Withum's World of Sports and Entertainment

Jennifer Sheprow – Intern – WithumSmith+Brown, PC

Do you have a dream? What is it that you WANT to do but you may not have the initial capital on hand to pursue that dream… be an innovative home designer, raise awareness for breast cancer, or simply create a website to sell all those clothes in your closet you forgot you had? Well here’s some good news, it’s called crowdfunding and it could be the answer to your dream, and you don’t need a dime to your name to do it. Sounds too good to be true! Lucky for you, it’s true. Crowdfunding is the practice of funding a project by gathering online contributions from a large group of backers. So, if you have over a thousand Facebook “friends” or Instagram followers don’t stop reading now because it’s about to get good. Originally, it was only used to raise small sums of cash but in recent years it’s exploded, just like everything else in the technological field. But if this is something you are interested in, there are some things you are going to need to know.

Tax Treatment of Crowdfunding

One important thing you need to understand is the tax treatment of  the funds received using this method. The IRS has turned to the general principles of income inclusion to clarify how funds raised from crowdfunding are taxed.. Generally, gross income includes all accessions to wealth, but just like with any rule; there are exceptions. And these exceptions may be beneficial to you. These benefits arise from the distinction between what is included and what is excluded in your taxable income and the IRS has just defined that. It’s fairly simple actually.

Crowdfunding revenues are includible in income unless:

1. The funds are considered loans that must be repaid;
2. The funds represent capital contributed to an entity in exchange for an equity interest in the entity; or
3. The funds are gifts made out of detached generosity and without any “quid pro quo”. However, a voluntary transfer without a “quid pro quo” isn’t necessarily a gift for federal income tax purposes.

Additionally, the funds  from crowdfunding must be included in income to the extent  they are received for services rendered or are  from the sale of property. The income tax consequences to a taxpayer relies on the facts and circumstances of the crowdfunding effort.

So, if you believe crowdfunding will be the coffee to your Monday morning, make sure you are aware and understanding of the tax treatment of crowdfunding.

-Jennifer

Maybe you are a fantasy sports junkie or maybe you saw too much advertising from Fanduel and DraftKings and you decided to enter the world of Daily Fantasy Sports (DFS).  You enter a tournament and lo and behold, you win!  After the excitement of winning fades, you start to wonder if your winnings are taxable. Good news, you don’t need to call your accountant you can just continue reading this article. Bad news, those winnings are taxable. If you are a professional fantasy sports player this article does not pertain to you.

Daily Fantasy Sports are currently labeled a game of skill and therefore are classified as ordinary income and not gambling income.  The winnings for a non-professional fantasy sports player will be treated as other income not subject to self-employment tax. However, this classification is currently being challenged by the State of Nevada. If the courts rule in the favor of Nevada, DFS winnings will be classified as gambling income (New York Times – Nevada Challenging DFS). Whether it is gambling income or other income, it is reported on line 21 of your Federal 1040 tax return. Another way to further clarify if you are receiving gambling income or other income is to check the document that reports it. For gambling income you will receive a W-2G Form and for other income you will receive a form 1099-MISC. Since DFS is currently other income, you will receive a 1099-MISC form if you earn over $600 in winnings from Fanduel or DraftKings.

Another important consideration is to determine if you have any offsetting losses to help reduce the amount of taxable income to be reported. Losses would be defined as entries into a DFS game in which you do not win. These losses can be deducted on line 21. If DFS income becomes classified as gambling the way losses are treated will change. You will then be able to lump together all other gambling losses, (i.e., casino or horse racing losses). These losses will be deducted on Schedule A, other miscellaneous deduction not subject to 2%. Keep in mind, you can only offset gambling losses up to the extent of the winnings and only if you have itemized deductions. After deducting your loses if you still have income then you may be required to pay estimated taxes. Please consult your accountant to see if estimated taxes are required.

With the tax laws changing the issues behind Daily Fantasy Sports can become complicated. If you have any questions, please feel free to contact anyone in our sports and entertainment group.

-Josh

Update: As of the posting of this article, Arizona, Iowa, Louisiana, Montana, Nevada, Washington and New York have all currently banned Daily Fantasy Sports. These bans are currently being challenged. Stay tuned for further updates.

