The Business of Independent Filmmaking

Welcome and thank you for joining us. I'm Candace block, and I'll be your host for this episode. While filmmaking is a creative process, it's also a business and to be successful in your productions, it's important to manage those business aspects thoughtfully and properly. On this episode, we aim to provide some guidance and advice on the subject through two interviews.

First I talk with CPA and MBA, John Aaron, where we discuss things to consider when it comes to funding and. I then have a conversation with entertainment attorney page gold, who gives advice about insurance and contracts.

John Aaron is a CPA with an MBA in taxation who has decades of tax finance and strategic planning experience in the corporate world. He writes a narrates on various business and educational topics and has contributed.

as a consultant to various organizations, he's been very active in with serving as a board member and a member of the communications committee. That's bringing you this podcast. And currently he is consolidating his business and media skills into a new business as a production accountant for independent media contractors today, we're going to benefit from that knowledge and experience as we talk with John about some of the money matters in media making.

So hi, John, and welcome to the podcast.

Thanks, Candice. Happy to have the chance to provide this podcast.

with members and members of the larger media community. 

As we all know, filmmaking is, show business has the art side, the show and the business side of things and the business there's money, paperwork, insurance, and so forth. So today we're going to talk about some of that business stuff, because while it's not necessarily as fun to most of the creators, it is crucially important to do properly.

So let's dive in. So when a new project is getting underway, one of the very first steps to see. Funding, obviously this can be done in many different ways. So let's talk a little bit about what some of those different methods mean from a business standpoint.

Sure. The first question is how much do you need? And you have to have a credible ask and a credible ask is a result of pre-product. And budgeting. I like to relate an anecdote, the magic partner of a CPA firm I used to work for would tell he had a client who produced arguably the world's best chocolate chip cookie. They went out of business. Why he put too many chocolate chips in the cookies, he couldn't afford it. And similarly, if you're making a movie, You don't want to put too many chocolate chip in to your budget chocolate chips here being cranes, or affects or locations or costumes to the extent your story would support alternatives.

You need to do that. Now. We all know the steps. You get a script, you break it down. You schedule, but then you have to budget when you're scheduling and breaking down a script, you're going to make a storyboard. Just think of budgeting as being your financial storyboard. It's as important to the project as the storyboard for your director. 

 when people are thinking about how they're going to start getting their funding, once they've got their budget and they know how much they need to get this done what are the differences between like self-funded pitching to investors, loans, grants, crowdfunding donations.



where's the money gonna come from? Can you come out of your pocket? It can come out of grants. It can come out of Deals. If you can sell the script to a distributor before you start making it, or more likely in these days, particularly for smaller projects that are independently produced, it may come out of some form of crowdfunding. So they're basically a different crowd funding sources, and they each have different tax applications. 

Okay.

The most common crowdfunding source that we would run into in terms of funding, a project like this would be something like a Kickstarter or a GoFundMe. It's technically something that's known as a reward based crowdfunding source in that the reward may be recognition, a mug, a t-shirt something as distinguished from.

If you have an LLC, that's your production company. LLCs don't sell stock. They can't raise money themselves by offering a position. So the crowdfunding, if you can raise enough from friends, family, and assorted hangers on is one way to do it, but there's a major tax impact that everyone has to keep in mind.

That income's taxable. And should you be lucky enough to raise everything you need? You want to be conscious of your timing. In other words, if you raise all your funds in 2022, but you don't finish your campaign until November, December, you got to have all that income at 22. But if production does begin till 23, you don't have any offsetting expenses. It's one of those things that you have to keep in mind that can sneak up on you. 

 I'm sure a lot of people wouldn't necessarily think of that, which is why these kinds of things are great to discuss ahead of time.  if you're not doing any crowd funding thing or direct donations, and if you're maybe not able to get a grant, if you're perhaps pitching to potential investors from a money person perspective, do you have any tips of what what helps make a good pitch for that?

the critical component is knowing how much you need to ask for And that?

gets back to the concept I opened up with about breaking down, scheduling and budget. 

So you did mention LLCs are ready as well. And we know productions come in, all different shapes and sizes and all the people listening come, they range from amateur to veteran and small, to large and medium and all of that. So what are the differences between being a sole proprietor, an LLC, or a sub C corporation for.

 clearly you can choose any form of business that works for you. The difference has to do with legal liability or protection from liability that corporations offer compare to in effect funding the project out of your wallet as a sole proprietor. Many of us who have been self-employed from time to time, particularly before LLCs were available actually wouldn't have to form anything.

