In praise of Brain Harmony

I often preach how important it is for creatives to develop their analytical left-brain skills while using their artistic right-brain skills.

So I was very pleasantly surprised to learn that Masi Oka, one of the stars of NBC’s sci-fi series Hereos, began his post-college career programming computer-generated effects for Industrial Light & Magic.

Oka, who studied both computers science and theatre at Brown, remarked in a USA Today profile, “You’re not left brain or right brain.  I feel you need to use them both in harmony.”

Excellent advice coming from a popular actor with a reported 180+ IQ.

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Hire an Accountant or DIY?

In the first three and a half months of every year, a lot of people struggle with the question of whether to do their own taxes or to hire a tax preparer.

On one hand, creatives tend to be very DIY oriented.  On the other hand, creatives prefer to spend as little time as possible mucking around with taxes and things financial.  It’s quite the dilemma.

I first prepared my own tax return while I was in middle school.  Um, yeah, I’m weird like that.

I had earned some money from a cool summer job at the local science museum and come the next April, I wanted to understand what all the fuss was about.

I had no desire to become a CPA.  No pubescent urge to calculate.  It really was just a challenge to learn something new.  Like I said, I’m weird like that.

In the almost 30 years since, I’ve only had a CPA do my taxes once.  And in all those years, I’ve only once received a nice little notice from the IRS saying that I’d neglected to include some 1099 income.

Three guesses which year that was.  Yep, the one year I didn’t do my own taxes.

Out of fairness to the guy–he was my parent’s CPA, as I was still years away from becoming one myself–the 1099 in question probably just fell out of the stack of papers that went to him.

But ultimately, as the IRS and recent tax cases reiterate, the taxpayer is responsible for making sure the tax return is accurate and is timely filed even when a tax preparer or tax attorney has been hired.

So what’s a creative to do?

The good people at Lifehacker have written a few quality articles that ponder this very question.  Rather than rehash them in detail here, I’ve put the links at the bottom of this article.  They’re worth a full read.

To summarize them, though, the answer to the question of whether or not to do your own taxes is an absolutely unqualified maybe.

Do your own taxes if you have the time and bandwidth, if you’d like the challenge, or if you have a simple, straight-forward tax situation.  Outsource your tax prep if you don’t have the time or the bandwidth, if you’d rather not be bothered, or if you have a complex tax situation.

 

From Lifehacker:

Should I Prepare My Own Taxes?

Battle of the Human Accountant Versus TurboTax.com

How Do I Find a Good Tax Professional?

 

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Artisan Q&A: Expense Reimbursement and Non-Profits

Dear Rex,
I’ve formed an arts organization and serve as an officer.  The org has applied for tax exempt status.  I paid out of my own pocket both the filing fee to form the corporation and the application fee to file the Form 1023.  Assuming the IRS approves our tax exempt application, can the organization reimburse me for these costs without either of us getting in trouble?
—Nervous Newbie

Dear Nervous,

As I described in another recent Q&A, the IRS has very specific rules that prohibit transactions between an exempt organization and the people (called disqualified persons) who exert control over the operation of that organization.  The payment of compensation or the reimbursement of expenses by an exempt organization to a disqualified person constitutes one of these prohibited transactions.  [Internal Revenue Code 4941(d)(1)(D)]

However, volunteers of an exemption organization, including officers, may receive reimbursement or an allowance for out-of-pocket expenses, so long as such expenses are reasonable and necessary to carrying out the exempt purpose of the foundation and the payment is not excessive.  [Generally, IRS Guide and specifically, IRC 4941(d)(2)(E)]

The expenses you described—called organization costs—are only incurred during the organization’s formation.  Are they still eligible for reimbursement?  Yes.  The IRS recognizes organizational costs as legitimate business expenses.  Similar costs include:

  • State incorporation fees
  • The cost of legal services incident to the creation of the organization
  • Accounting fees for services incident to the creation of the organization
  • Filing fees

[IRS Publication 535]

So no need to be nervous about receiving reimbursement for the out-of-pocket expenses you incurred in creating your organization.

