If you do what you love you’ll never work a day in your life. Not so easy a creed to live by when you’re faced with mortgages, loans, and a blood-thirsty car. But a recent comment by a U.S. Tax Court judge might make it even tougher for aspiring filmmakers to chase their dreams.
Judge Diane Kroupa made the comment while presiding over a case involving filmmaker Lee Storey, who filed for more than $300,000 in deductions based on expenses she shelled out over three years while making her documentary “Smile ‘Till It Hurts: The Up With People Story.” Kroupa’s statement may not only make it even harder for independent filmmakers to prosper, but her words also feel like a slap across all our faces.
“I’m… intrigued by the concept of a documentary. By its very nature, a documentary to me means that it’s not for profit. You’re doing it to educate. You’re doing it to expose …” she said this past May.
Three simple words, not for profit, could transform documentary filmmakers’ labors of love into a mere hobby, at least in the eyes of Señor Tax Man, and once something’s viewed as a hobby, the IRS can become very stingy when it comes to allowing deductions.
Let’s put aside the hobby vs. vocation argument for now (Fear not, we’ll broach the topic further down, where you’ll also find tips on how to keep from getting screwed by the proverbial man). For now let’s sift through the tax side of things, understanding that the IRS uses jargon and muddy explanations for the same reason mechanics and computer geeks do--so that we’re inferior to their power.
Firstly, this is mostly an issue for those of us who are so delusional as to want to make filmmaking our main (and extremely unstable) source of survival. Those of us who commit time, money and reputation on projects that steal years of our lives and fragments of our sanity. If you fall into that category, or hope to one day, read on.
This was all brought on by the Storey case, but the big-picture issue is precedence. Kroupa’s comment could present a precedence that is problematic for all financially struggling filmmakers, which, if you are one, you’ll understand to be as redundant a phrase as two twins or very unique.
The IRS allows deductions for profitable businesses (or business and non-businesses aimed at making a profit). That’s not the case for a hobby, or officially, an activity not engaged for profit, hence why the judge’s comments pack a powerful punch.
Bear with me as I dig into IRS codes for a moment. IRC 183 was established to thwart taxpayers, who have significant income from other sources, from reducing their taxable income by claiming losses on ventures deemed as a hobby. Simply put, Lady Cab Driver can’t write off the cost of her yarn, needles, fabrics and sewing machine that she bought as a way to bide her time on rainy Sundays, not if her livelihood is fueled by cab fares and tips.
Seems fair, right? But let’s introduce filmmakers into the mix.
Mr. Teacher (teaching being his significant source of income) spends summers, school vacations, and weekends working hard on a documentary. The guy’s spent a ton of cash on equipment, travel, hiring a crew, and God knows what else. He goes to write off these expenses, but hold on there, partner, says here you’re a math teacher. What’s that have to do with a documentary on the Brooklyn music scene? Nah, sorry. What you’ve got there is a hobby. Run along now, oh, and next time be a bit more frugal with your spare-time activities.
But hold on, Mr. Tax Man. What if Mr. Teacher’s dream, and goal, is to become a filmmaker, except he’s got kids, a car, and a pesky landlord who seems to enjoy getting rent checks each month? What if Mr. Teacher hopes this documentary will be his big break, but until his break comes he’s keeping his day job (his kids whine enough as it is; imagine if there was no food on the table)? What you’re saying, Mr. Tax Man, is for him to get a tax break, Mr. Teacher should have quit his job and go for broke? Only then would you take his filmmaking venture more seriously?
To be fair there is another option Mr. Teacher has, and that’s to turn a profit on his documentary. But even if that does happen, it may not happen soon enough for the IRS.
One of the ways the IRS determines if a business (or activity) is for profit is if that activity turns a profit in at least three years of a five-year span. Again, that seems fair. Businesses that don’t achieve that over five years are bound for failure. But no one ever said our business was a financially fortuitous one; all we’re saying is it is a business.
Most films can take two to three years (if not longer) to make, from brainstorming to distribution. Think of it, particularly with documentaries. Researching, traveling, equipment, legal expenses, hiring a crew, test footage prior to making commitments… we haven’t even gotten to shooting the documentary yet and already the budget is soaring and the calendar pages are changing. Documentaries, and all films, require a ton of cash, and a ton of time, before the film is even shot, let alone ready to be distributed.
And while Mr. Teacher may land some grants, risk his life by loaning from Paulie Walnuts, double-dip on credit cards and stick his hand in grammy’s cookie jar, he’ll likely need to part with some of his salary to make this film happen, with no guarantee he’ll earn that money back.
But it’s just a hobby, right? Like go-carts and stamp collecting.
Most of us have other jobs outside of filmmaking. Those who can claim filmmaking as their lone source of income – bravo! E-mail me if you need a collaborator. No, really, e-mail me. But the rest of us need other jobs to keep at bay the loans, landlords and life expenses, (regardless of if we’re baristas, freelance writers or rocket scientists). It doesn’t mean we don’t see our filmmaking as a job; it just doesn’t pay all the bills yet, although it does a fine job adding to our debt, which is why we need a break.
There is no question that filmmaking is a lousy business to get into financially. But documentaries can make money. Just ask Michael Moore and Morgan Spurlock. You’re talking hundreds of millions of dollars people! Filmmakers deserve the respect and freedom to say “Yes, this is what I do,” without the IRS sounding like a chauvinistic husband writing off (pun intended) his wife’s artistic passions as frivolous.
When I was a teacher I often said that I didn't do it for the money. It’s like a badge of honor, really, for teachers to be able to say “I do it for the love, not for the money,” (and on a side-note let me just say some of my most successful moments in the classroom came when I showed, then discussed, a documentary with my students).
Well guess what, Mr. Tax Man? You’re damn right I make films for the love, not for the money, but you are out of your mind if you think I don’t want to turn a profit. It’s a risky business, this business of making films, but isn’t that all the heart of capitalism: taking risks?
It’s not fair to belittle our work just because our chosen journey is as rocky as they come. Let us deal with the repercussions of our choice: working multiple jobs, reusing tea bags four times, eating scraps from a dumpster (What? No, not for me, I’m just giving an example) and surfing couches from coast to coast. It may not be picket fences, 2.5 kids (that sounds painful) and free weekends, but it’s still a dream. Our dream.
Give us a break. Literally. We give everything we have to our projects; why make it harder on us than it already is?
On that note, here are nine factors the IRS considers in determining whether an activity is for profit. Below each factor are tips on how to look your best for the IRS, provided by Attorney Michael Donaldson (courtesy of indiewire.com), who is involved as friend of the court in the Storey case.
1) The manner in which the business/activity is run.
Tip - Look professional. Keep separate files and bank accounts for your production.
2) Expertise (meaning the likelihood that you can make a successful film).
Tip - Film school degree helps, as does memberships to film organizations.
3) Time and effort spent.
Tip - Again, keep great records, including daily logs.
4) Appreciation of value of the asset (i.e. – film).
Tip - Keep records showing that you’re doing all you can to sell your film.
5) Post success rate.
Tip - This is a tough one, especially if you’re a first-time filmmaker. Worry about the other factors.
6) History of income and loss.
Tip - Like #4 – show that you’re trying to sell your film.
7) Amounts of profits.
Tip - Yikes. See #5.
8) Financial status of [filmmaker].
Tip - In short, it hurts you if you have a full-time job outside of filmmaking, because then, what you do away from that job is a hobby. If you can swing it, then live poor, like a true artist, I suppose. Hey, if the government encourages it …
9) Personal pleasure/recreation.
Tip - If it seems like fun, it’s not work? Jeez! Again, document all the personal and financial sacrifices made.
