Thousands in back taxes ride on one question:

[missliz]

Is Venus de Mars a professional or amateur artist?

http://minnesota.publicradio.org/display/web/2013/07/19/arts/demars-artist-tax-audit

[loebtmc]

This is pretty terrifying........

[PSMKay]

Well, they've been disputing the terms "life" and "liberty" in the courts for years now. It was only a matter of time before they took on "pursuit of happiness" too.

[On_Headset]

This is nothing new in my jurisdiction.

It's nothing to do with the amount of pleasure you take, it's that, as the article says, "de Mars did not make a profit in any of the three years audited".

If you don't have any income, then you can't be self-employed. Because, well, you aren't employed. And the proper term for a career which doesn't generate any income is, in fact, "hobby".

[MatthewShiner]

No, there are business that operate in the red for years before they become profitable, and it's still a business - and no one would bat an eye at that.

[PSMKay]

And some, like many commercial theatre ventures, never turn a profit.

[MatthewShiner]

I think there maybe other issues afoot - such as an attacks on the arts in general - or something due to the fact "she" is not a "she" - I feel like this article may not have all the details.

There are years where I made a negative income after I take all my deductions - it happens.

[On_Headset]

No, there are business that operate in the red for years before they become profitable, and it's still a business - and no one would bat an eye at that.

Yes, and when she becomes a business, that argument might have some gas in it.

But she's a private individual who identifies as self-employed. She's, presumably, claiming all manner of deductions related to her self-employment. (Most self-employed artists do--and the ones who don't, ought to.) In the absence of any evidence that she's making a living at this self-employment, the government does at least have good reason to audit and examine and probe. The purpose of these deductions isn't to make life cushy, it's to allow you to eke out a living. And by her own account... she isn't.
Post Merge: Jul 22, 2013, 06:46 pm

And some, like many commercial theatre ventures, never turn a profit.

When a business doesn't turn a profit and eventually collapses, the shareholders and investors and partners get taken to the cleaners, but there's no real splash damage. Only the people who signed onto or purchased a stake in the enterprise have to wear the failure.

When someone spends several years living without an income, it's the taxpayer who ends up on the hook. (And that's doubly true if, in the mean time, they're claiming deductions.)

[MatthewShiner]

So, the answer for an artist, to protect them selves, it form a LLC?  Incorporate in some way that strongly identifies themselves as a business?

One of the main reasons I don't like freelancing on random gigs, or out of the norm boxes, is for a variety of tax reasons - running my own business - I do feel a greater burden falls on you to make sure you are covering your butt as far as tax laws.  This is where you hire the professional.

I think the freakish argument that comes out in the article is " . . .chief among them that de Mars took too much pleasure from her work, and didn't work hard enough to make a profit. As a result, state officials say she owes thousands of dollars in back taxes."  This really upsets me . . . because she likes her job too much?  Because she didn't work harder?  How is that gaged?

So, if, for example, a banker, REALLY LIKES BANKING . . . it's his hobby?  It has it roots in the devaluation of the arts as necessity for society.  (Again, I have NO idea of the type or quality of art in this case - I am just playing this out in my head.)

I worry that this sort of rational could be very detrimental to the arts as whole.  So, let's say . . . you are a young stage manager with a day job . . . and I am going to show my ignorance here . . . the day job pays a majority of your income (various odd jobs) - does this mean that you can NOT deduct expenses on your stage management experiences.  There are shows in NYC which might pay 300.00, but I may have costs of 350.00 to do the job properly - and the job is not taken for income as the sole reason, but because of potential future life.  Is one unable to declare those expense because I enjoyed the job too much?    Is someone going to come in my tech rehearsal and measure my enjoyment?  (If so, I am going to act VERY miserable in tech as to not lose my tax standing). 

I know the answer is to consult a tax professional, but at the end of the day, this is not the situation I am in personally. 

But there are those Stage Managers who LOVE doing kooky, off-off-Broadway shows, and may not make a huge amount of money, and love their job, but with deductions and so forth, may be able to live off 20,000 a year (like the case in this article here).

Again, I don't think the article has the whole story . . . and I feel like we may have caught the overly dramatic side - and I would be interested to learn more.

But if their chief argument is "she enjoyed it too much" - then I think we have a right to upset.

