Mermaid Tax Tips

Mermaid Tax Tips

By Joseph McGarry, CPA

Joseph McGarry has been a CPA for over 20 years. He is currently a CPA with Peter & Associates in Isanti, MN, US.

DISCLAIMERS:

1.       The information presented is for general information only. It is not intended as specific tax advice. See your tax professional for tax advice.

2.       The information presented is based on my understanding of tax law in effect at the time it was written. Any change to tax law could materially and adversely affect the information presented here.

3.       The information presented is based on United States federal tax law. Laws of other countries may or may not be similar. In addition, individual states may have additional provisions affecting their state taxes. See your tax professional if you have any questions about this.

4.       The analysis and opinions presented here are my own. They are not necessarily the views of Peter & Associates.

INTRODUCTION

Some of you reading this may have already decided to become a professional mermaid. Others would like more information before getting started. I’m providing this information as a means to help both groups. For those who are professionals, this will help you know what records to keep, and what is or is not deductible. For those who are not, it’s a means to get started.

For an excellent resource on becoming a professional mermaid, two excellent resources are the books “Fishy” Business: How to be a Mermaid, and "Fishy" Business: My Life as a Mermaid by Raina Mermaid. You can order them here:

https://www.lulu.com/shop/search.ep?keyWords=raina+mermaid&type=

The first thing to do is to have some place to record your income and expenses. This could be a computer program such as Quickbooks, or even a notebook. The point is to have some records somewhere. The important thing is to keep good records. In the event of an audit, the IRS will want to see your records. Their attitude is that if it isn’t written down, it didn’t happen.

Next, if you have a business name, you should get an Employer ID number at www.irs.gov. It’s free, and will allow you to give out that number instead of your Social Security number.

TYPES OF BUSINESSES

If you haven’t decided what type of business to run, here are your choices:

1.       Sole proprietorship This is the easiest one to form and manage, but there is no liability protection. If there’s an accident, and you’re determined to be at fault, the other side can go after all of your personal assets.

2.       General partnership This, in my opinion, can be worse than a sole proprietorship. In a general partnership, the other side can go after you if your partner gets in an accident. There have been many cases where one business partner has taken off with company funds, and the other partner or partners have been stuck for the debts of the partnership, with no way to pay them.

3.       Limited partnership In this arrangement, there is one general partner and one or more limited partners. The general partner is personally liable for all debts of the partnership, but the limited partners are liable only to the extent of their investment. This requires registration with the state, so check state law for details.

4.       Corporation This provides excellent protection. Shareholders are liable only to the extent of their investment. This also requires registration with the state. For tax purposes, there are two types of corporations. The C Corporation is the “traditional” corporation. It pays its own taxes separately from the individual shareholders. With an S Corporation, the income and losses are passed through to the individual shareholders, who then pay taxes on the earnings themselves. A corporation requires registration with the state. Additionally, an S Corporation requires an election to be made with the IRS.

5.       Limited Liability Company (LLC) This was designed as a hybrid between partnerships and corporations. The members of the LLC are liable only to the extent of their business investment. This also requires registration with the state. For tax purposes, the IRS calls a single-member LLC a “disregarded entity”, so that they pretend it doesn’t exist.

In my opinion, you want to have an entity that provides limited liability. A lot of things can happen, especially when there’s water involved. Speak to an attorney about which entity is right for you. All of the limited liability entities (3, 4, and 5) require registration with the state, and a registration fee, as well as possible attorney’s fees, but they are well worth the investment.

Whichever type of business you decide on, you should open a separate bank account for your business. Use this account only for business income and expenses. Do not take money out of this account for personal use unless you document it properly. If you choose a limited liability entity, this is especially important. One of the main situations where corporations lose their limited liability status is when the shareholders use the corporate bank account as their own personal piggy bank, taking out money when they feel like it without proper documentation. Your attorney can provide more guidance on this.

TAX MATTERS: INCOME

You will need to look up the appropriate business code for your return. This will be different depending on which type of entity you are. The codes are available at www.irs.gov.

Make sure you record all of your income. This includes performance income and income from items you sell, such as jewelry, books, or clothing. It also includes tip income. It doesn’t matter whether it was received by check, credit card, or cash.

