CPA Robyn Cohn has run an independent tax practice in New York City since 1991. She serves a diverse base of clients, including photographers, throughout the US. (Disclaimer: This interview is for informational purposes only. PDN does not provide professional accounting or tax advice. Readers should consult with their own accountants for tax and accounting advice.)
PDN: What are some of the changes in the tax law in the last year that might really benefit photographers?
Robyn Cohn: One thing that’s a tremendous benefit is more of a deduction for self-employed health insurance. You used to get an income deduction for that, but you still had to pay self-employment tax on it. Now you get a self-employment tax deduction as well. So if you pay $5,000 per year in insurance, for instance, you’re going to save $765 in taxes, compared to 2009.
PDN: That’s a little confusing. You used to get a deduction for health insurance, but still had to pay taxes on it?
R.C.: A self-employed person pays income tax, and then gets hit with a self-employment tax, which is 15 percent. And that’s a killer. When you’re self-employed, you’re the employee, and the employer, so you pay double. Now employers also get a deduction for the health insurance they pay on behalf of employees, so that’s another deduction for photographers who are buying health insurance as [self] employers. But the deduction is for 2010 only.
PDN: What else can photographers can take advantage of this year?
R.C.: There’s a bonus deduction for capital expenditures that went into effect in September (2010) and will remain in effect through 2011. Normally, you can write off 100 percent of the cost of certain types of fixed assets in the year you purchased them. But you can only write off up to the amount of income you have. Under the bonus deduction now in effect, you can write off 100 percent of certain assets, even if it creates a loss. So if your spouse earns income, and you are filing jointly, you can reduce your [joint] tax bill by taking advantage of the bonus depreciation deduction.
PDN: As the economy slowly improves and photographers start to earn more, what steps can they take to reduce their tax liability a year from now?
R.C.: Think about retirement contributions. You don’t have to make them in the year you earn the money. You can make them up until April of the following year. That’s one area where many photographers are deficient, because they’re so often hand-to-mouth. But that retirement tax credit is a help, if you have enough income to take advantage of it.
PDN: Are there tax saving strategies that photographers often overlook?
R.C.: In general, people tend not to take full advantage of business expense deductions. All business expenses are tax deductible, so make sure that everything you are [purchasing] in conjunction with your business, you are writing off. Don’t assume something is not a business expense until proven otherwise. Say you buy an expensive briefcase. People say, “It is too expensive. I can’t write that off.” But it’s still a business expense..
Also, keep better track of expenses, and use accounting software to do it. The better you keep track of expenses, the less you pay in taxes. It can make a tremendous difference. Local travel is one area that photographers don’t keep track of adequately. They’re carrying gear, so they use a lot of cabs. Anything they pay cash for, I’m sure they cheat themselves out of a deduction because chances are, they don’t keep track of it.
PDN: What the status of that controversial new rule requiring businesses to issue a 1099 to every vendor they pay more than $600 during the tax year?
R.C.: That’s supposed to start in 2012 for most businesses, but they’re working on revoking it [because it has been widely criticized as too burdensome for business]. But this reminds me: Photographers are notorious for not issuing 1099s for assistants. If they get audited, they’ll be required to issue them retroactively. That’s the nice way. Or the mean way is, the IRS will disallow the business expense deduction [for the money the photographer paid to the assistants].
It’s more of a risk to the person not reporting the income, though. So if you don’t get a 1099 for work you did, and you don’t pay taxes on that income, then there’s a problem if you get audited. You’re liable for late penalties on the unpaid taxes. And keep in mind that if you pay people and you get audited, the IRS will make you send out the 1099s. The people [ie, assistants] who didn’t pay taxes on that income when they should have are in the position of having to amend their past tax forms, and pay late penalties.
PDN: If you had a really bad year in 2010, are there strategies for using a loss of income to your advantage?
R.C.: Yes. If you have a negative income, and it’s a loss based on certain parameters, you are allowed to carry that loss back over the prior two years. In other words, a loss this year can create a refund on taxes you paid in the last two years.
PDN: Is it difficult to amend your tax forms to take advantage of it?
R.C.: It’s very easy for an accountant to do, but it’s probably mind-boggling for most people. Call an accountant, tell them you have a loss and would like to amend your tax forms, and ask what the fee would be. If your filing status has been fairly stable for the last five years, the accountant can go over some rough figures with you over the phone to determine whether your tax forms would be worth amending.
PDN: Some photographers have given up studios to operate out of their homes instead. Does that make them eligible for home office deduction?
R.C.: It has to be an area used exclusively for business. It can’t be mixed use. If your office is the corner of your living groom, it’s hard to take a deduction for that. But if you have a room filled with your photo equipment, your computer, your darkroom—you can take the home office deduction. And you can take it even if you perform your business outside your home, shooting assignments on location or in a rental studio.
PDN: How does the deduction work? How do you calculate what you can take?
R.C.: You allocate it based on square feet—say you live in a five room apartment, and one-fifth [one room] is used for business, then you can deduct 20 percent of your expenses, including your rent or your mortgage interest, real estate taxes, insurance, utilities, internet expense, trash removal, even cable TV if that’s integral to your business. If you make improvements to the office space only, you can deduct those expenses 100 percent.
PDN: Isn’t that deduction going to attract the scrutiny of the IRS?
R.C.: Home office deductions used to raise a red flag. The example they always gave was the anesthesiologist, who worked in five hospitals, but used a home office for billing. He was not allowed to take the home office deduction because he performed his services in the hospitals. But [Congress] revamped the whole thing. It no longer matters where you perform your service. If you have a space at home where you’re doing [administrative tasks] such as billing, filing, and computer work, or storing work-related equipment, then you can have a deduction.
PDN: So claiming the deduction no longer raises your risk of an audit?
R.C.: Right. But any expense can be challenged. I had a client who was a photographer, and the IRS agent came over and wanted to see the home office.
PDN: Taxes are due April 15. If you’re unable to file or pay in time, what should you do?
R.C.: If you owe taxes on April 15, file even if you can’t pay, in order to avoid a non-filing penalty. Remember, though, that filing an extension gives you more time to file your return, NOT an extension of time to pay the tax. You have to estimate what you owe and pay it, and you are penalized if the amount is not at least 90 percent of your actual tax. If you’re self-employed and paying estimated taxes on a quarterly basis, I’d advise you to pay a larger estimated amount than usual when you file for the extension. That theoretically creates an overpayment for the first quarter, which will be applied to the estimated payment, and give you some protection from late penalties.
And if you owe money and you can’t pay, have your accountant call the IRS. They’ll review your finances and if your expenses are exceeding your income, they will put your [tax] debt on hold.
PDN: There was an uproar a while back over the heavy-handedness of the IRS. Is it a kinder, gentler IRS than it used to be?
R.C.: They are. They’re looking for a level of compliance, They’re not looking for blood money. But if you can’t pay your taxes and you stick your head in the sand, they’ll put a freeze on your bank accounts. The IRS is imposing more liens than they used to, according a recent report from the US Tax Advocate. In some cases the IRS is issuing liens even when they have no chance of collecting back taxes.
The bottom line is, if you have a problem with the IRS that you can’t solve, call the Tax Advocate. They can help you solve it. People run into problems all the time that aren’t their fault.
Robyn Cohn can be reached at 212-254-4880 or at firstname.lastname@example.org.