CPAs to the Stars Tell All: What Expenses Do Celebs Write Off?
The audit wasn’t going well.
The Internal Revenue Service had a few questions about the tax return submitted last year by … well, she’s the leading actress in a hit TV series.
“Her previous accountant had allowed her to write off virtually everything,” said Chuck Sloan, a certified public accountant based in Los Angeles who specializes in entertainment.
Her hair. Her rent. Her makeup. Her clothes.
“Let’s put it this way, she had written off $30,000 of expenses, and I think I wiped it down to $11,000,” Sloan recalled.
Worse, the actress made it more likely she will be audited again.
According to the IRS, work-related expenses need to be itemized and actually related to work. Even if you’re famous. Yet, celebrities have tried for ages to elasticize the definition of their work. Despite common myths that celebrities can write off just about anything that helps them maintain their image—and marketability—the opposite is true.
Expenses like clothing, makeup, personal trainers, bodyguards and limousines are generally found to be personal expenses that cannot be used to reduce taxable income. Red flag items are those whose personal benefit clearly outweighs the potential business benefit.
There are exceptions, said CPA David Rogers, president of ActorsTaxPrep, in Los Angeles. The IRS may allow deductions for items that couldn’t be used for everyday personal benefit. For example, a new suit for an audition can be worn again, and may not count as a deduction. But a ball gown for an awards ceremony may be deductible.
Another Hollywood CPA, Reginald Singh, represented a well-known TV hostess and commercial actress whose expenses caught the suspicion of the IRS and triggered an audit. She claimed she drove 10,000 miles around town for work, a tax deduction of about $5,000. (Keep in mind that you can’t deduct your commute to, or from, work.)
The IRS didn’t believe that an actress would have to drive so much for work. Singh said the actress had a shabby notebook with rough notes chronicling the trips from studio to studio, to back up her claim. The IRS ended up accepting it.
Singh and other CPAs noted that people in show business have another tax advantage. For us, things like going to the movies, reading a book, or binging episodes of “Mr. Robot” are escapes. For people in the entertainment industry, that stuff is research.
That’s right: Celebrities can deduct Netflix.
It also doesn’t hurt to be famous when sitting down for a face-to-face audit, said Rick Nelson, an entertainment CPA in Los Angeles.
“I did have someone who was an entertainer, who had a home office deduction. He lived in one of the canyons in L.A. and it burned down. Documents were burned up, so we really couldn’t substantiate some stuff. The funny thing about the audit was the person looked a lot like their father, who was a well-known actor and had the same last name.
“And when the agent walked in, he said, ‘I have been a fan of your father’s for many years.’ ”
It was a good sign the audit was going to go well, Nelson said.
The Loan Out Corporation Scheme
There is another tax scheme that almost every successful person in the entertainment industry relies on to reduce his or her tax liability.
An actor registers a single-employee (the actor himself) company with the state. It’s called a “loan-out corporation.” When the actor is cast in a role, the studio pays the corporation to “borrow” the services of its sole employee.
Let’s say the role pays $1 million and it’s the actor’s only income for the year. The company pays for the agent, lawyer and manager, typically 25 percent of the entertainer’s income. Since the loan-out corporation works on behalf of the actor, it pays for publicists, possibly as much as $100,000. And it offers a pension plan, where the employee can shelter up to $54,000 per year tax free. The loan-out corporation also can offer a medical plan to its sole employee, like any traditional employer.
The actor gets a Form W-2 that shows $600,000 income, instead of $1 million. It’s a way of short-cutting the alternative minimum tax, or AMT, which does not allow deductions for commissions to agents and managers. Those benefits are tax-exempt. And they can be tailored to the actor’s needs.
For example, William Abrams, partner in charge of entertainment law at AGMB law in Los Angeles, said he has an actress client with fertility problems. For most average Americans, fertility treatments — on average, about $12,000 — would be a hefty out-of-pocket expense. Only 15 states have laws that require insurance companies to cover any portion of fertility treatments. But if you’re an actress with a studio deal that provides a loan-out corporation, like Abrams’ client, that loan-out corporation that “employs” you has a medical plan that covers fertility treatments at 100 percent.