How The IRS Is Going After Documentary Filmmakers
I see a disturbing pattern of government overreach in myriad areas, and this is just one more example. I know a good many documentary filmmakers, and they have many fiscal ups and downs, and do seek to make money -- of course! -- but it's a tough profession to do it in. This doesn't mean it isn't a profession -- that it's a hobby -- but that's what the IRS is trying to declare it...so they can sock filmmakers with huge back taxes.
Paul Devlin writes in Filmmaker magazine:
The business of nonfiction filmmaking in the U.S. has become ever more competitive, speculative and entrepreneurial. Often even veteran filmmakers are expected to have significant portions of their films completed to demonstrate merit before funders will participate. As a result many filmmakers are investing substantial amounts of their own money to get their films off the ground.This investment can stretch over many years as the project develops. During this time costs absorb revenue so there is little opportunity to profit until the project is complete and sales can be made. Deducting losses during the development period from other sources of income to reduce personal income tax can help ease the financial burden facing independent filmmakers.
The IRS has no problem with a taxpayer deducting expenses for an activity from the income of that activity, even when the activity is considered a "hobby." However, when expenses from that activity create losses that offset other sources of income (such as income from a "day job"), the IRS requires that the taxpayer be able to demonstrate that it is "an activity engaged in for profit."
Last year, the IRS audited my 2007 and 2008 tax returns. After conducting two arduous interviews lasting many hours each and combing through my meticulously well-documented financial records, the IRS revenue agent determined that my own documentary film business was "an activity not engaged in for profit." This is the euphemism the IRS uses for "hobby." Although he cited several factors, many years of losses provided the primary basis for his determination.
The agent's report disallowed all deductions that resulted in losses for 2007 and 2008. I was going to owe up to $80,000 in back taxes and penalties to the U.S. and New York State governments. Moreover, this meant I would not be able to deduct most of my business expenses for 2009 and 2010. I was not only being put out of business, my personal financial well-being was threatened.
I was outraged. Filmmaking was my pasttime? Clearly, the agent had no idea how much work goes into making an independent film. I did my best to describe the grueling shoots in far away places, the all-night edits, the endless fundraising and marketing, and the constant efforts to sell, sell, sell. Did he really think I had no interest in making money?
My entreaties had no effect. The agent had made up his mind. He insisted that my filmmaking was an activity not engaged in for profit and my tax deductions over the years were, therefore, not legitimate. I owed the IRS big-time.
As a matter of survival, I had to become an expert on the IRS "hobby loss rule," consulting with lawyers and accountants and doing my own research to challenge the revenue agent's determination. Otherwise I would not be making independent films again.
This is also yet another First Amendment issue. There are numerous doc filmmakers who have exposed wrongdoing -- and made substantial financial sacrifices to do it. If this is declared a hobby, we'll surely have far fewer films that show up malfeasance. In essence, the IRS will make it too personally costly to use this form of speech.
via Kate Coe
Obnoxious. All part of a growing pattern of stifling dissent.
Lisa Simeone at July 27, 2011 8:43 AM
Most people in movies and television actively support big government.
Somehow, they object when it comes to personally having to experience big government or pay for it.
My heart bleeds ice for them.
Perhaps they could clamour for a combined federal and state government that balances its books and consumes less than 10% of national income. Then IRS rules wouldn't be such a big deal.
On the bright side, anyone that voted for the USA to become "more like Europe" can imagine what a 50% of the economy-sized government will cost and much harassment the IRS will give then.
Antoine Clarke at July 27, 2011 8:57 AM
Amy Alkon
http://www.advicegoddess.com/archives/2011/07/27/how_the_irs_is.html#comment-2383892">comment from Antoine ClarkeYesterday, Antoine, a guy I know who's a screenwriter, and a successful one, lamented in the comments on an entry here that we aren't paying enough in taxes, and that *he* isn't paying enough in taxes. I encouraged him to do what I called a reverse Bastiat (based on the idea that just because we don't think government should be doing something doesn't mean it shouldn't be done at all), and find the address of the IRS and write them a big juicy check.
Amy Alkon at July 27, 2011 9:30 AM
I see "big government" and "big business" as one and the same. Corporations run this country. Neither the president nor Congress takes a step without its being approved by the plutocrats.
Whatever your political leanings, the state is more than willing to trample you. "Terrorism" is the magic word. We are all potential terrorists now. Coordinated campaign to stifle dissent? Listen to Michael Ratner, Center for Constitutional Rights and author of “Hell, No," and decide for yourself:
http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=7089
Lisa Simeone at July 27, 2011 9:47 AM
Lisa Simone wrote: "I see "big government" and "big business" as one and the same."
There is one fundamental difference.
If I refuse to pay for a corporation's products, and refuse to use them, I don't get arrested, fined, shot, raped in a prison cell, etc for not giving them my cash. Government on the other hand...
Keep it small. Anything needs doing that costs more than 10% of the economy, it's either something evil or let businessmen work out a way of providing it at a cost we're willing to pay.