You would just do business either under your own name or an assumed name, a DBA. But essentially you're operating your business out of your wallet. It's fine. Unless something goes wrong.  So to try and protect yourself against lawsuits liabilities even if you had say errors and emissions or casualty sorts of insurance, you're still personally liable. If you run it as a sole proprietor, which means that any of your personal assets could be the subject of an attack.

You could lose your house. You could lose. Investments, you could lose too much if you don't have the protection of some corporate form. Now LLCs limited liability corporations and subchapter S corporations are unique in that they're hybrids. They give you the same protection. To varying degrees against lab, personal liability for.

acts of the corporation.

It's a matter of discussion between you and your attorney to spell out exactly what the limits of those protections are and how far they extend because it's not impossible to use the legal phrase to Pierce the corporate veil. In certain cases and you end up with your personal assets being exposed, but it's certainly better than having no wall around you, your project at all. 

So it sounds like you would recommend doing an LLC or something like 

I would from both a attacks or reporting and as a non lawyer, from what I may say about it, Having some degree of protection from liability and insulating it within the project within the four corners of a corporate structure is to my mind always preferable, but you and your attorney and your tax counsel can tell you which one's better from those points of view.

The nice thing about LLCs. Is that it very much simplifies the reporting. Now, the question has arisen in the past. What happens if I don't make money with. Or takes a number of years from my movie to get from pre-production to a screen and actually derive ticket sales or rental or downloads one of the best defenses against the hobby loss rule, which says that if you don't have income at three out of five years, the IRS may presume.

That you're a hobby and not a business. And therefore dislodge deductions. I wrote a blog piece for, with some months ago explaining that there's a case out there called story S T O R E Y, where a judge told Ms. Story that she was in fact, a business. And could take those deductions because she was clearly not a hobby.

How did she sustain that She did it by meticulously demonstrating a profit motive,  keeping copious detailed records. Having a separate bank account and memorializing everything she did to demonstrate that she had a profit motive, including paying for seminars on topics like this to find out how do I. Going to networking meetings,  learning how to distribute paying fees for courses. Being scrupulous about appearing as a business is absolutely necessary to defend against the possibility of the rebuttable presumption that you're merely a hobby and having a corporation such as an LLC or an S corporation is really going to help in that. 

 you had mentioned before about the financial storyboarding concept that you like to talk about. So w let's go into that a little bit more.

I mean, obviously there's the budget. Element and breaking it down. But how do you if somewhere were to come to you with a new project, for example, what are the first steps that you would talk to them about? And for making sure that it gets done 

 first, I need to understand the business structure. I needed to get a sense of the scope. I need to get a sense of who will be funding it. And then if they've already broken it down by scene, I need to sit down. With whomever on the production team, broke it down and then start to attach dollar signs.

Now, when we talk about storyboarding, there might be three or four or five different camera angles during any scene, that's going to tell us how long it's going to take. Okay. A traditional storyboard just says, here's how I'd like it to look, but it's going to take so long to capture that. Look that. Times the rates that you will find by surveying the typical costs in your community. It's going to tell you what's going to cost to produce each scene, add it all up in essence. That's what it's all about. 

Yeah, so that's great. It's a good thing to keep in mind, obviously from a creative storytelling perspective, there is that, planning out the story and it's a good tip to also have that. What is each scene potentially going to cost 

Yeah, exactly. 

realistically what's going in that's a wonderful piece of advice.

Thing is that  any accountant could multiply times dollars, but the perspective that I am advocating is to keep in mind what creative alternatives. Might exist so that if you say, I want to shoot a scene in a health club, I've got to rent the house club.

Is the scene about the health club or is it about the conversation? The two or three women who are working out together have. Could they work out, say on yoga mats and the living room with the backyard and save all that money. So again, without trying to drive the artistic arc of the story, just having an eye on what the alternatives are that w may allow you to tell the story more economically is that. 

Yeah. So it's almost like having contingencies. This is, your first choice, your second choice, third choice for how to get a scene done, but based on what you were able to actually gather for your budget.

Yeah, because you can shoot for the moon. You can put together the Cadillac budget and then say, based on. My budget.

is going to cost me a Cadillac. It's gonna to cost me a Tesla. Maybe ought to be looking at a Toyota. 

