Saturday, February 19, 2005

PJ accounting tips

Let's start by saying I hire a great CPA to do my taxes each year. A CPA's fee is a business expense and can be deducted from income taxes. It also saves me time and the stress of keeping up with tax codes while getting the proper amount of taxes paid (not paying more than needed).

In other words, I spend my time shooting and making money in my profession and leave the taxes to a tax professional.

With this said, PJs must still accomplish many record-keeping tasks throughout the year to accurately report their information to CPAs. We'll list what documents to give CPAs, however this entry addresses what PJs need to keep for the end-of-the-year baton pass to the CPA.

Young PJs
Staffer tax benefit
Car expenses
Home business

Young PJs
Although this is a boring part of PJ, it's important to get a grip on it early. It could literally be the difference between a steak and starvation one day.

Since there are many college students (and even a few high schoolers) who regularly read PhotoJournalism, know your tax filing status. Parents with children in college often take the deduction because they are paying the bills. Know if you are listed as a dependent elsewhere (a deductions for your folks), or if you should take the following advice for yourself.

Staffer tax benefit
Before I jump too far into this discussion, staffers need to get with human resources and make sure ample taxes are deducted from each paycheck. The point is to cover any freelance gigs. This creates a buffer zone for staffers to earn money without needing to worry too much about some horrible payment in April.

Additionally, if too much has been paid throughout the year, the PJ gets a lump-sum refund check. Extremely wealthy people suggest against using taxes as a savings account, but I'm not extremely wealthy.

As an observation, most staff PJs aren't extremely wealthy and tend to buy high-dollar photo gadgets on impulse. Over-paying taxes all year is a relatively painless way to ensure enough money for the once-a-year gadget binge with the refund check.

Keep them all. Whether the PJ pays cash, check or credit, put the receipt in a wallet until it's either expensed through the company or notated on a personal spreadsheet (more on this to come).

At home, notate all the receipts in the spreadsheet daily or at least weekly. It doesn't need to be elaborate. Include the date, the store name, and a check number or which credit card was used. Designate one column as the known business expense column, and mark it with an asterisk (*) for all legitimate business expenses.

Once the receipt has been noted, place the receipts in a cancelled check file (4.5"x 9.5" flap folder with a pocket for each month). Include all monthly bills (rent, utilities, auto, etc.) in this file as well.

This creates a central depository of all information CPAs or the IRS need. If the purchases were marginal and not claimed or reimbursed for the year, PJs can find additional deductions in this file during an audit (hopefully it never happens).

For all of the following sections, we'll assume the first sentence would read, "Keep your receipts."

Car expenses
There are two ways everyone expenses business vehicles:   actual expenses or mileage allowance. If the vehicle is paid off, mileage is probably the best bet. If the vehicle is leased or has a note, actual expenses is probably the way to go. This is best decided by a CPA.

However, PJs can make it easy on CPAs by keeping records of both mileage and expenses. It's good to have this redundant accounting system to keep everyone off our backs as well as maximize tax returns or minimize tax payments.

By keeping actual mileage numbers, PJs can determine exact percentages of business vs. personal use of a vehicle. Although I'll explain in detail later, record each mile driven for business purposes. A simple five-mile assignment is 10 miles round trip. This equals $3.75 in 2004 or $4.05 in 2005. Miles add up quickly.

Most importantly, the information can be used by staffers and some freelancers to get reimbursement from the company or client. Many newspapers reimburse staffers either total office-to-office miles or give an auto allowance (around $400 per month) and reimburse out-of-county mileage expenses.

Freelancers need to negotiate mileage with most clients. Some PJs ask for standard rate and charge for travel time. Others ask for an increased mileage rate to compensate for travel time. Explain these fees to the client before sealing the deal.

This alone might be motivation for PJs to have fuel-efficient, well-maintained vehicles. Each penny saved on mileage is one less needed to make the bills. If the vehicle is very economical, it may even be a profit center for some PJs suddenly making the lethally-dangerous nuclear disaster in the next state look more appealing.

Actual expenses
Actual expenses include car payments, insurance, repairs, parts, towing, parking, etc. These are obvious as they occur. If money goes from the PJ's pocket to the health of the car, notate it.

