Child Modeling Expenses

[DaveinTexas]

Let's say a mother drives around her 5 year old daughter, who is a clothes model, and also has other expenses such as specialty clothing, photo portfolio expenses, etc.

Since the mileage is really the mother's expense, should the mother have the child reimburse the mother for actual expenses to get her to each photo shoot, or any other business location?

Or should the child pay her mother a manager's fee and then the mother can deduct her mileage?

Don't see this very often; usually the child is old enough to drive if they are working!

I read this from Kleinrock's Tax Expert:

To obtain the benefits of income-splitting, the arrangement must be
structured so that the child (or other family member) has some control
over the income earned -- a parent who is responsible for a child's
earnings and retains total control over the earnings may be required to
include those earnings in the his or her own gross income. 4 If this
requirement is met, the compensation paid to the child is taxed to the
child, whether or not the child actually receives it and regardless of
state law provisions relating to who is entitled to it. The code section is 61.

I don't see how a 5 year old can have much control over its income. Maybe this rule can also be avoided if the parent sets up an IRA for the child and contribute most of the earnings.

TIA

[Golden Rocket]

How much income?

Check the requirements for child's income before the income becomes taxable at the child's rate.

If the child's income exceeds the threshhold, my opinion is that the mother should pay herself 48.5 cents per mile from the proceeds of the child's income. Mother should thus document the mileage to substantiate the deduction. The reimbursement becomes a business deduction for the child, and is not taxable to the mother.

[DaveinTexas]

In 2006

the income is around $3200, but it is all NEC reported on a 1099 MISC. For 2007 it is approaching around $10K. The child's expenses are very little except for the driving around by the mother. I thought about the reimbursement approach; that seems to yield the highest benefit for both parties.

Thanks for the help.

[Bees Knees]

If the 1099 has the child's name and Social Security number listed, a tax return must be filed for the child. You can't elect to report a child's self employment income on the parents return. There is no age minimum in regards to self employment tax.

As to the expenses, I would say each time mom pays an expense out of her own pocket on behalf of her child, it is a gift to the child, who in turn is treated as paying the expense and taking a deduction for it. In this case, I wouldn't try to mess with the standard mileage rate, as there is no provision in the Rev. Proc. for gifting the standard mileage rate to a child, and mom isn’t in business for herself. Calculate actual costs to drive the child to the various job sites. Then treat mom's out of pocket expenses as gifts to the child, who in turn treats them as payments for business deductions.

There is nothing in the code that prevents you from taking tax free gifts you receive, and then using those funds to pay for deductible business expenses.

[Bees Knees]

One thing to keep in mind concerning trying to deduct the cost of driving to the various modeling job sites. In order to deduct in town commuting, you have to have a regular place of business, which then allows you to deduct any commuting expense to a temporary work location. This could include an office in home.

So if the 5 year old child does not have a home office, or does not have a regular place of business, then in town commuting to temporary work locations is not deductible. In this case, only out of town travel for business is deductible.

[DaveinTexas]

I wasn't trying to make

an election to include the child's income on the parent's return; this would actually be a disadvantage to the parent. I just thought I would mention the information I pulled from a court case that related to a parent's substantial control over a child's earned income and because of that scenario the income was treated as income to the parent, as if the parent actually earned the income.

I know about the commuting rules and I don't think a 5 year old could actually contend that she could maintain a home office. I like the idea of gifting the expenses to the child and have the child deduct the actual vehicle expenses that don't pertain to commuting. What a mess this is. The only alternative is for the child to pay the mother wages as an employee, but there would be no advantage to that.

Thanks for the info.