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
RECOMMENDED RESOURCES:
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=
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