If you live in America and you watch TV, you can't help but know that Charlie Sheen dominated the news for weeks with his strange and sometimes violent outbursts, marriage woes, child custody issues, a long fight with the producers of his show, a trip to the emergency room… all related to his self-acknowledged drug abuse. Sheen, age 45, is the star of "Two and a Half Men", but after a few weeks of public ranting about the show's producer and studio officials, and possible other reasons, CBS and Warner Brothers fired Sheen from the show.
Unlike many other celebrities, Sheen has not been in the news for tax trouble. But his new situation poses some interesting tax issues.
With the show now cancelled, it isn't widely known whether or not Sheen will be paid for the unproduced shows. Assuming that he is, will those payments be taxable compensation?
For the answer, AccountingWEB asked Ken Miles, CPA and managing partner of the Beverly Hills, CA firm, NSBN LLP. Although NSBN does specialize in entertainment accounting, Sheen is not and has never been a client of the firm. However, Miles was able to answer our question by telling us that whatever monetary compensation the actor receives will indeed be taxable income. For completed episodes, Sheen's contract calls for payments of $1.8 million per episode, for 22 episodes, making him the highest paid actor on TV. It isn't public information whether Sheen's contract includes a reduced payment for unproduced shows.
While the fate of "Two and Half Men" was being considered, the entire cast and crew did not know from one day to the next if they had jobs or not. Sheen offered to pay one-third of the cost of their salaries if the studio would pick up the rest. Assuming Sheen did pay those costs on behalf of the cast and crew, would he be able to deduct them?
According to Miles, the answer is yes. "If he pays out a portion of what he receives to the other members of the production, he would be entitled to a deduction and the recipients would be required to include the amounts received as taxable income."
On a personal level, will Sheen be able to deduct the cost of his rehab?
Generally, rehab is deductible as a medical expense, and unlike some deductions (like charitable contributions) there is no upper limit. In other words, no matter how many times Sheen goes to rehab, he can deduct the costs to the extent they exceed 7.5% of his adjusted gross income. At his current rate of pay, ($1.8 million per episode, for 22 episodes per year) Sheen earned $39,600,000 per year. 7.5% of that is $2.970.000. That means his rehab costs (combined with other medical expenses) are only deductible to the extent they exceed $2,970,000.
Sheen might be able to avoid the 7.5% floor by establishing a Medical Expense Reimbursement Plan through a business entity.
After the cancelling of his show, Sheen has filed a $300 million lawsuit against CBS for what he describes as eight years of verbal abuse from the network. Will those legal fees be tax deductible?
According to Miles, the legal fees will be deductible because they are for the preservation of taxable income. CPA Kurt Kilwein, also of NSBN LLP, elaborated on that theory, telling AccountingWEB that the legal fees will be tax deductible if:
- They are incurred as part of Sheen carrying on his business
- They are ordinary and necessary
- The amount of the fees is reasonable, and
- They are paid within the deduction year.
“I do not believe Sheen will have to capitalize the costs,” said Kilwein. He added that, if Sheen is considered an employee of the network, his legal fees may be subject to the 2% itemized deduction limit and AMT limits, even if the case is related to his trade or business.