Four Teslas and a Bugatti. Yeah. If money's no object, obviously that's one thing, but then there's also the creative strengths and constraints that allow for creative problem solving. And that is a budget constraint as well as, what other people come up against in terms of locations and who's available and things like that.



and to what extent can you barter a credit for cash? Yeah, we talked about a rewards.

based program. You can have tiers of contribution,  if you contribute up to X number of dollars, we'll send you a coffee. If you can share up to Y dollars, we'll give you a copy of the script signed by the director and the stars.

Yeah 

if you'd give us this much, if you give us a Z amount, we'll give you a screen credit. So as an, as a producer, that's a reward. 

Yeah. R a background extra role, all kinds of 

Yeah, exactly. Use your imagination. 

 So there is imagination within money as well. Is the point I'm seeing here needed for sure. Once everything is put together and you have your budget and your pitch deck, and you've gotten, the money that you need for everything. And you're about to start your project. What, from a money sense is success.

There's two combustors success.

getting the money, having the money to go far enough, but ultimately getting your work on this. Attracting an audience, creating a body of work and staying in the game and not incidentally, not alienating all your friends and family who gave you the money in the first place, because you couldn't get it done.

That's success. 

Making sure it gets on and also not forgetting to factor in distribution and all of that stuff beyond just getting the thing in the can so to speak.

Exactly. I mean, budgeting is a cradle to grave process. You will have to account for fees for rights, for insurance, for health and safety on set for you name it. I've put together a model chart of accounts that stretches for two and a half pages. And you have to have a contingency fee Southern sky go Rog, you got to lose a day of shooting because of rain. 

Nothing ever goes exactly the way you expect, which is part of the adventure of production. As we all know

 if this is all sounding overwhelming to anyone listening that is why people like John exists definitely consult with and talk to people who are experts in these matters and will know what questions to ask and those little things to keep in mind to get you a successful beginning.

Production to the end and distribution as well. as everyone is aware, tax day is right around the corner. The filing deadline for 2021 is just upon us. It might not be too, it might be too late for this year, but are there any last minute tips for things film makers should keep in mind for next year?

So as they're getting into, doing their projects in 2022, when they're going to have to file.

Yes, the facts for 21 are now set in stone. It's always good to. Planned for the future, just as you do with a budget for a project that overlaps more than one year, the good news is there are still a few areas where taxpayers may have some latitude in how they treat the 20, 21 facts. Some topics that our members may not be aware of. I want to focus on just a couple of areas, including crowdfunding, obviously the question of timing and.  if you formed a new LLC in 2021, for the purpose of this production, you've got your crowdfunding incumbent, no expenses check with your advisors.

Maybe you can use the accrual method of accounting and take into account on an accrual rather than a cash basis. Those expenses that you reasonably expect to incur. The other thing is for an ongoing LLC perhaps you made money as you can make a pension plan contribution. There are certain elections if you've acquired equipment  to expense them in the first year, rather than depreciate them Ratedly over their lives. But you should also look at during 2021, if you had COVID loans or grants, make sure you check with your tax prepare to see what you may have be exposed to whether the loans or grants may be forgivable the extent to which.

Let's say you receive payroll per protection plan money or other grants the extent to which you're allowed to deduct your ordinary necessary business expenses funded by those grants. So those are the things to contemplate as you're putting your information together for your CPA and obviously having a good set of books during the course of the year makes it less of a.

All very helpful and useful information. Any last, a bit of advice from a money minded person before we before we wrap up.

 earn more, spend less. Safe. And if you can spend less on your movie than the potential of it being financially successful, to the extent any movie that's made on spec, may expect to be financially successful is at least enhanced with out, going through the process.

You're making that.

goal less. 

 you want to be focused on the art of it, not so stressed all the time. So all that pre-planning is really important and doing it.  thank you so much for chatting today about some of the fundamentals of what to keep in mind when it comes to dealing with the money side of things for production.

I'm sure filmmakers have learned a lot more about credit. Successful works and getting them all the way from concept to screen. So we really appreciate you sharing your knowledge on the podcast today. Thanks. 

Thanks.

It's been my pleasure to pay back and pay forward for the WIF community in in respect to all the things that I have derived from being in the community. So it's always my pleasure, and I'm always happy to talk about these related stuff.



I'm 

now sitting down 

with Paige gold, a bi-coastal 

entertainment and media attorney with extensive legal and business experience gathered from years of practice involving television and film production, copyright, and 

trademark law contracts 

and negotiations.