To give two examples. Can anyone figure out how a profit seeking business would have done the R&D for atomic weapons without a big government to sign the checks? And the persecution of minorities: without government paying for it, would anyone go out and kidnap millions of people, and put them in camps to die?
Antoine Clarke at July 27, 2011 9:55 AM
In 2008, I believe, the IRS sent me $500 dollars back out of the check I had wrote them. Woohoo! Or at least, I thought. Turns out that I was right with my initial check, and within six months they were wanting their $500 dollars back. I hate the IRS.
Cat at July 27, 2011 9:55 AM
Our Founding Fathers are spinning in their graves like pinwheels in a hurricane. This does NOT bode well for our future.
Flynne at July 27, 2011 10:26 AM
On the other hand, if it means we don't have to watch some of those PBS documentaries...
BOTU at July 27, 2011 10:41 AM
BOTU. STFU.
Thanks.
o.O
Flynne at July 27, 2011 10:43 AM
Well, I would argue that if he isnt allowed to write off the losses in ceating the film that when he finally sells it the IRS is not entitles to tax the profits
lujlp at July 27, 2011 10:51 AM
This is also yet another First Amendment issue.
Nowhere in the First is it stated that your rights to free speech will be subsidized. You don't have the right to a printing press, for instance.
This is really about a byzantine tax code, allowable deductions, and revenue agents encouraged to find unpaid revenue in this otherwise poor economy.
Hint: simplyfing the tax laws and not using them to do social engineering via tax breaks and other deductions goes a long way towards helping this guy out.
I R A Darth Aggie at July 27, 2011 11:02 AM
What its said. A flat tax that everybody pays whether they make 10th bucks or 10 million. It would help to eliminate the perception of class warfare
ronc at July 27, 2011 11:24 AM
Amy Alkon
http://www.advicegoddess.com/archives/2011/07/27/how_the_irs_is.html#comment-2383979">comment from I R A Darth AggieNowhere in the First is it stated that your rights to free speech will be subsidized.
No, but because you aren't doing well financially -- same as an inventor who tries and fails many times -- doesn't mean what you're doing isn't a business.
Amy Alkon at July 27, 2011 11:32 AM
Amy:
The case Devlin writes about, Storey v. IRS, hasn't reached the end of the trial phase-- the tax court judge hasn't made any decision on whether the IRS can disallow Storey's documentary film expenditures as business expense deductions from her income. The controversy arises from an offhand comment the judge made from the bench during the trial:
This is equivalent to some of the questions that SCOTUS asks from the bench. Just because the court asks a question doesn't mean that the court has adopted the position it's articulating-- that's only done in the court's written judgment and opinion. Also, there's no indication that the IRS argued that all documentary filmmaking was per se disqualified from business expense deductions. The IRS argues that in this specific instance the taxpayer was not engaged in a profit-making enterprise, and thus was ineligible for the claimed business expense deductions.
Here's a link to the amicus brief submitted by several documentary film organizations. It makes a convincing, heck, not-even-close argument that some documentary filmmaking is a profit-making enterprise-- thus refuting the judge's implication that all documentary filmmaking isn't a for-profit enterprise. That doesn't resolve the case, though, because some documentary filmmaking is not a profit-making enterprise.
Some facts to think about before you side with Lee Storey:
1) Storey is a partner at Ballard Spahr, a big corporate law firm in Phoenix, AZ. The average profit for a partner at Ballard Spahr is $415K.
2) Storey has taken hundreds of thousands of dollars of business expense deductions against her income as an attorney.
3) Storey has made a documentary about "Up with People". What's the potential audience for that? At what price have comparable films sold? Considering her expenses, at what price will she break even? Is that even achievable?
4) Given the relatively poor returns on documentary filmmaking, what's Storey's business plan for making a profit from it? Did she even have a business plan?
Personally, I'm with the IRS. I think Storey thought her documentary film would be a great way to redirect her tax money to her own personal causes, and hasn't a ghost of a chance of making a profit on her film. As such, she was not engaged in a for-profit enterprise. She was constructing a tax shelter for her bounteous partner's income.
If she does profit from the film, fine, she can deduct her business expenses from the income from the film. If she quits her lucrative job as a partner in a silk-stocking law firm and starts editing film in a god-forsaken loft, maybe I'll be a bit more sympathetic.
Dale at July 27, 2011 11:43 AM
Amy Alkon
http://www.advicegoddess.com/archives/2011/07/27/how_the_irs_is.html#comment-2383990">comment from Dalea documentary to me means that it’s not for profit.
Because documentaries aren't as profitable as feature films doesn't mean they aren't a business. I give advice to many people whose questions will never make it into my column, and are of no benefit to me whatsoever. Does this mean that I am not in business? I could make far more money writing sitcoms. Does this mean I have no intention of making money?