No matter who you are, receiving a paycheck feels good. The amount doesn’t always matter because getting some income is better than getting no income at all.

Us common folk who have a job that pays every other week (and get our taxes taken out automatically) tend to be envious of the movie star who might work for a month on the summer’s hit blockbuster and walk away with a multimillion-dollar check. However, we tend to forget that we have one very important luxury that celebrities don’t stability. We know that the 1st and the 16th of every month, we will have a check for the same amount direct deposited into our bank accounts. Entertainers aren’t as lucky.
Whether you’re a well-known celebrity or an actor just starting an acting career in NYC and struggling to make ends meet, either party is not guaranteed a steady income.
Typically, entertainers receive their earnings after they complete a job or performance.

For purposes of this article, we’ll say that an up and coming actor in NYC receives two checks a year.

Sure, those checks may be for $150,000, but they may be received pre-tax. When you get a check for $150,000, your first inclination may be to spend it on some somewhat extravagant purchase. Take Nicolas Cage for example. In a relatively short period of time, he had a large influx of cash, so he went out and bought multiple new houses, a couple of yachts and even a private island. He overlooked the fact that he still needed to pay taxes on the money that he just spent. He wound up owing the IRS $13 million in taxes in which he failed to pay and blew almost all of his near $150 million fortune. Oops. If he had been a little more financially aware, he would have realized that he should be putting about half of his earnings away to go towards his quarterly estimated tax payments to the IRS.

Now, most of us aren’t lucky enough to receive checks with seven figures, or even five or six figures, but regardless of how much that check is amounted, entertainers need to be aware that in most cases, taxes have not been taken out of their earnings. In another post, we will expand more in detail about projections and estimated tax payments, but for now, plan on putting between 35% and 40% of your earnings away for tax payments, if tax is not being withheld for you. Unless you’re a super megastar like Nicolas Cage who brings in about $20 million a movie, in which case it’d be safer to put away an even higher percentage and even safer if you don’t buy yacht number five.

Along with not allocating a certain percentage of earnings towards your tax payments, entertainers tend to forget that their income fluctuates. The entertainment industry doesn’t usually allow you to receive that dependable check every other week that a majority of 9 to 5 workers receive.

Going back to our previous example, say the entertainer gets paid $150,000 in January. That entertainer then takes my great advice and puts about 40% of that amount aside to go towards tax payments. That leaves them with approximately $90,000 to last them until their next check comes in during July. If they are smart, then they will divide that by 6 to see the maximum amount they can spend per month while still living in their means until the next check comes in. But if they are even smarter, they realize that that next $150,000 check may not come; Stuff happens. Entertainers can get fired or the next movie they agreed to act in ends up never being filmed, which is why it’s so important to plan ahead.

Planning for the future is one thing that has gotten numerous big wigs in the entertainment industry in trouble. Famous stars such as R. Kelly, MC Hammer, and the aforementioned Nicolas Cage are prime examples. They got used to a large inflow of money and got accustomed to a certain lifestyle, and everything changed when they hit a dry period. It’s when you continue spending the same amount without bringing in a comparable amount that issues start to arise. To prevent this problem, you need to set aside a certain amount in each paycheck to invest. If you are investment inept like a majority of us are, it may be beneficial to hire an advisor or financial planner. Or in my case, if I am being too stingy to pay for an advisor, I can use my dad for advice and to invest my money how he seems fit. But regardless of who you use or how you invest your money, all that matters is that you’re doing it! If you do so, you will have nothing to worry about if you ever reach a lull in your career.

So remember to be smart with your money, live within your means and plan for and invest in your future.

-Kate

Hello Internet. Actually, based on our traffic numbers, it’s a bit presumptive to say hello to the entire internet. Realistically, hello Mom, the four people who clicked this blog from my Facebook link, and the seven people who found this through our surprisingly high Google page rank. (Go Withum Marketing Team!!!).

Today I want to talk about money. More specifically about the government giving you money. Even more specifically, about the government giving you money for making movies and TV shows.

Film production incentives are offered by various states as an incentive to film in that state. Currently there are 39 states that offer some form of film production credit (including Washington DC and Puerto Rico). In general terms, certain states offer a tax credit in relation to the film’s overall qualifying budget. Essentially, if you spend $X in qualified costs in a specific state, that state will give you Y% of $X as a production incentive. In the coming weeks and months, I will discuss specific State credit programs. For now I want to discuss some general issues that you should evaluate when analyzing a credit program.