First amendment rights, and more before getting her law degree, 

had a 

background 

in 

television production and as an attorney, 

she has counseled clients ranging from production companies. Producers to TV, personalities, authors, PR specialists, and 

communication firms. She is also a whiff member and brings her wealth of knowledge and experience here today to chat a little bit with us about the 

business of independent filmmaking welcome page.

And thank you so much for joining us.

I'm very happy to be here. Thank you so much for 



I guess

we'll 

we'll 

kind dive right in 

on the 

legal stuff.

what are some of 

the, legal matters 

that you found that 

newer  filmmakers tend to just overlook or things they don't yet know to consider. 

 on a basic fundamental level, a lot of them are doing this because it's a passion because they love the art and the craft and they don't realize it's elsewhere.

And that they need to operate like a business, which includes having signed legal documents with  the people you're working with, who are helping to put together a production. a lot of times it boils down to not getting releases, not getting permits, certain things that when it comes time to try and find a distributor they're going to have to track people down and get them to sign stuff.

Sometimes there've been arguments and people aren't willing. I years ago met with a young man. He and his friends had made a horror movie and they were friends. They'd done it edited.  but nobody had signed anything.

And some people like, including the director of photography, he didn't even know where they were. And I said, this is probably unreleasable because it's going to be hard to get errors and omissions insurance, unless you have releases from everybody. Okay. You don't want to lie on the application by saying you have all the leases you need when you're drunk.

So that, that was like the biggest mistake in terms of not having paper. Other times, people wait till the end and it's just, it's a lot more difficult after you've wrapped to get all the signatures you need. Cause people go their own separate ways. So I'd say getting started just as you said a shot sheet or a storyboard.

You also need to start by consulting with a entertained the lawyer. That is who who understands what documents you're 

going to need. Attorneys 

often 

suggest that

producers use some form of like corporation to shelter them potential civil  arising, arising from their work.

Um, What are some examples of some potential lawsuits that filmmakers should be aware of? Our 

concerns? 

about? 

First of all an LLC will do for a low budget film often for a medium budget film.

there's two types of insurance kind of business insurance that any retail store would have accidents, injuries. That's the kind of thing you want to set. And after you finished shooting and editing, you need to get errors and omissions insurance. And that is for the more abstract lawsuits by people who say you stole their script by people.

Say that was based on my life. I can't believe you used me. You've embarrassed me in front of my family. That actually happened. I wish I could remember the name of the movie. Some very well known movie where the screenwriter would use the name of a guy who went to high school with. And I think that was all the character had in common.

It was not Forrest Gump, but it was something like that. And the real living person, trying to get a bunch of money. And he was unable to, because it was in the name was not that unusual. It was getting on say Steve Smith or something. So it was the loss. It didn't go anywhere.

The problem is even if you get sued by somebody who doesn't have a case, it costs money to defend yourself. That's why a lot of losses, broad kinds of lawsuits settled because it's cheaper than going to trial. also, as a practical matter, you cannot get errors and emissions insurance, unless you have a business entity and the film.

If you PR bruised it as yourself, you need to transfer all rights to 

the LLC. And that's what the Arizona, Michigan shirts

will cover. 

as you said, with that example, you don't know, even if you're doing something that you don't see as a problem or an issue that doesn't mean someone might disagree 

wherever it was that named somebody and I don't think he even knew the person just seemed like a good name and Yeah, somebody came out of the woodwork. movies that are based on real events can be true. And there was a lawsuit.

 either the book or a movie about Sylvia, Plath, somebody sued and said, I was recognizable in this and you embarrass me. And the problem was that it was a different. And  unless somebody actually knew that  woman, they wouldn't have known it was her.

And by suing the whole world knew who it was. So those are those things generally that far. Anyway, those are things that you never imagined. And by the way, the one thing I always say is that if your movies doesn't make money, you don't need to worry about most of this 99% of the time. you don't want to worry.

It's when your movie is successful and suddenly it gets distributed, starts making money. That's. People are able to find lawyers who are willing to file 

suit 

what's the difference if you're doing like a documentary versus a 

narrative in that  

documentary, you get everybody's on camera, you get them to sign a release saying I can depict you your voice, your face.

in many cases, if it's somebody who's a significant personality, it's about that person. The producer will have to give them the right of.

consultation. And as a matter of fact, there was a documentary.  a profile of Aldous Huxley, the brave new world author, a profile of his wife who was in her nineties and a character. If she insisted on having a makeup artist there, which the producer said we never did that with documentaries, but she, she wanted to look good on camera.

