BY GREG MERMEL, C.P.A.
Whether certain behaviors are learned or genetically determined has been a topic of much debate, at least since Charles Darwin and Gregor Mendel published their respective works on evolution and plant genetics during the 1850s. Sometimes these debates are politically charged and explosive, as when dealing with behaviors such as sexual orientation or various forms of social pathology.
I have been thinking about this dilemma in a more benign context, that of procrastination. Are procrastinators made or born? Maybe it is a more complex phenomenon. We have all known actors who were off book at the first rehearsal, and others who are not secure in their lines till the day after opening. Do the actors who are off book at the first rehearsal do their income taxes in February? Do the others wait until April? (Or August or October with extensions?)
And what about you? Are you ready?
Offering Excuses
"Information from third parties needed to complete the return has not yet been received but is expected within the extension period requested." For more than 20 years, I have used that phrase whenever an IRS extension application required a reason, and they have always accepted it. But in many cases, it is not entirely true.
Strictly speaking, there are only two situations where you must have documents from third parties before you can prepare your income tax returns. The first involves documents that must be attached to the returns, specifically W-2s. Both the IRS and state governments rely on those slips of paper as evidence of the amount of taxes withheld. The IRS eventually compares those data with that submitted by employers, but lacks the computer power and personnel to do it in "real time." Illinois stopped trying, and no longer requires employers to submit copies of W-2s.
You should have all of your W-2s by the time you finish reading this issue of PerformInk. Employers are required to mail them no later than Jan. 31. This is by no means a perfect process. Some employers struggle to have W-2s ready a mere month after year-end. (Are they procrastinators? Can a company’s behavior be genetically determined?) A certain number of W-2s will be sent to obsolete addresses, and the post office does occasionally lose mail. Any W-2 not received by Feb. 10 merits an inquiry to the employer. You can do it in February, when nobody is too frazzled, or procrastinate until April 10, when you will spend a lot of time just trying to get through on the phone.
The other situation where third party documents are needed is when you truly have no other source of the information to go on your tax return. Most typically, this is because you have an ownership interest in a "pass-through entity" (such as a partnership, limited liability company or S-corporation) or are the beneficiary of a trust. In these cases, you have no way of knowing what the taxable income or loss from these entities is until the entity has completed its annual accounting, filed its income tax return and provided you with a Schedule K-1. Since most of these entities have the same April 15 filing deadline you do (corporations are a month earlier), it is not unusual to get Schedules K-1 at the last minute.
But relatively few people receive Schedules K-1 from entities they do not control. Perhaps five percent of my clients do, and that is undoubtedly much higher than the general population. Virtually everyone receives W-2s.
The sad truth about the extension reason is that what we usually need from third parties are replacements for data my clients once had–copies of bank statements, or Visa bills, or the amount of tuition paid.
What About the Other Stuff?
Other envelopes arriving early in the year labeled "Important Tax Document Enclosed" contain information that should be duplicated in your records. Most of them are various flavors of forms 1099. They can be a great convenience. For example, you can copy the amount of savings account interest from the form 1099-INT instead of digging through a year’s worth of bank statements adding up the monthly postings. But you could, nevertheless, do your income tax return without the 1099. Similarly for the forms 1098, showing the mortgage interest you paid and the property taxes paid from your escrow account.
These documents are sent to you almost as an afterthought. They really exist so that Big Brother–sorry, the IRS–can compare the payers’ data to tax returns filed to ensure the returns’ accuracy. When they do that comparison, the IRS tends to assume that the payers’ data are more accurate than the individual income tax returns. For many, even most, payers that is true. Banks, mutual funds, stock brokerages and the like are in the business of keeping accurate records.
But when we come to theatre companies and forms 1099-MISC, the average accuracy level drops as does the promptness of mailing them. Some payments to a director or designer or performer are fee payments and some are expense reimbursements. The fee payments should be included on the 1099, and the expense reimbursements not. 1099s which reflect a random jumble of these two types of payment are not rare. Check the amounts carefully, and do not hesitate to ask for corrected 1099-MISC forms if need be.
Trust me on this: Theatre companies are used to those calls and making corrections. They know they have problems with their systems. And maybe some day, after waxing the car and shampooing the cat, they will get around to fixing it. Or maybe not. These are creative people, and creative procrastinators can stall for a very long time.
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area).
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.