Transferable/Refundable/Neither:

Some states offer transferrable credits which essentially means that when you are approved for a credit, you can exchange the credit with another taxpayer or the government for cash. The advantage of a transferrable credit is that you can access cash immediately to finance your project, unlike refundable credits which are not issued until (usually) after the film is completed. The disadvantage of transferring credits is that sometimes the amount of credit is reduced on transfer. E.g. credits may only receive 90% of their value on sale.

A refundable credit first offsets your state tax liability and then the remainder of the credit is returned to you. For instance, Bill is going to make a film. He secures a $100,000 tax credit from state A. His film makes a profit and he owes State A $20,000 in taxes. The first $20,000 of credit reduces his state tax liability to $0. The remaining $80,000 of credit is refunded to Bill. The downside of refundable credits is that the benefit is received after the film is shot and the money is spent. Refundable credits can also be a powerful fundraising tool, as I will discuss in a subsequent post.

Some state credits are neither transferable nor refundable. Let’s try to avoid these whenever possible.,. as the utility of these credits is somewhat diminished.

Restrictions and Rules:

Credit packages are the brain child of state assemblies and as such are packed with narrow rules, red tape and tight rope walking. When evaluating these restrictions keep in mind that production credit packages are implemented to benefit the state’s film industry and economy and the restrictions are in place for these reasons. The efficacy of these programs is debated.

Several credit packages have requirements that the project may only employ state residents. Others require that the project shoot in certain locations while others require a certain minimum number of days shooting. There are also requirements for minimum spends, max spends and state level overall spending caps.

There are also content based restrictions. Some states allow production credits for feature films only, some states exclude documentaries, etc.

Conclusion:

Some of my readers may be working on productions where incentive productions will be one of many factors in deciding where to shoot. Other readers are operating on small budgets and will use whatever credits that are offered to maximize their value. Others are my mom. Hi Mom.

If you have questions about film credits, please contact a member of Withum’s Sports and Entertainment group.

— Alex

If you’re lucky enough to be paid to play a sport professionally, that’s a dream come true for some folks. But the tax issues that unfortunately arise with being a professional athlete can be a nightmare, especially when it comes to State and Local tax filings.

Being on the road for a majority of the year is part of the job for a professional athlete. Travelling from state to state, city to city and for some, country to country can be very exciting, but overwhelming and tiring in the same time. You’re away from family and friends, living out of a suitcase, dealing with airports/jet-lag and even worse… each one of those states travelled to may require you to file a tax return for their state. Each state taxes you at their income tax rate for every day that you’re playing (aka “working”) in their state. That same income earned for playing is also taxed by the athletes resident home state. But don’t worry, states aren’t that greedy! At first glance, you might think you’re “double taxed” on the same income earned, but that’s not the case here. To avoid double taxation, tax credits exist. The athlete can take a tax credit on their resident state’s tax return for the taxes they paid to the other states they played in during that year. However, there is no credit for athletes that live in a state that doesn’t tax income such as Florida and Texas. In other words, they can offset the taxes they pay to their resident home state with the amount of taxes they paid to the other states. Don’t try to get too clever with the credit, though; there are limits to ensure that you can’t reduce your overall tax burden/tax rate.

For example, Carmelo Anthony is a New York City resident. He will pay a combined New York state and New York City tax rate of 12.69% on his earnings playing professional basketball for the New York Knicks. With his current contract worth $124 million, that’s over $15.7 million in NY/NYC taxes he will pay over the life of his contract assuming he continues to live in New York City. When the team travels to Boston to play the Celtics, he would be subject to a Massachusetts income tax rate of 5.15% for every “duty day” he’s playing in the city of Boston. When filing his resident New York tax return for that year, he would receive a tax credit for the amount he paid to Massachusetts to avoid the “double taxation”.

Duty Days: AKA “The Jock Tax”

As previously mentioned in the Carmelo Anthony example, he is taxed for every “duty day” he played in the city of Boston at the Massachusetts income tax rate of 5.15%. The majority of states and cities assess “The Jock Tax” by calculating “duty days”, which is the number of work days spent in that particular state. Work days include not only the day that the game is played but also the practice days when games are not played. That total is then divided by the number of work days in a season, usually includes preseason games as well.