So anyway, the point was that she I'm sure how to write a consultation about the nature of the project. So I've gotten through a far-field if you're doing a profile of living parts and unless you're going to deal with this kind of, guerrilla shooting, gorilla photography stuff where you're, you're not doing what they're cooperative.

You're going to need them to sign a release and probably want to write a consultation. Now, if it's a news topic that's akin to journalism, it's very much like journalism and that anybody who's on screen, who you're interviewing needs to sign a release. But if you're doing a profile of, some villainous, Rupert Murdoch, for example, I'm sure they have been done.

The filmmaker will know that Rupert Murdoch is in, co-op gonna cooperate. And won't even probably will obligatory only ask if you want to be interviewed, be turned down and that's there. They're not going to hesitate job. Go ahead and profile them, even though he's not cooperating because he's a public figure  

and then there's 

I would imagine. 

um, and licensing, 

if you're going to be using footage and things like that, that you 



Getting rights and licenses that's a separate category from the individuals who you are profiling or who briefly on spring. Generally when you are in a public place, photographing people who are passing by you  in general, don't need to get releases. If they're just passing by if they're children, that could be a problem. But most of the time. And a big crowd. It's not assumed that you need to get relief from those people because it's, there's not much chance of them suing or having a viable lawsuit.

You are however, going to need to get a release. As I said, from the person that you're interviewing and talking 

to. 

Yeah. And 

And w what type of language would you 

say is absolutely crucial to have in, in those types of.

 it's a pretty boilerplate release that just says, I give you the. So my lightness face, voice and character I  on screen in this audio, visual medium in perpetuity there.

And I will not Sue you for how I'm depicted. So 

Gotcha. 

you have this kind of thing you need. The, anybody has worked on documentary. Pretty aware of this, even if you only made why you need to be on good terms with the people, you are profiling again, assuming it's not a Rupert Murdoch type who you're doing this this profile of to show how horrible it is.

If it's somebody who's collaborating with you, they need to be able to trust you. So it's a lot, like a lot like journalism and that you want your sources and your subjects to trust you. And to know you're not going to. Embarrass them that you're focused on whatever the subject isn't one of those bloopers movies where you're going to 

 for 

starting out, not 

everyone 

an attorney of their own, um, or someone with specific entertainment, 

experience. uh, what are things 

they should keep an eye for when they're creating, 

uh, contracts? For example, I 

know there's a lot

of.

um, templates and things available online and, and examples  

the stuff that's online is it's about as trustworthy. A lot of other stuff, that's on the internet and you have no idea who

who wrote it, whether it was drawn by a lawyer or a paralegal, somebody who justice seen it. Occasionally I will tell you I'm in Washington, DC, there's Washington area lawyers for the arts in California, there's California lawyers for the arts that I, where they offer seminars classes.

And they can set you up at nominal, price, a consultation with a lawyer. 

would 

you recommend that in almost all 

instances,  you consult with a specific 

entertainment.

If you actually. Are looking for distribution.

And this is something that whenever I talk about errors and omissions insurance,  I always say, unless this movie is only going to be seen by your friends and family, you're going to need to find a distributor.

Now a distributor is a broad term these days, Netflix, as a district. But there are many smaller distributors in different territories. Europe, north America, all of them are going to require that you have in Arizona missions turns so that if there's a lawsuit again, the hypothetical guy who says this embarrassed to me they want to know that you've got insurance just like they do that. In other words, there'll be two sources of litigation defense.  because presumably you do want other people to see your movie besides your 

friends and 

Yeah.

you should, uh, 

uh, assume that it's going to be successful. Therefore be as, 

protected 

as. 



By the way, one thing, and this is again, occasionally people are so cocky that they spend a lot of time negotiating back-end payments. In other words, I'm only paying you this nominal amount, but if it's successful, you'll make this and I'm always happy to help them with it. But I, it's not something to focus too much on 

Having said that movies do make profits. I'm not saying they don't, but the point is to focus too much on the backend. You don't have to spend hours and hours negotiating something. When ultimately the back end will be $250 for each person. It's not a practical use of anybody. 

