The New York Times reports on a court case involving whether an artist working for salary as teaching faculty can claim tax deductions of artist’s expenses (for supplies, travel, meals, etc) in excess of profits earned on sales of art. My understanding of this (tax people please correct me if I have this wrong) is that these net losses can be applied against salary and other earnings, thus lowering the tax owing:
The I.R.S., which accused Ms. Crile of underpaying her taxes by more than $81,000 from 2004 to 2009, argued that based on several factors, such as her lack of a written business plan, her work as an artist was “an activity not engaged in for profit” and that she could not claim tax deductions in excess of the income she made from her art.
There are two things to consider when reading such a story, things the reporter is likely to ignore.
First, when a ruling is made, how are people likely to respond to the changed incentives? It is all very well to focus on the party in this case, Ms Crile, but this becomes a ruling for everybody. So let’s imagine someone rather unscrupulous, who has a faculty position, makes art that is essentially unsaleable, but who likes to travel, visit exhibitions, furnish his studio with only the finest materials. And all of these expenditures could be deducted against his salary income. Something seems not quite right about that. The Times story focuses on the political nature of Ms Crile’s art, that she is pursuing her art where the monetary returns are unlikely to be high. But what about an artist who is simply a bad artist, but who likes to live large?
Years ago in Canada I remember a case that made the news, of people with high salaries – physicians in particular – making a purchase of a couple of goats, and declaring “I’m not just a doctor, I’m a farmer too! Shame, but this goat farm loses a lot of money. But I can deduct those losses against my income from doctoring.” No, I’m not saying Ms Crile is that doctor. But let’s keep in mind the possibility that some artists will be tempted to behave just like that doctor.
The second thing to keep in mind is how tax rulings for artists (or collectors, for that matter) are seen by taxpayers who are not in any position to claim tax deductions of various sorts – they work at ordinary low-paying jobs for a wage and that’s about it. The art world is not seen in the same light by them as by many readers of the Times Art & Design Pages, or these blogs. Avoiding estate taxes through complex transactions in art may serve a few people well, but the non-arts public can sense something of a scam about the whole thing. And ‘arts advocates’, those who want to build greater public support for the arts in the US, might ask themselves how helpful these stories from the tax courts are to their cause.
UPDATE: Very helpful, detailed analysis of the Crlle case from Sam Brunson.
The IRS is pretty clear about its guidelines for business deductions for small businesses. In order to deduct losses, you need to be in it to actually make a profit. They give you five years to actually make a profit. If you don’t do so at least once in those five years, your business is considered a hobby, not a business. A friend got in trouble for the same thing with a series of jazz concerts he put on. Wonderful musicians came, but he lost money every year until the IRS came. Now he has a restaurant with a jazz club. I bet the jazz still loses money, but it is offset by the profits of the restaurant.
If the artist had simply not deducted all of her museum lunches and Italian junkets every few years, she would have not raised the IRS’s suspicions.
While most of us that have looked at the tax code in the U.S know it is an unfair mess, why single out artists that for the most part could not even dream of documenting their work, especially in fields requiring intense collaboration like film making or performance arts like music, theatre and dance, if it were not for the possiblity that expenses incurred documenting or creating their work, not met through sales of their work, may be tax deductible? In the era of easy and often free access to content that can be presented or duplicated digitally, with little or no remuneration for the content creators, I ask if the contributions of “Artists” in general are not at least as valuable to the society at large, and consequently worthy or special consideration from those writing the tax code as Exon Mobile is of both liberal tax deductions and tax subsidies. When and if the entire tax code is fairly rewritten seems to me to be the appropriate time to address whether artists deserve such tax deductions, and not before. But then that raises the issue of who is going to decide what artists and what works are worthy of such tax deductions….. which is a whole different can of worms, that I for one would not want to have to deal with!