Tax Saving Ideas

Athletes seem to be more financially savvy these days and are aware of the so-called “Jock Tax”. More and more athletes are signing with teams that are located in states that don’t tax income, like the Miami Heat, the Houston Rockets and San Antonio Spurs. For example – Back in 2010, Lebron James made the “decision” to take his talents down to South Beach after playing his entire career in Cleveland. Another example, Dwight Howard signed with the Houston Rockets in 2013 after playing with the Los Angeles Lakers for one year and paying a California state tax rate of 13.3%. Most recently, LaMarcus Aldridge left the Portland Trailblazers and their 9.9% income tax rate to sign with the San Antonio Spurs and their zero state tax, Texas. Now, I’m not saying that saving state taxes was 100% the reason why they all made the decision to move to those non-taxing states, but I’m sure it factored into their decision considering their contracts were in the eight-figure range, and that would add up to a few million dollars of tax savings.

State taxes are an especially complicated issue for athletes. If you have any questions, please feel free to reach out to a member of Withum’s Sports and Entertainment group.

– Harris

What is the one thing you need if you plan to record an album, shoot a film, go on tour, or embark on any other creative venture? No, you don’t necessarily need an idea[1]. You need money.

Unless you are independently wealthy, have diligently invested, or own a goose that lays golden eggs, you’ll need to fundraise to jumpstart your venture. You may have some experience with fundraising, but may not necessarily be familiar with the diverse and complex tax implications of fundraising. (The tax considerations of owning a golden goose are also complex. If you happen to own one, please call me.)

Loans:

You may be able to fundraise through accepting loans. The loan principal, i.e. the amount you receive from a loan is not taxable to you. Assuming your purpose for taking the loan is a trade or business, the interest you pay on the loan may be deductible and may be available to offset taxable income.

Equity Investments:

An investor may offer funding in exchange for a stake in your project or entity. Such a fundraising method would be an equity investment. The amount you receive from an equity investment generally is not taxable.

Choice of an entity may be crucially important when it comes to accepting equity investments and how they are treated for tax purposes. Sometimes loans and equity investments can look alike and are hard to distinguish from each other. Please speak to a tax professional if you find yourself in an unclear situation.

Find a Box of Money:

Had Steven Spielberg never found a box of cold hard cash in the bathroom of the Museum of Natural History, the world may have never known Jurassic Park.

Gifts:

Nana loves you and wants you to pursue your passion, right? If so, she may gift you funds. A gift is not subject to income tax liability by the gift recipient, but may be subject to gift tax by the gift giver.

A gift is made out of detached and disinterested generosity. If the gift giver expects something in return, then sorry, it’s probably not a gift and it may be subject to tax.

Grants:

Several universities and other organizations may offer grants to filmmakers or for other creative endeavors. Unfortunately, unless the grant is obtained in pursuit of a higher education degree, the proceeds will be subject to income tax. The recipient will likely incur deductible expenses that may ultimately offset the income from the grant.

Bake Sale:

If you’re contemplating doing a bake sale, you’re not ready to be reading tax blogs.

Crowdfunding:

You are probably familiar with crowdfunding sites like Kickstarter and IndieGoGo. Crowdfunding sites are a tribute to modern technology. Movies like Wish I Was Here, Veronica Mars, and SuperTroopers 2 have raised millions thanks to the interest and funding from fans. Big budget albums and video games have been created through crowdfunding. And most impressively, some dude raised $50,000 to make Potato Salad!!! KickStarter-Potato Salad

As far as tax considerations go, it has not yet been decided how crowdfunding should be treated. Some say it is income, some say it’s a gift, some say it’s a mixture of both. The IRS has not issued any guidance on this issue, and until it does, no one will know how to correctly treat it. Kickstarter has advised that it will issue a 1099-K if a site user raises more than $20,000 and receives more than 100 contributions. For now, take care and discuss with your tax advisor how you should treat crowdfunding.

Now you know something about the taxation of fundraising. If you care to share a creative way you’ve thought of to raise money, leave it below.

– Alex

[1] If you’ve ever seen a Michael Bay movie, you know an idea is not required to make a movie.