Posts Tagged ‘art law’

Surprise: Art can be a business for tax purposes

(The original version of this article was posted by London attorney Elizabeth Emerson on the blog “Art and Artifice: a weblog dedicated to everything concerning art and the law”.  Triangle ArtWorks appreciates Ms Emerson granting us permission to reprint it here.)

by Elizabeth Emerson

In the recent US case Crile v Commissioner, the IRS sought to show that the forty-year career of a well-known artist, some of whose works hang in the Metropolitan Museum of Art and the Guggenheim, was not a business, but merely a hobby.

The case turns on the following point. Relevant US law permits taxpayers to deduct the expenses of their trade or business from the taxable profits of that business. And, if the expenses are greater that the profits, then the taxpayer may generate a net loss. That loss may be of value to the taxpayer if she or he has other profits against which the loss can be set, thereby reducing the overall tax bill payable.  Hand drawing money

But if the taxpayer’s activities are not a business but a “hobby”, then the deduction position is different. The expenses of a hobby can be deducted against any profit it may make, but only to the extent of those profits. Where the expenses of a hobby are greater than its profits, the taxpayer is not entitled to generate a loss. This is intended to prevent a taxpayer from running a profit-making business and at the same time enjoying a loss-making hobby activity (such as horse breeding or drag racing) – and using the losses generated in their spare time to reduce their business tax bill to nil.

In the case of Crile the artist made a profit working as an art professor, but a loss working as an artist. When she sought to offset the two, the IRS argued that her losses as an artist were not allowable since her artistic production was a hobby.  In determining whether an activity is a hobby or a business, the IRS will consider whether the activity is carried on with the objective of making a profit, or whether the real objective is  the taxpayer’s own entertainment. In coming to a decision the IRS will apply the “hobby loss rules”. These are nine different factors to be considered, such as whether the taxpayer keeps accurate books and records of the activity, how much of the taxpayer’s time an activity is expended on the activity, to what extent the activity has elements of personal enjoyment or recreation and so on.

The outcome of the case, hailed as a “victory” for artists, was that the taxpayer’s long and distinguished career – on which she kept detailed records, used a bookkeeper and agent, and spent much of her working time, although she typically lost money – was indeed a business. The court acknowledged that given the unusual nature of the art world, an atypical profit structure – such as a string of losses over many years, or sudden success following a successful show or review – would not necessarily be taken as evidence of a hobby. Nor would a business “be turned into a hobby merely because the owner finds it pleasurable” which is a relief – it would certainly be harsh tax result if it was necessary to dislike your own business in order for your expenses to be deductible. “Suffering,” the court confirmed, “has never been made a pre-requisite to deductibility.”

It has been pointed out however that the deductions which the IRS sought to disallow in this case were suspiciously large, and in some instances were of a personal nature which should not in any event have been deductible. The taxpayer’s approach to deductions, the court noted, was that “most experiences an artist has may contribute to her art and that most people with whom an artist socialises may become customers or otherwise enhance her career” – on which basis she deducted a great many expenses which did not pertain directly to her career as an artist, such as cable television bills, taxis to the opera, and tips to doormen.

The IRS therefore made a twofold argument: firstly that the taxpayer’s activities were a hobby and as a second (and more reasonable) line of defence that, if the activities were a business, then the expenses in question were not all “ordinary and necessary” for that business and therefore not deductible. While the court’s decision as to the first argument will be a relief for US artists, the decision on the second may not be good news for this particular taxpayer.

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Thanks to our Lawyer’s Task Force for spotting this article and obtaining authorization from Ms. Emerson for us to post it here.  Triangle ArtWorks Lawyer’s Task Force is exploring ways to assist the Triangle’s creative community with legal issues and education.   The Lawyer’s Task Force has already been instrumental in loading ArtWorks Resource Pages for Trademark/Copyright and Business.  If you are a lawyer and are interested in getting involved, email us!