That's good Um, just overall, 

are there 

any 

like 

final, any kind of common mistakes or 

oversights or 

what type of for someone

that's, uh, that's 

about to take on a project and they want to make sure they're doing.

 Check's a certain boldness to make a movie. It takes a certain kind of personality.

People who are always. Careful about what they're doing often, don't have the self-confidence and the willingness to throw themselves into a project along with that often goes a certain recklessness.  it's the same as being the head of a family when you're shooting a film and you need to make sure everybody is going to be physically protected because Liability for physical injury could destroy you economically.

There was a project now I, a friend told me there's another lawyer talked about this. She was representing a music video.

And with a bunch of young people in the back of a wagon with a bale of hay and something happened either it slammed to a stop or got an accident and a bunch of them fell off and a bunch of them were injured. The hospital bills started coming in and they're suing whoever made it. And there was no entity I suppose the person making it a plan to form it later, but it was a massive drag out forever because it was one of those things of the plaintiff's looking to see who they could Sue since there was no entity for them to Sue, they were going after everybody from the producer, the writer, the director.



you don't want to end up in a So 

it sounds 

like if this is not your 

strength, make sure you 

have, uh, 

 bringing in somebody who has done this kind of thing and who, who has worked with lawyers and who knows what's needed that that's the thing

My main caution is you don't need to hire a lawyer straight off, but you need to work with say a production manager, somebody who knows what sort of legal documentation is needed, who can remind you when when you come to.

a certain point, th the different 

things. 

Yeah, 

 And one of the things that puzzles me and it's not just women in film and video screenwriters everywhere.

 I think that their screenplay will be protected if they register it with the writers Guild. That, and so the only way to be protected is with the copyright office, the writer's Guild, it has this cash cow and people sending in their screenplays and registering them. And the whole point of registering it is so that if somebody were to steal it or copy it, you could have a basis and say, look, I own this.

 You had access to it and your project was too much like it. If there were a trial over this and you were only registered with the WTA representative, the WGA would get on the stand and say, yeah, we received this on March 4th, 20, 22. the lawyer would say, do you know if it's authentically that person's Nope, all we know is we received it 

Such a gap in knowledge.  I see so much in social media that just finished my script. I'm sending it off to, that'd be a GA. So yeah. I mean, you can do that if you want.

It's not going to do anything, but maybe get you a little, a certificate from the WGA. You absolutely need to register it with the 

current. Excellent. Well, 

 If anyone wants to, uh, get in touch with you or learn more about you and your practice, where can they go?

My website is Paige gold.com, P a I G E G O L d.com. And my phone number is (213) 507-6456. I am on the east coast ground, but I kept my Los Angeles. Entertainment line number because I do so much work with people in 

Well, Thank you 

you so much. this has been and, uh, I

know, uh, 

that giving some people, listening, some, some more food for thought to make sure they do everything, 

uh, 

as properly as possible 

from the onset.

So it doesn't 

become a problem later. 

Thank 

Thank you so much for 

taking 

the 

the time to 

talk with us about this. 

Before we wrap up this episode for even more information. What follows are some highlights from past whiff seminars that center on business matters?



We're going to have a great night talking about tax issues for media professionals. And I'm delighted to introduce our speakers this evening. we have with us Ben gross, who, um, these are all, uh, attorneys at Ivan's Phillips and Barker. One of the leading tax firms here in tax law firms here in DC.

So we have partner, uh, Benjamin Gross, uh, partner, Halena clump. 

And associate John Holbrook. And with that, I'm going to turn it over to our distinguished guest speakers. Thank you all. Thank you, Cathy. Thank you, Kathy.

So the first one we're going to cover is the distinction between a business and a hobby. So I want to put this in context before I leap into the slide, describing a hobby, just trying to think through why do we care about the distinction between a business and a hobby?

Let's say that someone goes out and they start a grocery store and they pour all their funds into this grocery store. And the store fails. Their produce all goes bad. Uh, everything that they've paid for it, it goes up in flames and it's a total waste. We would expect that person to get a deduction, to be able to deduct all the money.

They lost trying to start up this grocery store, trying to sell the. If someone on the other hand likes riding horses and they buy a lot of horses and they have horse breeders on staff and they train the horses and they practice riding the horses and they entering competitions. And it's just for the fun of having horses and something goes wrong or just over time, very expensive hobby.

