"...a qualified performing artist is engaged in a business for profit if he or she
constantly promotes and seeks employment within the industry."
What are three things every theater artist should know about doing their taxes?
1. Record keeping can’t be stressed enough. Keep every receipt no matter how small.
2. Professional viewing is a deductible expense. That means every time you pay to see a play or go see a movie that expense is deductible.
3. When in doubt, ask a tax professional. The U.S. Tax Code is 4 times longer than Shakespeare’s complete works. It’s impossible for a lay person to cover every deduction. Relying on someone who studied that tax code and does this for a living just makes sense.
What are some common mistakes artists make in approaching their taxes?
They don’t consider making their quarterly estimated tax payments until it’s too late and they owe a ton of money on April 15. If you get 1099’s instead of W-2’s where your taxes are withheld, you must pay your taxes on a quarterly basis. The IRS expects taxpayer’s to have all their taxes paid by December 31 of the current tax year. If you wait till April to pay your balance you may be subject to substantial interest & penalties.
I recommend doing a quarterly tax projection so that an artist pays their taxes as they go instead of in one lump sum. I would also recommend that whenever they can they opt to be paid net of taxes. I know it’s not always possible but it is the optimal way to pay your taxes, thru withholding.
What are some common misconceptions about tax prep for artists (write-offs, independent contractors, home-office etc.)?
I had a couple come in a few weeks ago and they were professional artists, earning a living at a professional art studio. At home, they had a studio and practiced their art with the intention of selling it, spending all kinds of money on supplies and rent for the studio. Someone had told them that if they showed losses for their personal business expenses, the IRS would consider their art a HOBBY and not let them take it on their tax returns. WRONG WRONG WRONG!
The IRS states that you can deduct losses as long as you are engaged in a business to make a profit. The Hobby Loss Rule states that if a profit is not made in at least 3 out of 5 years then the IRS can challenge the deduction of the losses. The IRS has 9 factors they use to determine if a person’s losses should be subject to the hobby loss rules. They are stated in IRC Section 183, as follows:
1. The manner in which taxpayer carries on the activity.
2. The expertise of taxpayer or advisers.
3. Time and effort spent by taxpayer in carrying on the activity.
4. The expectation that assets used may appreciate in value.
5. Taxpayer’s success in other similar or dissimilar activities.
6. Amount of occasional profits, if any.
7. Taxpayer’s history of income/loss with respect to activity.
8. Financial status of taxpayer.
9. Elements of personal pleasure or recreation.
An argument can be made that a qualified performing artist is engaged in a business for profit if he or she constantly promotes and seeks employment within the industry. So please, keep care in recording your expenses because in lean years a loss can come in handy in saving needed tax money.
I’m of the opinion if you don’t know even a little about taxes you shouldn’t prepare your own. Turbo Tax is wonderful as long as you know something about your tax situation. In regards to H&R Block, they are known for hiring lay people and training them to work with a Turbo-Tax like program. Most of them don’t know the difference between a deduction and a credit. A tax deduction reduces your taxable income, their value depends on the taxpayer’s marginal tax rate and they cannot reduce taxable income to below zero.
In contrast, tax credits directly reduce a person’s tax liability and some can even be refunded directly to the taxpayer. These nuances are important in order to correctly access a taxpayers tax situation. Most employees of H&R Block would fail an in-depth exam on the tax code. On the other hand if you hire a CPA or Enrolled IRS Agent, you know right away that person has a tested expertise in the subject of taxes. It’s one of the main questions you should ask a tax person, is he or she licensed. Other questions are what kind of clients do they work with? Are they available year round? How do you bill for services? I’ve heard so many horror stories about people going back to a tax preparer’s office and finding it empty. Trust no one until you find out what their credentials are.
Anything new and exciting in the tax code this year?
The payroll holiday ended this year. For the past 2 years, the Social Security tax withholding rate on a person’s salary was reduced to 4.2% from 6.2%. Due to the Republican’s little fiscal cliff drama at the end of the year, that ended. Also, rates on ordinary income for higher income taxpayers rose to 39.6% from 35%. This is actually a rollback to President Clinton’s highest tax rate.
Furthermore, personal & dependent exemption deductions were again set to phase out as your income increases. The last time we saw a phase-out rule for personal and dependent exemption deductions was 2009. As a result, your personal and dependent exemption write-offs can be reduced or even completely eliminated. Phase-out starts at the following adjusted gross income (AGI) thresholds: $250,000 for single filers, $300,000 for married joint-filing couples, $275,000 for heads of households, and $150,000 for married individuals who file separate returns.
What should you do if you get audited?
Contact a tax professional to help you. Dealing with the IRS can be tricky and if you’re not sure what you are doing you can really step in it. As an Enrolled Agent, I can represent a taxpayer in tax court. Dealing with a tax professional assures a person that their situation will be treated in an intelligent and professional manner. Plus, a tax professional may be able to mitigate a penalty if it’s found that you owe back taxes.
How did you get into this line of business?
It’s a funny story, I was studying to be an actor when I got a job in an accounting firm mail room. After about a year, one of the tax managers found herself in a bind to amend a client’s tax return and the office was empty of professionals. She had become friendly with me and asked me if I wanted to take a shot at doing the return. I said yes, since I had always been good at math. I did ok. She asked me a few more times, each time the return was a little more complex. Finally, one day she called me into her office and told me in all seriousness that acting is a wonderful but very hard profession. As a back-up, she said, you should take some accounting classes maybe even get a degree. I went home and thought about it and saw the logic to her suggestion. I changed my major and before I knew it, my back-up became my profession. I still love acting and the cinema so I keep up with both as a side hobby.
Nieves Tax LLC provides a wide range of services to individuals and businesses in a variety of industries. Mr. Nieves is a member of the National Association of Enrolled Agents. THEATERSPEAKERS get 10% off of tax services when they mention Theaterspeak. Yowza!
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