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Ew, David: The Tax Lessons You Can Learn From ‘Schitt’s Creek’

April 15, 2021, 8:45 AM

In the opening moments of “Schitt’s Creek,” the popular sitcom, the camera pans over a stately mansion just before federal agents from “Revenue Agency” begin carting off valuables. The occupants of the home, the super-rich Johnny Rose and his family, soon learn that they are broke. Television audiences then followed the Rose family’s trials and tribulations over the next six seasons as they adjusted to their new surroundings: a town they once bought as a joke.

The cast of ‘Schitt’s Creek’ speaking during the the 2018 Winter Television Critics Association Press Tour.
Photographer: Frederick M. Brown/Getty Images

While the show has its share of outrageous—and some downright cringy—moments, there are some valuable takeaways, too. What can you learn from a formerly wealthy family that’s now down on its luck? Here are four binge-worthy tax lessons from “Schitt’s Creek” (don’t worry, these aren’t spoilers):

It’s your responsibility to make sure that your taxes are filed and paid. Johnny Rose parlayed a $2,000 investment in a video rental business into a fortune. While at the helm, he entrusted his business manager, Eli, with the company’s finances. As tax agents seize the Rose family’s assets, Johnny learns the difficult truth: Eli had been embezzling money from the company instead of paying taxes. Johnny is told, “He took everything.” Johnny, who likened Eli to family, responded, “He was our business manager, he was supposed to pay taxes.” Only he didn’t. Eli ended up in the Cayman Islands (they think) while the Roses ended up in a motel in Schitt’s Creek.

It’s an important lesson. Even if you hire a tax professional, it’s important to keep close tabs on your finances and ensure that your tax returns are timely filed and that the taxes are paid. Remember, when you sign your tax return, you are confirming that “I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.” In other words, you are responsible for what is reported on your tax return.

You are similarly responsible for ensuring that the corresponding taxes are paid. Just as you know to never sign an incomplete or blank tax return, don’t sign blank checks for taxes, or allow your tax and finance professionals unchecked access to your bank accounts.

Not paying into the system can have real consequences. Out of work and running out of money, Johnny Rose decides that his best shot at temporary relief is to collect unemployment benefits—after all, he has worked for his entire life. But at the unemployment benefits office, he faces a grim realization: He’s never paid into the system. That means, the agency explains, that he likely does not qualify for benefits.

Unemployment benefits are a safety net—but you typically must prove that you were paying into the system. The same is true for other benefits programs, like Social Security. And the tax authorities expect you to report all of your income, even if you are paid off the books. Keeping that in mind, your best bet is to report your income each year—documented or not.

The same is true for owners of S corporations and other businesses. While it may be tempting to adjust your salary downward—and your distributions upward—to reduce your payroll taxes (typically, Social Security and Medicare taxes, which are referred to as FICA taxes), that’s not always a good idea. The IRS requires that S corporation owners be paid “reasonable compensation” for services to the business, and that compensation is subject to payroll tax. Failure to do so can result in penalties on examination, and more importantly, reduce your eligibility for benefits—not only for unemployment and Social Security but also for relief programs like the Paycheck Protection Program (PPP).

Tax-favored benefits for employees may have strings. After getting a job at the Blouse Barn, David struggles to get to work. The solution? His employer provides him with a company car. His family is envious of his newfound perk, which they see as a boon for the family. They likely don’t know that the benefit, while generous, comes with a price tag: The personal use of a company car is typically treated as taxable wages for the employee.

So what constitutes personal use? Generally, use that is unrelated to the employer’s trade or business. That includes getting to work, since the cost of commuting from your home to your place of work, including your office, is considered a personal expense. Exceptions apply if you are traveling from your office to a temporary work location or from your home directly to a temporary work location without first commuting to the office—that’s considered business mileage and isn’t taxable.

Bottom line: If you use a company car 100% for work, it is typically tax-free to you—but personal use of the car is taxable. If you drive a company car for business and personal reasons, keep great records since your personal use will reduce the tax benefit. Check with your company’s benefits department to find out what kinds of records they’ll expect you to produce.

Eugene Levy stars as Johnny Rose on “Schitt’s Creek.”
Photographer: Amy Sussman/Getty Images

Tax deductions are not simply free money. In one of the show’s most famous scenes, Johnny’s son, David, is forced to explain the increasing number of expensive items filling his hotel room. First up, new bedding. “I am testing this out for the store, so work is paying for it,” he explains as he removes it from the box. The new lamp? It’s “a write-off.” And new skincare products? Also a “write-off,” David claims, since he’s the face of the store.

“Do you even know what a write-off is?” Johnny asks, incredulous.

What we commonly call “write-offs,” Johnny explains, are tax deductions used to reduce taxable income. Here’s how it works in business: You can deduct legitimate expenses incurred in your trade or business on your tax return so long as they are “ordinary and necessary.” Under tax code Section 162, an ordinary expense is one that is common and accepted in your trade or business, while a necessary expense is “one that is helpful and appropriate for your trade or business.”

You cannot deduct personal expenses on your tax return—even if you believe that they help make you a better business owner, or if you find them to be convenient or desirable.

Of course, while these are good lessons, I’m not suggesting that you rely entirely on a television show—no matter how entertaining—for your tax advice. As David advised, “The idea of me life-coaching another human being should scare you … a lot.”

Reliable sources, like the tax code, the IRS website, your tax professional, and Bloomberg Tax are a better bet.

To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com

To contact the editors responsible for this story: Rachael Daigle at rdaigle@bloombergindustry.com; David Jolly at djolly@bloombergindustry.com

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