Archive | Creative

A winning tax picture for money-losing artists

You are an artist, or a photographer, or a writer who is trying to make money from your venture but usually don’t succeed. Can you still claim losses on your tax returns?

I’ve often told clients that the answer is yes, if you are conducting yourself in a businesslike manner, attempting to make a profit, and document, document, document your profit-oriented activities. I also warn that an IRS auditor’s skepticism about whether someone has a business tends to rise in direct proportion to the number of years the taxpayer loses money in that venture.

Now, in a case picked up by The New York Times, a Tax Court judge has come down on the side of an artist who lost money in 18 of the past 20 years.

In Tax Court Memo 2014-202, Susan Crile, whose work is in the Metropolitan Museum of Art, the Guggenheim and other museums, successfully defended herself against the IRS’s contention that her work as an artist was a hobby, and also succeeded in showing the court that her work as an artist was a separate activity from her job as a university professor.

While Tax Court Memos cannot be cited as precedent, this is still a big deal for creative professionals and for educators with sideline activities in the same field in which they are experts. The IRS has often gone after those activities as being either hobbies (in which losses cannot be deducted) or un-reimbursed business expenses (in which case the losses that can be taken on a return may be significantly reduced.)

As Peter J. Reilly pointed out on Forbes.com, the court sided with Crile that her art qualifies as a business activity, but she may find herself on the short side of an examination as to what expenses she can actually deduct.

The Tax Court put off to a future date the IRS’s challenge of her expenses. However, it noted that, “Petitioner’s theory for claiming deductions seems to have been that most experiences an artist has may contribute to her art and that most people with whom an artist socializes may become customers or otherwise advance her career. The trial established that a significant number of the deductions she claimed were not, within the meaning of section 162(a), “ordinary and necessary expenses” of conducting her art business but were “personal, living, or family expenses” non-deductible under section 262(a). The latter expenses appear to have included telephone and cable television bills, newspaper and magazine subscriptions, gratuities to doormen in her apartment building, taxicabs to the opera, museums, and social events, restaurant meals with friends and acquaintances, and international travel to gain inspiration from paintings in European museums.”

I’d call that a foreshadowing of bad news coming for Ms. Crile. Watch this space for an update.

Forbes columnist Tony Nitti makes even taxes entertaining

The IRS, bless ‘em, gave us new rules in the summer of 2014 covering how a shareholder in an S Corporation can establish the right to take losses on his tax returns.

This involves looking at ways the shareholder can show that he has debt basis in the corporation…and at the phrase, “debt basis,” most normal citizens’ eyes will rightly glaze over.

But Tony Nitti, a terrific contributor to Forbes, does a great job of explaining what’s going on in this long piece, including a Q & A that begins, “Please remind me why I should continue to read this?”

I leave it to Mr. Nitti to explain why shareholder basis in an S Corp matters.

Oh, and just for fun, here’s a link to another Nitti column in which he surveys the “tax lessons” to be learned from watching part or all of Fox’s marathon 522-episode airing of “The Simpsons” (already showing and continuing through September 1). Undoubtedly he wrote this so he could take a business deduction for the beer and pizza he consumed during his own viewings.

Multinationals seek tax heavens, er, havens . . . oh, what’s the diff?

More and more U.S.-based corporations are growing wings and flying away from their U.S. tax obligations.

Bloomberg puts it as simply as possible: “U.S. companies looking for lower tax bills are heading for the exits, and Congress is doing nothing to stop them.”

The immediate impetus for the story was Pfizer’s proposed purchase of AstraZeneca, which would result in Pfizer reincorporating in Britain while tapping literally billions of dollars it has been holding outside the U.S., as The New York Times reported.

What’s the solution? Congress could grow a set and change the tax laws so that there is a crackdown on companies that use tax havens to keep profits outside of the U.S. system, as Steven Rattner suggests. Rattner also suggests in essence giving up on taxing corporations and instead increasing taxes on profits at the shareholder level, which would effectively increase the taxes paid by the wealthiest Americans.

I don’t know what the solution is, but when you consider that the effective federal tax rate paid by corporations has dropped from more than 40% in the 1950s to about 15% today, it seems clear that something has to change.

Bitcoin: IRS says, “It’s property, and it’s taxable!”

A lot of people are still trying to figure out just what Bitcoin is, but the IRS has seen enough to decide: It’s a type of property and not a form of currency.

So what, you say? Here’s what: Because, as The New York Times has reported, the IRS is going to treat Bitcoin as property, people who buy and sell it are going to have to calculate the change in value from when they acquired it, and pay tax (or claim losses) on the difference.

That means you could buy Bitcoin, use it to purchase something, and then have to report a “trade” on the change in Bitcoin value between when you bought it and when you used it.

Oh, and if you’re one of those smart guys or gals who can actually electronically “mine” a Bitcoin, you are going to have to report the market value of the Bitcoin as income.

Could government-gathered tracking info show up in your tax audit?

As ProPublica points out, despite the veritable explosion of stories about secret government surveillance programs, there’s a whole lot we still don’t know. We don’t know how long the government has been collecting our phone records or how much is collected. It would be nice to know what government officials think they can do under the Patriot Act, but….that information is classified.

We do know, though, as The Washington Post has been reporting (along with several other outlets), that the government has been engaged in internet data mining of video chats, emails, documents and photos, and is able to track when calls are made, from where, and for how long.

What does this have to do with taxes? Well…what if the data that one arm of government gathers up could be used by another arm…like the IRS?

There’s no evidence that anything like this is happening. But as UC Berkeley sociologist James B. Rules mused in The New York Times, “Imagine that analysis of telecommunications data reliably identified failure to report taxable income. Who could object to exploiting this unobtrusive investigative tool, if the payoff were a vast fiscal windfall and the elimination of tax evasion?”

Wow–there’s a nightmare for you. Do I think this is going to happen? No. But these kinds of questions just reinforce something that I and other tax pros always tell clients: Always keep track of everything that is going to be part of your tax return as if you are going to be audited. Hate to have to give you such a downer of a blogpost, but sometimes That’s The Way It Is.