For a writer, artist, actor, model, or musician, thousands of dollars in taxes can often ride on a single question: is the artist a professional or an amateur? At first glance, it might seem like an easy question to answer — but there are some surprising twists in the rules, especially in state and IRS rules on tax deductions.
Consider the case of Venus de Mars. Minnesota Public Radio recently told the story of a tax audit that resulted in a bill for thousands of dollars in back taxes for de Mars, a local performance artist.
de Mars doesn’t have a day job, and earns about $20,000 a year entirely from music, painting and other artistic endeavors. Some years, she earns more than she deducts in expenses – and sometimes, she doesn’t, resulting in what she thought were tax deductible losses.
de Mars had filed Minnesota state tax returns since the 1990’s, each one prepared by an accountant and claiming deductions related to her art and music projects. In 2012, after the completion of a state audit for 2009, 2010, and 2011, the state determined that de Mars was not a professional artist, and disallowed all of her deductions for the three years covered by the audit.
The state’s main reason was the department’s determination that de Mars enjoyed her work too much, and didn’t work hard enough to make a profit. After being ruled a hobbyist, de Mars was left with a bill for thousands in back taxes.
Defining a Professional Artist
The Internal Revenue Service relies on Section 183 of the Internal Revenue Code when determining what deductions can be taken by an artist. The key question, according to the IRS, is whether or not the activity is a hobby, or part of a legitimate business activity intended to make a profit.
The rule of thumb that artists have used for years is whether or not an activity makes a profit in three of the last five years. If it does, then most tax advisors will say that the costs related to the activity are deductible – and if it doesn’t, then they aren’t.
The IRS fact sheet on determining whether the costs incurred by artists, musicians, performers, and writers are deductible or not poses these questions:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Do you depend on income from the activity?
- If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
- Have you changed methods of operation to improve profitability?
- Do you have the knowledge needed to carry on the activity as a successful business?
- Have you made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Do you expect to make a profit in the future from the appreciation of assets used in the activity?
1-800Accountant has just published a free white paper that can help an artist, writer, musician, actor, or other performer keep more of the money they earn by identifying legitimate tax deductions and learning how to keep the records required by the IRS and state tax authorities. The new white paper is called Taxing Questions: What Makes an Artist a Professional?
It includes sections on:
- Defining a Professional Artist
- What if I Fail the Profit Test?
- Managing Your Art Like a Business
- Consider Incorporation
- Tax Deductions for Artists & Performers
- Additional Tax Deductions for Professional Writers
- Additional Tax Deductions for Professional Artists
- Additional Tax Deductions for Musicians and Singers
- Additional Tax Deductions for Dancers & Variety Performers
- Additional Tax Deductions for Actors & Models
The white paper is now available or free download on the Resources page of the 1-800Accountant website. Clients of the nation’s largest tax and accounting service for small businesses and independent contractors can log into their account to download their free copy, or visitors to the site can click here to download.