An Overview of the Process, Exemptions, Requirements, and Tax Discovery Procedures
If you are an entertainment industry professional living or working in Los Angeles, you have probably heard the horror stories of colleagues opening mail to find a tax collection notice that they owe $30,000+ within 30 days. Yikes! Entertainment and creative professionals often fall into the crosshairs of aggressive tax collection activities by the City of Los Angeles tax collection office, simply because of the sheer number of entertainment industry professionals who work nights, side-gigs, freelance, or otherwise support themselves independently through film, TV, music, writing, radio, producing, or other related activities. After all, there are more creative professionals living and working in Los Angeles now than any other city in the history of the world, ever. Last week, LA Weekly reported on the epidemic of entertainment professionals who fall victim to being assessed thousands of dollars of penalties and interest on alleged tax obligations, when they didn’t even owe it to begin with. Because of the way tax collections are pursued, failing to challenge or contest and incorrect assessment can result in the assessment being made final, and a variety of penalties being added the principal amount, with interest accruing on the whole amount calculated – even if the tax was not correctly assessed in the first place. If it sounds nuts, that’s because it is. Read on to make sure you’re aware of your rights and how to structure your entertainment professional activities to minimize your tax obligations.
LA City Taxes
Earning money in Los Angeles as an entertainer in any entertainment activity requires registration with the City of Los Angeles to obtain a business license, within 30 days of beginning business. The business license in turn registers the business with the City of Los Angeles Office of Finance, which assesses taxes on LA County businesses, on a gross basis. This means that if you earn money through some means other than as a W-2 employee, you will need to pay taxes to the City of Los Angeles on all gross income received, not “net” income, which is your gross income minus all expenses. To give an example:
Federal/State Tax (net basis):
$500,000 Gross Income
$400,000 Net Income
XX% taxed on net income – Federal Taxes
XX % taxed on net income – State Taxes
City of LA Taxes (gross basis):
$500,000 Gross Income
XX% taxed per thousand dollars received – City of LA Taxes
(No consideration for deductions or business expenses)
Federal and state taxes assess taxes on a net basis, meaning that your tax liability is determined by taking gross income minus all your deductions and expenses, which lowers the overall taxable liability due. The City of Los Angeles, the other hand, assesses taxes on a gross basis, meaning all gross receipts, without any regard for deductions for expenses.
The problem arises, as LA Weekly recently noted, through a program the City of Los Angeles has entitled the “Tax Discovery Program.” Each year, City of LA issues notices to individuals, alleging that they owe thousands of dollars of taxes, based on “estimates” of what the Office of Finance thinks they might owe. The taxpayer is given a deadline to respond. If the taxpayer does not respond by the deadline, penalties are assessed and the obligation is assumed valid. The deadline is generally February 28 of each year. If the freelancer or entertainment professional fails to respond by that deadline, they are still responsible for paying all the penalties, even if the person does not actually owe any taxes. The penalties can range 5% on taxes owed after 1 month; 20% for taxes owed after 4 months, and if there is still no payment, collection fees of up to 39% percent. On top of all that, the City charges interest.
What’s the lesson? Be sure to follow the exemptions you’re entitled to each year so that you don’t get dinged by the tax man.
Overview of Relevant Exemptions
If you’re in the entertainment industry in Los Angeles, be sure to check and see whether the following exemptions apply to you:
- New Businesses. If you are in the first year of making money on your own, you are entitled to an exemption for your first year of income
- If you register your business within the first two months of starting the business.
- Small Business Exemption. If your business received less than $100,000 in gross receipts, you are eligible for the small business exemption.
- Creative Artists. If you are an individual “creative artist,” you are entitled to an exemption if your total gross receipts are less than $300,000. (http://finance.laci ty.org/content/EntertainmentCreativeTalentFAQ.htm) You can operate through loan-out Corporation and still qualify. Not all entertainment work is considered “creative activity” for “entertainment or aesthetic purposes.” For example, writing a script qualifies as a creative activity. A public appearance, on the other hand, to talk about the script, does not constitute a creative activity and it would not fall under the exemption.
To claim an exemption, you have to file the necessary paperwork no later than March 1 of each year.
Not Everything Falls Into Gross Receipts
Not all money is considered taxable for purposes of the City of Los Angeles gross receipts tax. For example, the following are not included:
- W-2 wages from an employer
- Retirement income
- Pension income
- Unemployment income
- Income from dividends on investment income
- Income from interest on investment income
- Disability income
- Social Security income
So, income that traces back to these sources should not be included in “gross receipts” for purposes of calculating whether you can claim the exemptions.