If you sell merchandise, you can deduct the cost of the merchandise against the sales price. If you manufactured the item, you can deduct the cost of materials, plus whatever you paid someone else to help you manufacture the item. (Sorry, you can’t deduct the value of your own time. The IRS says it’s too hard to value that.) You can also deduct the cost of shipping the items, if they were shipped by mail, UPS, FedEx, or other carrier.

TAX MATTERS: EXPENSES

You can also deduct certain expenses against your income. I will describe each of these briefly.

Advertising You can deduct the cost of any advertising or promotional materials. These include things like newspaper/radio/TV ads, flyers, posters, or anything else you use for promotion.

Car and truck expenses You can deduct the cost of the use of your car for business purposes. The main one here would be to and from your gigs, fairs where you’re appearing and/or selling merchandise, ad other legitimate business expenses. There are two ways to do this. The first is deducting actual expenses, such as gas, oil, and other maintenance items. You also depreciate the car or truck you use. The second method is to deduct a standard mileage rate. This is set by the IRS, and changes every year, so check with your tax professional or www.irs.gov for the current rate. You can use either method, but you need to use the standard mileage method in the first year your car is used for business, or else you won’t be able to use it again.

It’s important to keep good records of your car and truck expenses, such as mileage, gas, oil, and other expenses. The IRS is very picky about this.

You can also deduct the cost of your parking and tolls, regardless of which method you use.

Insurance You can deduct the cost of insurance you pay for your business. In her book, Raina recommends performers’ insurance for professional mermaids. The cost of this insurance is deductible.

Legal and professional fees You can deduct the cost of legal, accounting, and other professional fees for your mermaid business. Some people, especially when they’re just starting out, either can’t or don’t want to pay the professional fees. They prefer either to do it themselves, or go without. Economics can dictate this, but I believe that many of these expenses are a business necessity.  It may cost money now, but it could save you a lot more in the long run. In one seminar I attended, the seminar leader said that once you become a business owner, you’ve graduated from TurboTax. I agree.

Depreciation This allows you to deduct the cost of an item over several years, instead of the year of purchase. One example is a car. If you’re using the actual method, you deduct the cost of the car over 5 years. The exact amount deducted each year is based on IRS tables.

Another deductible cost is your costume. You have the option of deducting the cost in the year of purchase or over 7 years. The exact amount deducted each year is based on IRS tables. If you have a silicone tail that cost $5,000, this is a great option. IRS regulations state that the clothing cannot be adaptable to general use. I would argue that a mermaid costume fits this description. However, some other elements of your costume, such as wigs or makeup that can be adaptable for general use are not deductible. Check with your tax professional to see what applies in your situation.

Contract labor/wages You can deduct the cost of paying someone else who works with you, such as a mertender. This can be in the form of contract labor or wages. Wages require withholding and extra tax expenses. Check with your tax professional to see what the best option is for you.

Supplies You can deduct the cost of supplies for your business. This can include stationery, invoices, other office supplies,items to repair your costume, even giveaway items such as seashells.

Travel, meals, and entertainment You can deduct travel expenses while away from home overnight. This includes car expenses (discussed above), plane/bus/train fare, taxi fees, and hotel rooms. You can also deduct 50% of the cost of meals and entertainment while away from home.

Bank and credit card charges You can deduct the charges the bank deducts from your account. You can also deduct credit card fees withheld by your credit card processor. These will be deducted as miscellaneous deductions.

Business use of home You can deduct the cost of the use of a portion of your home that you use for business purposes. This area must be regularly and exclusively used for business. You can either deduct the percentage of actual expenses such as mortgage interest and utilities, or you can deduct a flat rate per square foot of space you use for business. This is a very touchy area with the IRS, so make sure that you speak with your tax advisor about this.

TAX MATTERS: NET INCOME

After you subtract the expenses from the income, you will have either a profit or a loss. For all entities other than the C Corporation, the profit or loss will be reported to you, and you will either pay taxes on the profit or deduct the loss on your personal tax return. A C Corporation will pay its own taxes, or take its own loss. The IRS likes to see a profit in at least 3 of the first 5 years.