The article goes about the tax law been loose and open to interpretation, but it is about intent - was there intent to make a profit - and I think that's where this case may fall apart a bit . . . that's a difficult one to prove.  If you are a passive artist . . . then I think you will be on shaking ground . . . you need to show marketing, business plans, etc, etc, etc . . . and that is not clear how much of that was presented . . .

In the end, I think the moral of this story, and we as stage managers are often in a different boat then other artists, is treat your career like the business it is . . . keep great records (I know I could do better).

[KMC]

I remember this exact issue coming up in a class I had in college.  It was an independent study with a few of us that focused on the business of theatre, specifically geared towards freelancers.  We learned all sorts of tidbits that most don't even consider until they're faced with it in the real world, and a lot regarding tax.  I had forgotten the hobby rule until this thread came up, but it now rings clear again.  If you're self employed you need to show a profit on your taxes in 3 out of 5 consecutive years to avoid following into the "hobby" category. 

note: this is for federal returns only.  I'm not familiar with MN tax law and frankly don't want to be, though from the admittedly miniscule amount of research I conducted it seems MN concurs with the IRS definition.  If I am wrong, please correct me.

For those not familiar, the way you'd show a loss is to claim deductions to the point where your AGI is down to $0, or in the red.  What you generally should avoid is claiming deductions that take your AGI into the red for more than 2/5 years, else you may come up on the IRS's (or in this case, MN's) radar.  Even if you show a profit of $1, in theory you should be OK.

Here is a snippet of an article on the Hobby Loss Rule, with the full article found here. 

Hobby Loss Rule of Thumb.
If a business reports a net profit in at least 3 out of 5 years, it is presumed to be a for-profit business. If a business reports a net loss in more than 2 out of 5 years, it is presumed to be a not-for-profit hobby.

This rule of thumb makes places a huge burden of proof on young businesses. On the one hand, the IRS expects new businesses to incur a loss. It is normal for a business to have a year or two of losses before becoming profitable. On the other hand, it is likely that a business could have several years of losses before ever making a profit. In fact, several such cases have been sent to the Tax Court.

If you cannot meet the 3-out-of-5 year rule (3 years of profits in a 5-year period), you can still prove your profit motive using the following nine factors:
    You carry on the activity in a businesslike manner,
    The time and effort you put into the activity indicate you intend to make it profitable,
    You depend on income from the activity for your livelihood,
    Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
    You change your methods of operation in an attempt to improve profitability,
    You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
    You were successful in making a profit in similar activities in the past,
    The activity makes a profit in some years, and how much profit it makes, and
    You can expect to make a future profit from the appreciation of the assets used in the activity.

It's not really clear in the article what she has done as they're focusing more on the emotion of the situation than the facts, but I would guess in their opinion she did not make the case above to be exempt of the 3/5 rule and thus avoid falling into "hobby" status. 

Our federal tax code is a disaster, and this is only one small way by which it's playing out.  The US Federal Tax Code in 1913 was 400 pages.  In 2013 it's 73,954 pages; unfortunately for Ms. De Mars and the rest of us unless you have the means to engage a small business tax professional you potentially can fall into this trap as well if you're not careful. 

@ Matthew -

So, the answer for an artist, to protect them selves, it form a LLC?  Incorporate in some way that strongly identifies themselves as a business?

The best solution for most independent artists is likely an S-Corp as opposed to an LLC.  LLC and C-Corp expenses are not deductible on your personal return - you need to file a separate return for your business.  All expenses (and revenues) for an S-Corp are filed with your personal return, and as such a lot easier for most to manage.

[On_Headset]

So, if, for example, a banker, REALLY LIKES BANKING . . . it's his hobby?

If someone self-identifies as a banker and claims all sorts of banker-related deductions and sets up a little banking window in her kitchen (made out of LEGO and lincoln logs) and sits there all day long waiting for customers to arrive and nobody ever does, then, yes: that person is a hobbyist. (Or a performance artist. YMMV.)

As the article says, they provided a whole list of reasons. Nobody's shutting people down for enjoying their jobs. But when the only thing your "job" seems to provide is pleasure (no livelihood, no savings, no appreciable assets, etc.)... isn't that what we call a hobby?

[MatthewShiner]

Or a performance artist.

Love that.

I going to cry foul on the article author who puts a slant like the big, bag government is coming after the artist . . .