If you are receiving 1099 income, you count as an income earner that must pay taxes to the City of Los Angeles and obtain a Business Tax Registration Certificate. If you fail to register with the City of Los Angeles, you could be targeted under the City’s “Tax Discovery Program” and accused of owing thousands of dollars in back taxes that you may not actually owe.
Frequent Changes in Address
One of the big problem that arises with individuals in the LA entertainment industry has to do with annual or other frequent changes of address. Many times, tax forms and other tax assessments often do not reach the individual because of a change in address, as Tax Discovery notices or other tax obligations can be generated the year after the tax year in which the taxes were purportedly due. These issues can also occur if a PO Box is allowed to lapse. The post office does not stop delivering mail to a PO Box simply because the owner has changed. You must be sure to fill out the change-of-address forms with your local post office to ensure that you are always receiving all mail. Because of the way the Office of Finance’s regulations are set, if you miss the deadline to file for an exemption or contest the taxes that are being estimated against you, those assessments will become final, and you will be responsible for all the penalties and interest that accrue, even if you’re not ultimately responsible for the taxes.
Common Activities and Exemptions
The entertainment industry in Los Angeles involves a variety of different fields and a variety of professionals with very different roles and duties, not all of which are creative in nature. Here are several common types of activities prevalent in the community and some guidance on whether the activities are subject to an exemption or are covered by a different tax rule:
- Screenwriting: Entitled to the creative activity exemption.
- TV writer: Entitled to the creative activity exemption.
- Music recording artist: Entitled to the creative activity exemption.
- Television broadcasting: You file under LAMC Section 21.45, Radio & TV Broadcaster.
- Actor: You file under LAMC Section 21.48, Miscellaneous Services.
- Theatrical Motion Picture Writer: You file under LAMC Section 21.49, Professions & Occupations.
- Multimedia: You file under LAMC Section 21.41, Multimedia Business. (Multimedia refers to producing films, disks, tapes, software, or recording devices, whether video or audio, integrating media including computer-generated graphics and video, film, slides, video tapes, audio tapes, and photographs,
- Computer programming services: This includes providing services to producers of films, disks, tapes, software, or other recording devices, integrating graphics and video, film, slides, video tapes, audio tapes and photographs, such services to include computer software design and analysis, modification of custom software, digital imaging and other related programming services).
- Developing Online/Internet Services: You file under LAMC Section 21.41, Multimedia Business, which includes developing online and internet services, including designing websites for clients.
- TV Producer: You file under LAMC Section 21.109
- Film Producer: You file under LAMC Section 21.109
What’s Your Tax Rate and How to Read Tax Rate Tables
The City of Los Angeles Tax Rate Table is located here: http://finance.lacity.org/form/TaxRateTable_2011.pdf
This chart lists the categories of businesses and the associated tax rate. The chart can be pretty confusing to read. The tax rate is listed in the last column and looks like a single digit number with the decimal point. The way to read this tax rate chart is to apply that number per thousand dollars. So for example, multimedia businesses pay $1.01 per thousand in 2015. This means that if the business makes $500,000, it would pay 500 x $1.01 = $505 in LA City Taxes. Medical marijuana collectives, on the other hand, pay $60 per thousand. So, in that example, an MMJ business making $500,000 gross receipts would pay $30,000 in taxes to the City of LA.
You will need to withhold the appropriate tax savings consistent with your income so that you do not face a huge tax bill the next year. Make a habit of simply saving up the percentage of taxes you owe on a monthly or other schedule and you will have enough money reserved at the beginning of the next year to pay the taxes due.
How to File for Exemptions
If you fall into an exemption, you must file for it each year, in order to qualify, and renewals must be filed no later than March 1 of each year. The forms can be filed here: http://finance.lacity.org/content/OnlineBTRenewals.htm
Getting Legal Help
AXIS Legal Counsel represents numerous types of entertainment clients across the country in entertainment negotiations, opportunities, deals, and disputes. Whether it is agents, managers, talent, musicians, artists, visual artists, producers, filmmakers, directors, photographers, actors/actresses, models, writers, authors, filmmakers, composers, television, singers, songwriters, publishers, or technical talent, AXIS Legal Counsel offers strong representation to all those within the entertainment industry. Rabeh M. A. Soofi, managing attorney of AXIS is ranked as one of the “Top Women Lawyers of Southern California” by SuperLawyers Rising Stars, and is a Los Angeles entertainment lawyer representing entertainment clients with numerous types of legal matters. AXIS handles entertainment matters as well as entertainment litigation, including music royalties claims.
For information on retaining AXIS Legal Counsel for legal advice on any entertainment matter, contact firstname.lastname@example.org or call (213) 403-0130 for a confidential consultation about your legal issue, or visit our Entertainment Portal for more information. AXIS is a Los Angeles entertainment law firm representing clients with numerous types of entertainment matters and disputes.
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