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The Federal Artist Deduction Bill- What it means to artists and what you can do.

by Joan Blazich

It seems like a variation of this bill comes around every few years in Congress, yet it never makes it past the committee level. But it should, because it will have a massive impact on ALL artists. Why?  Because, as of right now, there exists a disparate gap between how artists and collectors are treated when it comes to claiming IRS tax deductions for donating works of art. This definition of art includes literary, musical, artistic, and scholarly creations.

Under current laws, a collector who chooses to donate an artistic work to a nonprofit institution such as a school, museum, etc., may deduct the fair market value of that piece for tax purposes. So, if the going rate for the artists work is, say, $5000, that collector can deduct $5000. However, if an artist chooses to donate one of their works to a nonprofit entity, as the law stands now, they are only entitled to deduct the costs of creating that work.

So, a visual artist can deduct the costs of construction materials such as canvas, paint, clay, etc., but nothing more. For musical compositions, you could donate the cost of staff paper; for literary compositions, the cost of typing paper, etc… you get the general idea. Given the ever-increasing costs of artistic supplies, as well as the time and effort that goes into creating every artistic creation, it doesn’t make much sense for artists to not receive full deduction credits for their donations. After all, that creation has value, something which remains regardless of whether the item in question is sold or donated.

Thankfully, a bipartisan group of Representatives in the U.S. House is again working on a bill that would help correct this imbalance. Known as the Artist Deduction Bill, H.R. 1190, this legislation would end this disparity by granting artists the same deduction allowances as collectors.  This would not only offer an immediate benefit to artists, but may also help to increase donations to nonprofit entities in the future.

This sounds like a great idea! How can I show my support?

The great people at American’s for the Arts have made it very easy to help support this legislation- all it takes are a few clicks of a mouse. Click here to petition your Representative online to support this bill. I just did it, and it literally took less than one minute to make my support of this bill known to my local Representative, David Price. Americans for the Arts provides a form letter.  However, as always when sending such letters, if you have time, providing personal stories or examples of the impact of the issue on your life and work would make the letter more effective.

Taxes are never enjoyable for anyone, and we all want every deduction we can claim. This includes artists, whose creative endeavors make our communities a better, brighter, more intellectually-stimulating place. So why not give our artists the same tax deduction opportunity as collectors? Please take a few moments to contact your local Representative in support of H.R. 1190. It’s quick, it’s easy, and it will make a significant difference for all of our artists.

Joan Blazich, who is interning for Triangle ArtWorks this summer, is a second-year law student at the University of North Carolina School of Law. She also holds a Doctorate in Music and is an active performer in numerous local ensembles. She can be reached by email

Do you have something to say to the Triangle arts and creative community?  Be a writer or guest blogger for ArtWorks!  Do you have news to share? Help us keep this community informed! Email

 

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Trademark Guide added to ArtWorks legal resources.

Every wondered what it takes to protect your trademark?  Starting a business and want to know how to pick a good trademark?  ArtWorks has just added an excellent resource tool to its Legal section under Artist Resources: “An Essential Guide to Trademark Protection“.

Eric Stevens, a lawyer in Poyner Spruill’s Entertainment Law Section wrote the book. As he says,

In my practice, I have found that people make some common mistakes when they are adopting trademarks that lead to serious problems that could have been prevented if they knew some basic facts about trademark law.   For instance, if you adopt a trademark that “merely describes” the product or service being offered under that mark, you do not have immediate trademark protection available.  On the other hand, if you adopt a trademark that is “suggestive,” meaning that the mark suggests, but does not directly describe, some aspect or quality of your product or service, then immediate protection is available (so long as someone else has not already adopted the mark).  This book is a simple primer intended to give people and businesses the tools to avoid those simple mistakes and thereby avoid unnecessary headaches.

p.s.: Poyner Spruill LLPEric and his partner, Jim O’Brien who is also a member of Poyner Spruill’s Entertainment Law Section, are members of ArtWorks Law Committee. Thanks to Eric and Poyner Spruill for letting us make this book easily available to our community.

ArtWorks Law committee is working to collect and create more legal resources to load on the site. What legals areas should we be sure to cover?

Beth

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