New IRS tax rules may benefit independent musicians
As independent musicians, there are many times when we have to work second jobs to make ends meet, and after you factor in the costs of recording, manufacturing, marketing, touring, and other legitimate business expenses, not to mention sharing any profits you may receive with your co-authors, managers, agents, labels and distributors, the fact remains: independent music does not always turn a profit.
When tax time rolls around every year, many of us receive the same lecture from our accountants: “You need to start showing a profit, or the IRS may consider this a ‘hobby’ and not a ‘real job.’” If you haven’t heard this lecture in the past, you should probably get a new accountant. However, for those of you who have heard it, your reaction may be the same as mine.
“What? How could anyone even suggest this isn’t a real job? Spending hours upon hours writing and re-writing music, producing and recording that music in the studio, auditioning and hiring the perfect studio musicians to round out the songs, sending tons of copies out to the press to get reviews and build momentum, filming videos for the YouTube channel, planning a CD Release Party of epic proportions, lugging heavy gear out on the road day after day to perform the music live for fans, seeking endorsements to make gear more affordable and achieve the best possible sound on stage and in the studio, spending hours upon hours sending music out to music supervisors or libraries for sync placement opportunities, managing mailing lists, social media and fans, then starting the process all over again every year or two, because the fans want something new. Trust me, I.R.S., being an independent musician is a ‘real job.’”
Nevertheless, Section 162(a) of the Internal Revenue Code allows as a deduction “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business,” and the taxpayer has the burden of showing that they engaged in the activity with an actual and honest objective of making a profit. If they can’t meet that burden, the activity is considered a hobby or recreation, and you aren’t allowed to take any deductions for it.
Happily, when it comes to achieving that burden, there is a light at the end of the tunnel, thanks to a recent tax court decision involving fine artist Susan Crile. Ms. Crile had exhibited and sold her art through leading galleries, with permanent collections hanging in the Metropolitan Museum of Art and the Guggenheim. She had received recognition from prestigious art organizations, and had been reviewed by leading art critics in the New York Times, the Boston Globe, Los Angeles Times, and more. She was extremely successful as an artist (in terms of her reputation), though rarely profitable at it. Therefore, like so many of us, Ms. Crile took her artist deductions on her tax forms each year, while working a “day job” as a full-time tenured professor of studio art at Hunter College in New York City. The IRS initially claimed that Ms. Crile’s legal position that she was both an artist and a teacher was “artificial,” and that her art-related expenses should not have been filed as business expenses.
But on October 2, 2014, the United States Tax Court issued its decision in favor of artist Susan Crile, and found that she had indeed “met her burden of proving that in carrying on her activity as an artist, she had an actual and a honest objective of making a profit,” even though she oftentimes did not, and that she should be considered a “professional artist” under the tax laws.
What does this mean for artists as a whole? Well, for those artists who are truly engaging in a business with the intention of making a profit, whether or not you in fact can show a profit at the end of the day is not the ultimate question. Rather, the tax courts will examine a number of factors, including the manner in which you conduct your business activity, the time and effort you put into it, the expectation of appreciation in value for your art, your history of income or losses, and the amount of occasional profits you receive for your art, among other factors.
In the end, this decision demonstrates a unique empathy from the Court that music and art are not like other trades and professions; rather, there is something far more visceral to running an art-based business, and any number of factors that can cause legitimate artists to not show a profit at the end of the year. That fact alone does not mean that we are not “professional artists.” It simply means that we are finding new ways to make money in a very different market. Do your art with an honest objective of making a profit, and hopefully, the money will eventually follow.