Celebrities got caught with their hands in the cookie jar. Well, the celebrities didn't get caught. Rather The Academy of Motion Picture Arts and Sciences got busted for giving away free cookies in the form of gift bags to celebrities when they should have been charging for them.
What? Charge for swag? You betcha. If it doesn't qualify as a business gift, that is, which we'll get to in a minute. And how do you charge for swag when no money changes hands? You send the recipient (and the IRS) a 1099 telling them how much that swag is worth so they will be sure to include it as income on their tax returns.
The 1099: handcuffs for taxpayers to ensure they don't get away from their income-reporting obligation. The IRS wants to make darn sure that if a business reduces its tax liability by expensing something on its tax return, someone else had better be reporting that income on another tax return.
The part I find amusing is how The Academy and third party vendors keep insisting on calling the swag "gifts." If they had bothered to read the IRS rules they would know business gifts are limited to $25 to any one individual per year. Anything over $25 is nondeductible. Telling a business something is nondeductible is like telling a human they have cancer. It's bad. They don't want it. And they will do whatever it takes to make it go away.
So if it's not a gift, what is it then? I will bet good money swag expenses show up on the "marketing" line on the providers' tax returns, and here is my proof:
Distinctive Assets reportedly charges firms $20,000 to have their products included in the bags it puts together. But Lash Fary, the company's founder, was defiant in offering a defense in a statement on his website.
"Here's how it works," he said. "Celebrities appear as presenters at major awards shows for no charge. We give them a thank-you gift for doing so on behalf of the show. And you don't forfeit your eligibility for gratitude just because you're rich and famous. What we do is basic, tried-and-true entertainment marketing."
Marketing is indeed an ordinary and necessary business expense and therefore fully deductible. But calling it marketing means you expect to receive something of value in return, as opposed to a gift where you expect nothing in return (otherwise it isn't really a gift, is it?) A celebrity presenting on your awards show or wearing your product in public or visiting your spa = value.
Which probably explains why they doggedly refuse to stop calling these luxury goodie bags "gifts." If it is a gift, the celebrity can feel special and admired and probably doesn't mind providing the gift-giver a little free publicity. But if instead it is income in exchange for walking billboard services, that just isn't as much fun and perhaps even a little bit sleazy. Celebrities aren't going to like that.
I am guessing the additional income is a secondary issue to most celebrities. And they can always offset some or all of the income by donating the goodies to charity like George Clooney did.
The Academy settled up with the IRS for years through 2005, so recipients are responsible for taxes on swag for 2006 onward. It will be interesting to see what happens to award show gift bags in the next year. Will they stay or will they go? And will the IRS be taking a closer look at "marketing" expenses?
EXECUTIVE SUMMARY:
- Business gifts are limited to $25 to any one individual per year.
- Business gifts in excess of $25 to any one individual per year are nondeductible.
- Payments for services in excess of $600 (other than to a corporation) must be reported to the recipient (and the IRS) via Form 1099.
- "Payment" is not limited to cash but can also take the form of goods and services provided.
For more news stories on this subject, see my Tax Diggs. You can also check out The Academy's press release.
