PERFORMING ARTS DEDUCTIONS

First, lets briefly review what this qualification is. This qualification allows you to deduct certain expenses on you FEDERAL INCOME TAX RETURN. When you are a regular EMPLOYEE, which usually means you recieve a year end W-2, you can deduct certain employee expenses, but these deductions are limited to a two-percent floor, which means you can't take the full deduction. With the performing arts qualification, you can take a full deduction on your 1040 tax return.

However, you must meet the following standards to be considered a performing artist: (if you're really interested the section is 62(b) (1) and (2) in the tax code):

Well hello again my friends. Time for another tax talk. So I had a fellow performer ask me what he could deduct as a business expense and the answer is very vague. Here is the IRS' definition of a business expense, "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." The expense also should not be extravagent. For example: If you could stay at the Holiday Inn, you might not need to stay in a penthouse sweet at Trump Towers. Now, one does not have to be an Astrophycisiststst, or a good speller :), to realize that this definition is very ambiguous. The most important question to ask yourself is, "did this expense in some way help me make money?", if the answer is yes then chances are it is a business expense.

This concept in the accounting world is called "matching." Matching simply put means: properly matching expenses with the revenues that the expenses helped create. I think of it like inputs and outputs. You have different inputs (expenses) that help you create outputs (products or services) and those products and/or service are then sold to generate revenue in the market. For performers inputs would include things such as headshots, rehearsal space, training, classes, equipment, props, travel, supplies, etc. The output would be your service performing, or doing whatever it is you do to make money.

Personal use is another concept that is important to understand concerning business expenses. Some expenses help us produce income, but they also serve some personal function as well. Some examples of expenses that we get personal use out of would be cell phones, internet, automobiles, certain subscriptions, and even our home whether we rent or own. The business portion is usually deducted as a percentage of business use on your FEDERAL INCOME TAX RETURN.

What I want to talk about now are some common misconceptions among performers as far as what is deductible. I've heard people say that their tax preparer deducts gym memberships, clothing, haircuts, etc. as business expenses (remember personal use). First, it is not very ethical and second it could get you in trouble. Sure you can write off anything you want, but whether or not it is a legitimate business expense is another matter. I could write off my winter boots becuase technically they help me get to auditions through the snow, which helps me make money, but obviously if the IRS were to audit me, I'd probably be screwed. Usually only in very rare cases are these kinds of expenses legitimate. If you are unsure, I always recommend you talk to a competent TAX PROFESSIONAL.

For me this is a big issue because if your current preparer is doing this they are not looking out for your best interest and this is not someone you would want to do business with anyway. In the long run doing the right thing and avoiding an audit is better than deducting winter boots. Well until next time...take care and tax less!

The IRS has deemed certain activities to be considered hobby related instead of business related. This is important for one reason: taking advantage of a business loss! Taking advantage of a loss can decrease the amount of taxes you owe!

First a little background. Business profit is generally made up of two parts: Revenues (money received from sales of goods or services) and expenses (money paid out to vendors). When a business' expenses exceed revenues, then the result is considered a business loss that can be applied to ordinary income (W-2's, interest, your job at Starbucks, etc.), thereby reducing the amount of INCOME TAX that you owe. If your business is your only source of income, then you have a tax benefit of carrying the loss forward to future years to reduce future income.

With a hobby it is a little different. The income is reported as other income on your INCOME TAX RETURN and most of the expenses are limited to the two-percent-floor rule for itemized deductions reported on schedule A, which means that you don't get to deduct as much as you do with a business. So even if you have expenses you may not be able to deduct them.

Why does it matter?

Well my friends. If you are trying to make a living as a performer, or any kind of artist for that matter, usually in the first couple years you are not getting great paying gigs such as Patrick Swayze in ghost (RIP) or Lindsey Lohan in Herbie Fully Loaded, and it may take a few years to actually get some money coming in. It is very important to know if you qualify as a legitimate business or not.


So how do you know which criteria you meet? The IRS uses the following test: