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Category: new tax law

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A tax break for artists?

Working artists are among the winners in this year’s tax season.
Don’t mind me; I’m just using details from old paintings to talk about how I feel about preparing taxes.

The 2017 Tax Cuts and Jobs Act may have been intended to simplify the tax code, but simple it is not. Still, it has a provision that affects you, if you declare income as an artist.

Self-employed artists fork over a payroll tax of 15.3 percent, which cover both sides of our Social Security and Medicare obligation. Corporate employees pay half that, with their employers covering the remaining half. The change was designed, on paper, to redress that.
More importantly, it preserved the historic tax advantage that sole proprietors had over C corporations. Prior to the passage of the bill, the top effective tax rates for C corporations was 50.47%; for sole proprietors, it was 40.8%. When the rate on C corporations dropped, it had to drop for sole proprietors too.

Starting with the taxes you’re doing for 2018, pass-through taxpayers (those who aren’t a corporation) are entitled to a deduction equal to 20% of the taxpayer’s qualified business income, pr profit. For some people, its calculation is going to be very complicated. Once the broad plan was in place, more and more widgets had to be added to make it fair.
Most of the limitations on the deductions won’t apply to the working artists who read this blog. Singles making less than $157,500 or joint filers making less than $315,000 in total taxable income can stop reading here; they get to take the full 20% deduction. (If you’re between those levels and the ones in the next paragraph, you get the deduction in a trimmed form.)
Singles making more than $207,500 or couples making more than $415,000 are subject to different rules. They get no deduction if their business is a personal service firm.
A personal service firm (SSTB) is “any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.”
To me, that sounded like the very definition of a working artist, whose livelihood relies on his skill. And apparently, others were concerned that this was unduly broad, since it would apply equally to the machinist, riverboat captain, software designer and many other self-employed people. Fortunately, the IRS decided to define that catch-all phrase at the end very narrowly. You’re out of luck if you:
  • Endorse products or services;
  • Allow your name, likeness, etc. to be licensed to sell products like brushes, paints, or a teaching set of pastels;
  • Get paid to appear at events.

But even then, the only part of your income that’s excluded is the part you earned doing those endorsements.

    As Forbes wrote, “If you ain’t famous, as long as you don’t provide services in one of the specific disqualified fields, you are not in an SSTB, even if your skill or reputation is the only thing you have to sell.”
    Of course, it’s just a law, and it’s up to the courts to determine what it actually means. But until then, I’m going to feel fairly confident taking the deduction. A caveat—I’m an artist, not an accountant, so this advice is worth exactly what you’re paying for it.
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    The new tax bill and self-employed artists

    Are you losing all your deductions? Heck, no. The sky didn’t fall after all.

    More Work than They Bargained For (Isaac H. Evans), Carol L. Douglas, courtesy Camden Falls Gallery

    The last major tax reform occurred 27 years ago. Our combined household income was in the $10,000 range since my husband was in grad school. I can’t tell you what impact it had on my taxes, because I wasn’t filing by computer back then.

    This time around, I read daily reports of how this bill would eliminate the home-office deduction or other important considerations for the self-employed. Many of my artist friends were very troubled. It has done none of those things.
    I’m not a tax preparer. For heaven’s sake, don’t rely on this for tax planning. However, I’m keenly interested, because I prepare my own taxes. Anything that would simplify that would make me very happy.
    Spring at Rockport, Carol L. Douglas
    For many of my friends and family, the biggest change—and one that could cost them dearly—is the cap on state and local tax deductions at $10,000. People in other states used to boggle when I told them I paid $12,000 a year in property taxes in my middle-class neighborhood in New York. It’s one of the reasons I moved. (We still pay income tax to New York, for reasons that are too complicated to go into here.) For artists in New York, New Jersey and California who own their own homes, this cap could hurt.
    This will be offset to some degree by changes in the standard deduction and the income tax rate. I sat with a New York artist friend last week totting up her plusses and minuses on my fingers. I think she will be better off even with the property tax cap.
    Coast Guard Inspection (American Eagle), Carol L. Douglas, courtesy Camden Falls Gallery
    In most cases those households with five-figure property taxes will also see reductions in their tax rate. May they use their savings to buy more paintings.
    There are some other changes that might affect artists. One is the threshold for medical expenses, which temporarily drops back to 7.5%. There have been years where that would have mattered to me, and it’s a pity that it couldn’t have been cut permanently. It’s important to low-income people with catastrophic illnesses, especially in this era of high deductibles. My friend Barb will be happy that it’s retroactive to 2017, as she had to have emergency surgery this year.
    Winch (American Eagle), Carol L. Douglas, courtesy Camden Falls Gallery
    Casualty loss deductions are now limited to federal disaster areas. If a Nor’easter drops a spruce on your roof and your insurance doesn’t cover it, you’re out of luck. There are some other miscellaneous expenses you won’t be able to deduct, like unreimbursed job expenses or moving expenses.
    But as for Schedule C filers—which most of us artists are—the new tax bill appears to have helped, not hurt us. It provides an across-the-board 20% reduction of our business income before it gets transferred to our Schedule A. (The rest of its provisions appear aimed at higher fliers than me.)
    As far as I can see, the sky didn’t fall after all. But if you’re reading this differently from me, let me know in the comments.