Amy Alkon at July 27, 2011 11:49 AM
Amy wrote:
Agreed. But if you're producing documentaries as a business, and are deducting your business expenses from another, more lucrative source of income, you better make damn sure you have a good business case for your documentary film; otherwise, be prepared to have your deductions challenged.
The fact that your income comes primarily from writing an advice column goes a long way toward proving that related activities are a for-profit enterprise. If you were an investment banker pulling in $2 million a year, and claimed hundreds of thousands of dollars in "business expenses" to have your philosophical musings published by a vanity press, and none of your books ever earns a profit, well, the IRS isn't going to believe that your writing is a for-profit enterprise.
Dale at July 27, 2011 12:16 PM
@Dale beat me to it. One audit and one court case does not = massive conspiracy to stop film-makers. Note that Devlin won his dispute at the administrative level (in no small part due to considerable preparation; there's a lesson there).
Heck, the IRS is actually pretty hip to creative types. Their own audit manual recognizes that artists "often have a poor record keeping system. This doesn't appear to be due to an intent to cheat or defraud the Government; rather, it seems to be due to the taxpayer's basic lack of concern for these types of matters. . . . This, however, should not be construed to mean there are automatically large adjustments or deficiences to be found."
Also, look at the flip side of Storey's case. If her film is a hit, she makes a bunch of money. If it doesn't get picked up, the cost of her vanity project is subsidized.
Oh, and this has nothing to do with a byzantine tax code. Even the simplest of tax proposals typically recognize the concept of "net business profits" (i.e., a business owner should be taxed on profits, less expenses). All that's at stake in each of the two cases here is the "business" status of two particular projects.
This is not a dimunition of rights. This is business as usual.
snakeman99 at July 27, 2011 1:54 PM
They did this to writers some years ago - authors researching for their books were no longer allowed to deduct expenses unless the book got picked up a publisher and sold the same year or something (I'm sure someone has the exact details).
We've all got our IRS horror stories (they attempted to fine me $900 for failing to report $19 in interest income, and then when I won the fight I was hammered with increased surveillance and penalties for several years after that. In their defense, I would say my tax-preparing skills suck).
Anyway, this is why we have to get rid of income tax. It hammers people trying to build something and lets people sitting on vast piles of wealth skate away.
Gog_Magog_Carpet_Reclaimers at July 27, 2011 2:33 PM
Didn't there used to be a bright-line rule about side businesses -- they have to make a profit in 4 out of 7 years, or some such? Is that still in effect?
Cousin Dave at July 27, 2011 7:05 PM
Cousin Dave:
There's a "safe harbor" provision that does something like what you describe. If you make a profit in 3 out of 5 years, the IRS presumes the activity is a profit-making enterprise.
If you don't meet that criteria, your activity may still qualify as a profit-making enterprise, but is more closely examined.
A short summary of the applicable IRS regulations is here.
Dale at July 27, 2011 8:19 PM
Dale--thanks for this. Storey's not the poster girl for doc makers. She gave many interviews about how she made the film for fun. There's a terrific film to be made about Moral Rearmament and Up with People, but this amateur-hour film isn't it. i can't believe she got such bad tax advice, unless she thought she could try some tricky moves.
KateC at July 27, 2011 11:29 PM
Amy Alkon
http://www.advicegoddess.com/archives/2011/07/27/how_the_irs_is.html#comment-2384687">comment from KateCThat's why I didn't post Storey's story as the excerpt, Kate. She appears to have another job.
Amy Alkon at July 27, 2011 11:37 PM
Nowhere in the First is it stated that your rights to free speech will be subsidized. You don't have the right to a printing press, for instance.
This. While I am no friend of the IRS, I disagree with the article. This person works hard and long hours to produce documentary films, which basically never cover their own costs. Storey does not earn a living making films, but rather by being an attorney.
There are zillions of wannabe authors, film-makers and musicians out there! Many of them passionately pursue their hobby, and maybe make a bit of money on the side. Some of them are hoping to be the next Pulitzer Prize winner, or the next J.K. Rowling. So what? They are allowed to deduct hobby expenses against hobby income - fair enough. However, there is no reason that they should be able to deduct their hobby expenses against their primary income. That would force the rest of us to subsidize their free-time activities - we pay taxes while they don't
If I like a book I'll buy it. If I like a band, I'll buy their music. If I like Storey's films, I'll pay to see them. We don't need the IRS collecting our taxes to give to wannabe artists.
a_random_guy at July 28, 2011 4:47 AM
Once again, Dale makes a lot of sense and clears some things up. Thanks, Dale.
Lisa Simeone at July 28, 2011 6:54 AM
I bought a bunch of PUA (Pickup Artist) books a few years back, and they just languished here on a shelf. I finally had a question that I used just one of them for (quoted from it). A lot of research is speculative. You need to take a lot of wrong turns to get to the right one. I have a bunch of books I worked on that never made it, but in spending money on research (books, etc.) it's part of the process of figuring things out. As Gog says, this is why we need to get rid of the income tax.
Amy Alkon at July 28, 2011 7:14 AM
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