The Standard Mileage Rates Set is determined annually by the IRS. It's an auto use cost estimate for business purposes at a per mile flat rate. It may be higher or lower than actual expenses depending on the PJ's vehicle and driving conditions.

Either way, PJs should keep a notepad in the vehicle and record each mile driven for anything related to photography. This includes trips to the bank to deposit freelance income, trips to the post office to send promotional mailings, etc.

Write down the date, location and odometer reading for each stop of the day. A normal shooting day might look like this for a freelancer:
2/17/2005   Office*   82550
2/17/2005   Fort Worth ballet   82650
2/17/2005   Feature photos   82675
2/17/2005   FW football game   82725
2/17/2005   Newsroom   82800
2/17/2005   Office*   82825
* "Office" is the freelancer's home office.

This example day includes five stops. It totals 275 miles. It lists exactly where the PJ was and why. Being a PJ could make an audit almost fun because we actually have images to PROVE we drove these miles. ;-}

At 2004's standard rate, the example day cost the PJ $103.12 to operate the vehicle at 37.5 cents per mile in 2004 or $111.37 in 2005. Someone - other than the PJ - needs to pay or compensate for this expense.

Home business
Both freelancers and staffers who freelance can write off a portion of their home and utilities for business expenses. I don't know all minutia of the code. But as I understand it, areas of the home set aside exclusively for business purposes can be deducted as a percentage of the total home's bills.

This requires PJs to set aside a closet, a spare bedroom or tape-off a section of the floor to designate it as the "office." This area is to be reserved for business-related activities such as printing, record keeping, filing negatives/CDs, storing equipment or reading and commenting on PhotoJournalism. ;-}

Let CPAs know the size of the home as well as the size of the "office" areas. Also give them the total annual expenses of the home (mortgage/rent, insurance, utilities, etc.). CPAs calculate the correct percentages and take appropriate deductions.

I'm going to take the easy course here and assume readers are editorial PJs (selling various rights) and only deal with federal and state income taxes rather than sales taxes.

If some PJs sell a product rather than rights, they need to check with their CPA to get proper paperwork for local and state sales taxes as well as business ID numbers to purchase supplies used to produce the products without paying sales tax for those supplies.

The invoices created throughout the year represent the PJ's income. If money exchanged hands, someone else could take the business expense (depends on their use of the images). PJs must report all income so they don't get in trouble later.

There are two basic billing procedures:   invoice and receipt.

Most PJs bill by invoice. These are commonly created on spreadsheets, databases, word processors or a combination of all three. Save a copy of each final invoice in one folder on the computer hard drive labeled as "tax" with the year. At the end of the year, group invoices together by client on a spreadsheet and tabulate for each client as well as a total. To the invoice total, add any receipt sales.

Receipt sales
There are a few rare instances where receipts are appropriate. For safety sake, buy a medium-sized two-copy sales receipt book and keep it in the car. If PJs need to sell rights quickly on location, they can cut a receipt on the spot (get ALL client information on the receipt). Remember to check the book at the end of the year before delivering information to CPAs.

Preparing this information for a CPA is miserable and time consuming if PJs don't pace themselves throughout the year. By regularly maintaining and updating records throughout the year, this process is automatic at year's end. Import the data, sort it, total it and send it to the CPA. If all went well, staffers get a nice check and freelancers don't need to sell blood can earn enough to cover taxes before April 15.

Next, we'll discuss what documents to give CPAs.

Enough for now,


redde said...

Mark, Your site has been helpful to me for sooooo long now. I can not even begin to emphasize that enough.

Recently I have turned to your site for resume advice, cover letter guidelines, and other typical "trying to get a gig" stuff that a typical senior year PJ student needs to check out.

Today I got my first stringer gig with a local weekly. When I got home I started searching for software to manage finances for tax purposes and to create invoices. I knew deep down that spreadsheets and DB'ses would be the way to go, but thought that there may be an established suite of software.

Suddenly it hit me... Like a mantra in my head. "Go check out Mark's blog, you know it has the deal" And, of course you do!

Your plethera of information is invaluable to any upcomming PJ out there. Thank you for that! I wish that my school would check out your site when creating their curriculum!

Thanks again for an irreplacable wealth of information!!!

Mark M. Hancock said...

You made my day. :-)

Good luck with your gig and your career.