RECORD KEEPING

It’s important to keep good records, and keep the business money separate from personal money. If you want to transfer money from the business to your personal account, be sure to have procedures in place to do this, and record it properly. If you don’t, the IRS will consider this a hobby, and allow to deduct expenses only to the extent of your business income. In addition, creditors could argue that this isn’t a real business, and go after your personal assets, ignoring any limited liability protection you have.

I know this isn’t the fun part of being a mermaid, but it’s something everyone has to do. I hope that I’ve been able to make this a little less painful for everyone. Have fun being a mermaid!

Joseph McGarry, CPA

Joseph.mcgarry@tax.hrblock.com
jmcgarry2011@yahoo.com

RECOMMENDED RESOURCES:

1.       IRS website www.irs.gov

Available for free on the IRS website:

IRS Publication 334, Tax Guide for Small Business

IRS Publication 17, Your Federal Income Tax

       2. “Fishy” Business: How to be a Mermaid and "Fishy" Business: My Life as a Mermaid, both by Raina Mermaid.

Available at https://www.lulu.com/shop/search.ep?keyWords=raina+mermaid&type=

"Blamestorming"

I was watching TV the other day, and I saw a commercial which shows what is all too common in life. The setting was a board meeting of this company's competitor. The competitor was losing customers to this company, and the chairman asked for ideas on what to do. One person then said, "Let's have a 'blamestorming' (their word) session. I'd like to blame Ellen." The ad then ended with a message for the company.

How often do we have 'blamestorming' sessions? We sit around at work, at home, or some other organization, and blame others for our problems. It's not always other people; it can be outside circumstances or other companies. In some cases, it's God. Instead of spending the time fixing the blame, we should spend our time fixing the problem.

I know you've probably heard this before. The message can become like elevator music; it's there in the background, but it's so familiar you don't pay attention. It can be hard to fix the problem. In some cases, people are going to get hurt, so no one wants to be responsible for that. Also, there's a fear that if you don't fix it right, you'll just make it worse. However, not fixing it can be worse than fixing it wrong.

Here are some suggestions that I have. I struggle myself with this, so I'm not telling you to do anything I wouldn't do myself. I also don't do these perfectly all the time, but I find I get a better result than not following the suggestions.

1. Identify the real problem. This seems obvious, but sometimes what you think is a problem is only a surface issue, like the symptoms of a cold. If you don't find the real problem, you are only treating the symptoms, but the cold still lingers.
2. Identify legitimate outside causes. This is not a 'blamestorming' session. Sometimes there are legitmate outside causes for the problem. These usually involve government regulation, weather, medical issues. They rarely involve other people or companies.
3. What action can you take on the problem? If the problem involves another person or company, look at your own behavior. Did you make your instructions clear? Do you have the proper paperwork? If it involves medical issues, how can you compensate for that? If it involves weather, what backup plans do you have? If it involves government regulations, have you done everything the regulations tell you to do?
4. Talk to the person or company, if applicable about the problem. Show them what you have done.

To make a new path, you may need to cut off access to the old

I drive back to Sioux City every so often. Part of my route takes me on highway 60 in northwestern Iowa. In the last few years, the Iowa DOT expanded highway 60 to 4 lanes. In the process of doing this, they bypassed the small towns highway 60 used to go through. In other places, they simply added 2 additional lanes to the existing lanes.

I used to drive up highway 60 when it was 2 lanes, and I can tell you the 4 lane road is much better. It has taken at least 1/2 an hour off the time of the trip. I can still tell, though, where the old highway used to be. The DOT left the old road intact, because local traffic still needed to get in and out of their property, but there are big fences at the end of the old highway, cutting it off from the new highway.

This principle works in business, as well. There may be a change you need to make, which will be an improvement for you or your company. In order to make the change, you may need to cut off access to the old ways. In business, this may involve a system of doing things, or customers that are no longer profitable. In your personal life, this may involve things or people (other than your family) that are holding you back. You may need to keep limited access to the old ways, but that access should be extremely limited. Once you make the change, you'll wonder why you didn't do it sooner.

Don't be afraid to do what is necessary to make a change for the better. You'll be glad you did.

Initial post

This is my first blog post. I plan to give my thoughts on business, and going for your dreams. Please note, any views on my blog are my own, and are for general information purposes only. They are not necessarily to be considered professional advice. If you need professional advice, please seek a professional. I look forward to the discussion.