Tuesday, October 16, 2007

PJ is a write off

It's important for less-experienced PJs to understand why they should charge appropriately for their work.

No matter how much a PJ charges, it's a complete write off to the business buying the work. At the end of the quarter, publishers take the expense write-off from their taxes. If an image costs $1, they write off $1. If an image costs $700,000, they write off $700,000.

From a theoretical point of view, content is free. All fees involved in the making of a product are a 100 percent write off.

Not entirely free
I said content is theoretically free. We all know it costs money to make money. Successful businesses earn more money than they spend to make a profit.

Most businesses only consider 2/3rds of their expenses to be a write off while the other 1/3rd is absorbed on a budget by creating income and paying taxes. Although this has nothing to do with actual expenses, it affects the bottom line.

Apply this to our expenses
Most PJs invest money into equipment to keep them ahead of the competition. We understand the money we invest into this equipment is a tax write off. Consequently, we also understand we're not really paying for the equipment, but we're actually paying for the interest lost on the equipment until our taxes are filed (plus whatever depreciation our CPAs determine).

PJs see we get the money back from the income we earn. We buy $1K of equipment and we write off $1K to equal $0. This assumes we don't earn more than the actual cost of the equipment.

If we earn more, we must pay income tax on the difference to the government. Whatever remains goes toward our living expenses and profit.

This makes perfect sense to most PJs. However, it gets lost in translation when some PJs sell their work. They forget this is the same accounting method every business uses.

In short, these PJs forget other businesses are investing in our PJ work. The businesses are only "losing" interest on the money until the next time they file taxes (quarterly). Then, they get the money back.

If they earn any income as a result of our images, it's applied against the interest lost and becomes profit. So, it all washes by the time they pay taxes because they didn't pay interest to the government on profits earned during the same time.

There's no loss after all. Again, the PJ rights, fees, etc. cost nothing.

How the biz shell game works
On paper, PJ work is free. If a PJ charges $1,000, it's a $1,000 write off for the biz (business or publisher) purchasing rights to the work. So far so good.

Now, the business must earn the $1,000 to pay the PJ.
$1,000 earned - $1,000 paid to PJ = $0 earned.

This is also a flat situation. A grand was earned and paid. After the write off, the biz still has paid $0 for the PJ work.

If the company registers a loss during the quarter, then it maxes out its losses to equal taxes owed. The remainder of the loss is eaten by the biz. This is the first place PJs get blamed because the biz didn't earn enough to cover the PJ expense. This isn't the PJ's fault. The images were free IF the biz earned enough to cover the expense.

If the biz earned more than it paid, the biz must pay taxes on the income it earned. This is where bean counters like to blame PJs again.

A view through a creative CPA's money goggles:

Biz earned $2K (gross). PJ charged $1K. Taxes are on $1K (net) difference. So, the profits are split by the IRS. According to these CPAs, the math looks like this: $2K - $1K - $500 = $500.

They show the boss that they only kept $500 of $2K because of the PJ.

This is incorrect, but it's what they tell the boss.

The truth remains that the IRS got half of the biz's net income. The IRS gave them credit for the entire amount they paid the PJ. In turn, the PJ paid roughly 50 percent taxes on the income (after cost of doing biz losses).

If this same math is reversed, the company actually earned $2K (gross) because they purchased (invested in) the PJ's work. It's the same logic.

By this rationale, not only did the PJ work for free, they helped the company earn $500 and pay the IRS another $500. So, why do bean counters still try to minimize our income? This is the subject of tomorrow's post.

Enough for now,

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