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Artisan Q&A: Loans to Non-Profits

Dear Rex,
Our arts organization is waiting on some big donations promised to arrive in January of the new year.  But we’ve got some expenses due in December and not enough money in the bank to pay them all.  Can I make a short-term loan to our organization to cover these expenses and have the organization repay me when the donations are made?  If so, how would it affect my personal taxes and the org’s taxes?  And if the org is unable to repay me, would the loan become a donation or just a bad debt loss?
Board President

Dear Board President,

Exempt organizations receive their special tax treatment to promote and encourage public support of the charitable purposes around which they were organized.  To ensure a few private individuals don’t take advantage of something intended to benefit the public, exempt organization are subject to special rules that prohibit selfish activity.

One such rule is the prohibition against “self-dealing” transactions between an exempt organization and a disqualified person.  Self-dealing transactions include the sale, exchange, or leasing of property; the lending of money or other extension of credit; the furnishing of goods, services, or facilities; the payment of compensation (or payment or reimbursement of expenses); and the transfer or use of the income or assets of the organization.  [Internal Revenue Code Sec. 4941 (d)(1)]

Who is a disqualified person?  Simply put, substantial contributors, foundation managers, and family members of both.  If substantial contributors are themselves organizations, then the owners of more than 20 percent interest of that organization are also considered disqualified. A foundation manager is an officer, director, trustee, or a person having similar responsibilities whether specifically so designated on an official document (like the certificate of incorporation, or bylaws) or if he or she regularly exercises general authority to make administrative or policy decisions on behalf of the organization.  [Internal Revenue Manual 7.27.20]

To recap your particular situation, you are an officer of an exempt organization (a disqualified person) who wishes to loan money to that organization (a prohibited self-dealing transaction).

So this transaction is clearly not allowed, right?  Not so fast.

There is a legal exemption that states the prohibition against a self-dealing loan “shall not apply to the lending of money or other extension of credit by a disqualified person to a private foundation if the loan or other extension of credit is without interest or other charge.”  [emphasis added, 26 CFR 53.4941(d)-2(c)(2)]

As long as (a) you are lending money to the organization and not the other way around, and (b) you are charging no interest on your loan, your loan would be allowed.

If you decide to make this loan, you’ll want to put the loan in writing.  I’d have the full board vote on the loan while you abstain from voting.  The board should, of course, record its decision in the meeting minutes.

For accounting purposes, you would show on your personal books a loan due to you (“notes receivable”); the organization would show that it owed a loan (“notes payable”) in the same amount.  Because the transaction is a loan, rather than a donation, and no interest is being charged, there are no tax consequences for either you or the organization.

If the organization is does not repay the loan, the tax treatment becomes trickier.  The IRS will look at the facts and circumstances of the situation—especially the organization’s financial ability to repay the loan—to determine your “charitable intent” in writing off the loan.  Let’s hope for the best and assume, if this happens, you’ll call in a tax professional to guide you through the process.

The rules around self-dealing and disqualified persons are much more complex and nuanced than I’ve described here.  If your situation doesn’t exactly match the one described above, you owe it to yourself and your exempt organization to get good advice that fits your unique situation.

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Why You Have Insurance

Croc Farm_39

You DO have insurance, DON’T YOU?

The county music duo Sugarland has been named as a defendant in a lawsuit stemming from the collapse of the stage at the Indiana State Fair three months earlier.  The accident, which killed seven and injured another 44, occurred just minutes before the group was set to perform.  Yes, having probably narrowly escaped death, the group finds itself at risk again.

It’s a tragic situation and I’ll leave a discussion of the finer points of negligence theory to the legal scholars.  But I want to highlight the importance of taking steps to adequately protect your business.  This includes liability insurance.

I have run shows both ways: fully insured and sans insurance.  The “commando style” show even featured an aerialist suspended breathtakingly close to the heads of the front row audience.  Everything turned out okay, but promoting a show without the financial safety net of insurance was an unnecessary risk that I’m not exactly proud of… or willing to take again.  Several organizations offer group liability insurance coverage for clowns and other performers at incredibly reasonable rates.  I could not have put on a show at a Six Flags theme park–featuring a half-dozen fire performers, no less–without such insurance.

Yes, I’ve gotten away with it, and maybe you have, too.  But for many professional venues, the lack of insurance is a show stopper.  For that matter, so is a lawsuit.  Insurance won’t ward off lawsuits, but policies can be a talisman against the financial devastation that can follow an unfortunate accident.

Creative Commons License photo credit: variationblogr

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