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.