They spend all of their money on this hobby, just for enjoyment. It's a lot closer call weather, the government society. Once those people to be able to deduct their horse expenses. There's a long line of cases. Court cases, believe it or not distinguishing between whether a horse hobby was a hobby or it was actually horse breeding with the expectation of profit.

And so you, you can do something that's enjoyable as a business, uh, but you have to run it in a business like manner and you have to have the expectation of. And so to avoid the problem of people just getting deductions out of their fun hobbies, playing video games, riding horses, if they aren't engaging in it as a business, you can't deduct your expenses for a hobby, but you can for a business.

So with that, let's talk about what is a hobby? What is the distinction between a hobby and a business for tax purposes? A hobby is an activity carried on without the expectation of making a profit. It's pretty hard for the IRS to get inside your mind and to know what you expected. So they look at the circumstances, they look at how you engaged in the activity.

Did you keep records? Did you have a business plan? Uh, they will look at the time and effort you put into it. Is this just something that, you know, you spent one weekend on and then you sort of forgot about, and you never took it that seriously, or is it something where you've shown persistence and you've worked on it consistently over a long period of time.

That's not to say that you could never have a business that lasts a short span of time, but these are just factors that are taken into account in generally getting a sense of whether you're trying to make a profit. And then the last factor mentioned here, but there are many others, uh, whether you depend on the income for your livelihood.

The other thing I just note on this topic is for, you know, think about where the IRS is coming from and really where Congress as well, it's coming from this, the concern, um, is going to be they're afraid of abuse by rich. So the, the hobbies of the really rich, you know, oh, I want to have a winery, oh, I want to own race horses and compete in the Kentucky Derby or, you know, those, those sorts of things.

Um, and, uh, or, you know, travel and take nice vacations or dabble in the arts. So those are the sorts of things that they may be, you know, most, uh, concerned with are where they're coming from. Um, and I think, you know, for most people you usually, you should know pretty clearly, like in your mind, is this something you're doing for fun and thinking like, oh, can I get a tax deduction here?

Or is this really something you're doing, you know, for profit making enterprise? Is that what it's about? Um, you know, I, I did have a cousin who worked for a year writing a travel guide and, you know, the, there are some jobs where you can have some really, uh, Interesting and entertaining business, legitimate business expenses.

Um, but for most people who travel, um, you know, that wouldn't be

thank you. And there's also a taxpayer helpful presumption that if you actually made a profit in the last three out of five years, then the IRS will assume that this is a real business and treat it as a business. It's not ironclad. Do you think presumption can be overcome if it turns out to it really clearly was not a business, but that's a general rule.

So for tax purposes, what's the distinction. Why do we care? What's the consequence of having a hobby or having a business well for a business, you get to deduct your expenses. That's pretty good. If you have. And you're actually putting out a money, making outlays to generate that income. The downside of having a business is you're subject to self-employment tax on that income.

So if you're in a situation where you have a fair stream of income, but you have very low expenses, then a hobby, if it actually is a hobby, hobby treatment would be better for you because that income would not be subject to self-employment tax. And you're not really missing out by not getting the deductions because you don't have expenses.

Anyway,

the distinction between a business and a hobby it's based in reality, it depends what it actually is. But often in tax there's substantial overlap. There's gray area and there's room to argue one way or another. If the situation's not clear, or maybe you haven't even decided for yourself, which you want it to be.

So there may be circumstances and. Uh, you expect maybe something will come with this. Uh, I'm just doing it for fun, but I'm not going to treat it as a business because who knows. I'm not spending much on it. I'm not taking it that seriously. And then down the road, if you're able to treat it as a hobby, you get the income, not subject to self-employment tax.

There's a narrow exception here. I, I generally say you can't deduct expenses for a hobby, narrow exception for technical tax reasons, cost of goods sold. If you're selling a tangible thing in your hobby, then the expenses that go into producing that tangible thing are taken out of the income that you receive.

And so you don't pay tax on the income from that hobby to the extent of the expenses for the tangible, physical thing that you sold. So in this example, here, Film, if you are selling actual film to somebody, uh, then the cost of that film can come out of your income for a hobby. Um, but if it's a video recording and it's just a, a computer file, not a physical thing, can't get that benefit

 So next, the topic of choosing a business entity, and this is really a thorny set of issues. And we'll try to just lay out the framework and avoid getting tripped up with too many of the details because really the framework, uh, should be all you need at this point.

