parts costs related to the photographic equipment.

Newspapers and magazine subscriptions as well as most books and greeting cards are expenses to professional PJs. The subscriptions (and single issues with a receipt) are a source of clips, ideas, professional development and potential client. The books and greeting cards are used as either professional development or as a potential client.

I think my CPA puts these in with one of the other sections, but let the CPA know about them.

This is actually a separate form. It is form 8863 titled, "Education Credits (Hope and Lifetime Learning Credits)."

This seems to be a volatile category. Lately, the codes have been very favorable for students (or parents). Include any direct educational expenses (tuition, fees, books) as well as related expenses. If the entry is not obvious, spell out the purpose for CPAs.

Contests are a form of self promotion. The major contest winners get to increase rates and attract more clients.

This includes any direct fees associated with traditional advertising (design, printing and insertion). It also includes promotional direct-mail piece costs. Likewise, promotional products from keychains to coffee mugs are advertising. These "leave behinds" may remind a client to call the PJ when an assignment pops up.

Limit this line item to actual out-of-pocket, total loss expenses. Don't include basic office expenses (mail, envelopes, etc.) because they are covered elsewhere.

Charitable donations
This is only cash donations. The hours and hours a PJ spent shooting for a 501c-3 group was done for the PJ's kind heart and is not deductible. There is a way to make it work for both, but it's complicated. I'll save it for another day. In the meantime, do these freebies for your soul and stock file, but don't think they're a write-off.

The actual costs of film and equipment are still a write off elsewhere, but not the PJ's time.

Professional education
Include educational photo workshops, seminars and private instruction fees with an explanation.

Proprieties (props)
Proprieties are objects purchased and photographed by the photographer. A bag of oranges, jelly beans, tree ornaments, a cake or any other small item could be a prop.

All these objects can be used as subjects or supporting items for illustrations within an overall image. Although by this definition, a new motorcycle could be considered a prop, I would advise against it. Instead, think of props as items costing about $10 or less each.

The advantage of perishable props is that the PJ has the option of throwing the prop away after use or eating it. I normally eat whatever props I can, but sometimes they get snarled up and nobody wants to eat it. For poor college students out there, remember to shoot it before you eat it. Then, tell your parents you are actually saving money by playing with your food. They'll be so proud of their young college student.

09 Auto
Again, this is all expenses PJs pay to have reliable wheels. If a PJ has more than one vehicle, give the CPAs a note about the number of family vehicles and a percentage of use each one gave the PJ. This is also how PJs talk their spouse into letting us use the convertible for occasional assignments. ;-}

17 Professional services
Professional services include CPA fees, legal fees, and memberships in various professional organizations such as NPPA, ASMP, EP and so forth.

18 Office expenses
Office expenses cover everything needed to keep the PJ in business. Phones, pagers, computers, software, paper, pens, stamps, etc. are business expenses. CPAs may separate big-ticket items into other categories for depreciation. Let them do what's best.

19 Utilities
Utilities include all electricity, gas, oil and water related to the business location.

20 Rent
This is the costs for the PJ's home office or studio. Give CPAs the raw numbers rather than trying to calculate the numbers for them. Again, they need the total square footage of a home and the total square footage of areas used "regularly and exclusively for business or for storage of inventory or product samples."

22 Supplies
Supplies are anything directly related to producing an image. Common examples would be film, batteries, chemistry, printing paper, and other single-use items.

24 Meals
Meals are tricky and don't actually pay much of a percentage return. I limit mine to only meals I purchase while with a client or subject and the meals purchased while on assignment in a distant city. However, I keep all receipts because I constantly talk about this biz. Should an audit arise, I know I'll have a bigger safety net.

27 Access fees
Access fees are costs related to actually covering an event. If the PJ paid admission to shoot a festival, concert and or sporting event, get a receipt. This is an understandable business expense for non-affiliated PJs.

Other expenses
This line is normally a catch-all for any expenses which don't fit into another category. Let CPAs know exactly what the expense was and how it applies to the business. "Lion rental fee" isn't something CPAs or IRS folks always understand at first glance. Technically, it's an expensive prop, but set it aside to brighten a CPA's day. :-)

How long to keep records
As we talked about in the record-keeping post, PJs should have one central file folder for each year's receipts. Keep these folders and related tax returns in one box for 10 years. I know the rule is seven years, but they could always change the rules and mess up everything. It's also easier to know when to shred the old file if it's handled in 10-year increments

Enough for now,


btezra said...

~FANTATSIC post, a ton if info and easy to read/comprehend...which i cannot say for the tax code~

Mark M. Hancock said...

Thanks. If the records are in order, it takes about three hours to prepare it in the right order. Then, let the CPA do their magic with the actual tax codes.

Borhol Quib said...

Very lovely guide, but since I do my own taxes it would be enormously useful to know where to put these expenses in my Schedule C. I'm wondering things like, 'Do props go under Other Business Expenses or under Materials/Supplies, COGS?' And what about the cost of printing? I send all my stuff out to a photoshop, but if chemicals and paper would otherwise be deductable? Anyway, thanks for the rundown!

Mark M. Hancock said...

This is why I have a CPA. Her fee is tax deductable, so I get her expertise for free. ;-)

Yes, chemicals, paper, lab fees and props are deductable, however taxes aren't.