But we'll see if there are any questions. Yes. Rich with both tax and non-tax issues as well, which is part of the reason this, this is a little complicated, so there are almost totally independent. Systems of business entities under state law purposes and how those entities are treated for tax purposes.

And there are some connections, but they're really distinct concepts. And so if somebody tells you, I have an LLC it's taxed as an LLC, generally you can guess what that means for tax purposes, but it really could mean three, four different things for tax purposes. You don't know for sure. There's totally separate tax, uh, classification scheme that runs alongside the state law classification scheme.

So for state law purposes, basic distinction is, have you registered or incorporated the entity? Have you signed it up somewhere? Have you filed papers or is this just something that you have informally going, uh, either by yourself or with. The unincorporated entities for state law purposes, sole proprietorship partnership, the registered, uh, or incorporated entities.

You've got corporations, limited liability companies, S corporations. The list goes on, there are new ones coming out every few years who knows what a state legislatures are going to come up with. Next, that many things where we can give a global answer of this is good, or this is bad for everybody. But as one of my undergraduate professors, you know, made sure to impress on all of us.

It is always a wrong answer to have an unincorporated partnership. And that's not for tax reasons, but you will be liable for whatever else that person does. And even if they're a good person, you know, they might make a mistake. They might get in a car accident, you know, going, you know, while doing something for the job.

And all of a sudden your house is on. So that is the one thing. And one of the rare times I feel like I can say that is definitely a wrong answer.

Thank you.

so a sole proprietorship, uh, this is the most basic business entity. This is just, you're engaging in business as a human being directly without an entity and the tax consequences are actually pretty good. It's just pass through taxation. You can take deductions. There's nothing really that you're missing out on.

Um, there are some tricks that you might be able to pull off with a different entity type, but by and large sole proprietorship can be good. A downside is you're operating without the legal protection of an LLC or a corporation for state law purposes, but for tax purposes, If you're in an industry or you're engaged in an activity where liability risk is very, very low and you aren't concerned about that, it can be a fine choice to proceed with a sole proprietorship.

The next type of entity as a partnership, as Ben mentioned, an unincorporated partnership can be very dangerous. You might've seen the term limited partnership, that's a form of registered or a registered partnership, uh, that does give you some protection for tax purposes. A partnership by default is also going to be passed through a taxation.

Uh, by definition you need at least two people to have a partnership. You need a partner and the tax reporting on a partnership can be complicated, uh, but the tax results not bad.



And maybe this slide is one that I'd like to linger on just a bit, uh, LLCs, very flexible entity type, because I've mentioned how there's a distinction between the state law entity and the tax, um, entity type or how it's treated for tax purposes and an LLC. If one person owns an LLC and they don't make any election, they just take it as it comes.

It'll be treated as a pass through just like a sole proprietorship just as if there were no entity there at all for income tax purposes, but they could make any election and treat it as a C corporation as Ben was just covering or an S-corporation as we'll cover on the next. So there's, there's choices in how you treat it.

If they had a partner and there's two people, uh, who own this LLC, the default would be, it's treated as a partnership for tax purposes, pass through taxation, but again, they could make the election for it to be treated as a C corporation or an S corporation. So LLC is very flexible. There are some other entity types that can only be treated as a corporation of some sort.

 I think there can be a lot of advantages in having an accountant who is very familiar with and works with a lot of clients in field.

Uh, my sister is a professional costume designer, uh, or she works for, or has worked for like Barnum and Bailey's and starting live much more interesting stuff. Um, but that is such a unique field and raises some unique, you know, business deduction, self-employment tax expense issues. Um, when she, after a few years in New York, a friend in the industry connected her with.

Uh, accountant, who was a bit of a patron of the arts and Jack was both experienced, but also would do it pretty affordably for those who were not doing, you know, doing as well. Um, and you know, the number of deductions that you just opened up in a big way, because you know, a regular accountant who's sort of used to dealing with more traditional businesses or mostly people who work for companies or governments or traditional employment situations would just be less, either able or familiar or comfortable with what is ordinary or necessary in your specialized field.

So I would think an organization like whiff, you know, you, there's probably, hopefully a few of you have found some good accountants who may have a lot of experience in your field and, and, and that can, can play to their and your advantage. Yeah. They just really know how to ask the right question. Um, things that wouldn't occur to somebody who's never seen a filmmakers facts before.

If they have some industry experience that will know the right questions to prompt you to say, oh yeah, we didn't spend that this much on that kind of thing. And here's my receipt for it.