Actors, performing artists and taxes don?t seem to mix very well. Taxes and administrating their business are often last on the list of concerns for the actors and performers. The artistic temperament simply does not interface well with the exacting rule-filled world of federal and state taxation. Many performers tend to avoid the whole matter and consequently leave themselves vulnerable to bad advice. The secret to overcoming this phobia is to develop an understanding of the mechanisms of the tax code and some simple, effective ways of complying with this onerous task. I often use the analogy that you may not need to know how to fix your car but it is helpful to know how it basically works. In so doing you will pay less in taxes and you will be less likely to fall prey to erroneous tax information and disreputable advisors.
Many working performers are considered “self-employed” in regard to filing their taxes. In a legal and taxpaying sense this means that your “business” as a performer and you as an individual taxpayer are one and the same. There is no legal separation such as one would have in a corporation or other legal entity. In this case the performer will file a “Schedule C” as part of their regular 1040 income tax form (this is where you report all the 1099?s you received last year). The performer may also file form 8829 for the home office deduction and will be required to pay self-employment tax (Schedule SE) on their net income (profit) as well as federal income tax. All these forms are part of the year-end 1040 income tax filing. The self-employed performer will also usually be required to pay estimated quarterly taxes on Form 1040-ES (if the tax liability is to exceed $1,000). The performer may also have extensive W-2 income (this is the case with Equity actors) that will often have extensive expenses that will be deducted on Federal Form 2106. This means that a performer with BOTH W-2 and self-employment income will have to separate or allocate expenses between the 2 types of income:
|Income from W-2 Form||Income from Form 1099-MISC|
|Expenses found on Form 2106,
Employee Business Expenses
|Expenses found on Schedule C|
Because the tax deductions are reported on 2 different tax forms the performer with both professional income reported on form W-2 and the 1099 would HAVE to allocate the expenses between the 2 types of income.
What is a Deductible Expense?
The goal is first and foremost to lower your taxes! The musician/performer has a number of tax deductions that are unique. In the balance of this article we will try to break them down to their component parts to make the issues understandable. For the IRS, all deductible business expenses are those that are:
- Incurred in connection with your trade, business, or profession
- Must be “ordinary” and “necessary”
- Must “NOT be lavish or extravagant under the circumstances”
It does not take much analysis to see that these guidelines are not an exacting science. Al Pacino?s stay at the TAJ Hotel in Boston might for many other actors be considered “lavish and extravagant” by the IRS. Mr. Pacino can no doubt justify the expense due to his need for security and privacy that most actors would not need. As you can see, there is plenty of space for interpretation between the cracks here. These are the types of questions that can arise on audits ? so be prepared.
The performer has a bag of basic expenses that easily fit the above criteria: travel (hotel, meals, etc.), vehicle and transportation, equipment, supplies, wardrobe, home office expenses, legal and professional fees, video costs, agent fees, promotional expenses, etc (see our list). Let?s review some of the more complex and contentious deduction areas, but first let?s discuss income.
Income for the Performer
Income for the performer is: all payments for performances, guest appearances, income from teaching, voice over work, film and video work, directing, choreography, etc. regardless of whether you receive a 1099 or W-2 at year-end. It is a common misconception that if you do not get tax forms at year-end then it is not reportable income. This is untrue. If you have income in any form (including barters and free products from endorsements), it is required to be reported on your 1040. The form 1099-MISC tax form is supposed to be filed on any payments made to an individual for services amounting to more than $600 in any calendar year. When you are paid as an employee on a W-2, the employer withholds federal, state and local (if applicable) income tax as well as the FICA taxes, Social Security and Medicare.
Travel & Meals
The performer is allowed to deduct all expenses associated with overnight travel. These include meals (only 50% deductible), hotel & lodging, reasonable tips, dry-cleaning, phone calls home, etc. Overnight travel is roughly defined by the IRS as travel that is far enough away from home so as to make it inconvenient to return home at night. Travel could include expenses related to performances, guest appearances, recording sessions, auditions, etc. and will include many of the expenditures made on such trips. The other question often asked is whether or not the travel deduction applies for mixed vacation/business travel. If the trip is primarily business then deductibility will be maintained. For example: a trip to NYC for acting work in an independent film that includes a two-day stopover in Philadelphia on the way home to visit a friend. In this case the entire NYC trip would be deductible but the expenses related to the Philadelphia stopover would not be. Since maintaining receipts on the road is difficult, consider using the IRS “meal allowance” for deducting meals when traveling. This “meal allowance” (adjusted annually by the IRS) ranges from $51 to $74 per day depending on the location (see www.gsa.gov for current rates). In practice this means that receipts for meals are not required as long as the travel itself can be substantiated. This “allowance” includes all three meals and incidental expenses for the day. Travel for spouses or dependents are not allowed unless they are employees or part of the performer?s business.
Meals are deductible (remember, only 50%) as part of the overnight travel. They are also allowed as a separate (non-travel) deduction when they meet the criteria of “ordinary, necessary and business related.” This means that the meal must include direct business discussions. This can mean lunch or dinner meetings with agents, fellow actors or performers, directors, film & video producers, record producers, etc. If a direct business purpose were documented then the deduction would be allowed. These meals could include discussions on schedules, music arrangements, possible future acting or directing work, recording dates, meetings with lawyers or accountants and production or film companies. The best place to keep records for these expenses is in an appointment book. Log into your book who was present, and briefly the nature and substance of the discussion. I often suggest that you keep a copy of the person?s business card as further substantiation.
A question often asked is whether the artist has any tax deductions if the employer covers or reimburses the artist for all expenses. The answer to this question centers on what type of expense plan the employer operates. There are two basic plans the IRS allows:
- Accountable Plan – If the employer has what is called an “accountable plan” the artist will typically not have any tax-deductible costs. In this scenario the performer is typically reimbursed using the US Government per diem allowances or the performer submits all receipts and details on an expense report (or similar document) and then the employer reimburses the artist directly for all the costs. Sometimes the employer will pay things such as hotel, etc directly. In an accountable plan the performer will have not have any tax deductions if all the costs are being covered by the employer. What if your employer would have covered a particular expense, but you forgot to submit it, can you deduct the expense? Absolutely not! For example, say a performer notices when he or she is doing his tax returns that he or she had forgotten to submit a hotel bill to an employer he or she was employed with during the year. If the contract clearly states that all living expenses would be covered (the IRS will review these contracts if they audit him), he or she will not be able to deduct it even if they are past the point of getting reimbursed by the employer. This hotel bill becomes what I call a tax orphan that nobody gets to deduct!
- Non-Accountable Plan – The second type of plan is called a “non-accountable plan.” In this system the employer simply gives the performer a flat amount added to wages on the W-2 to “cover” expenses. In this system the performer would be able to deduct all allowable expenses incurred.
Automobile & Vehicle Expenses
The use of your automobile is probably one of the most common and largest deductions for performers. The automobile use expense can be taken in two ways. The first method is by using the IRS “standard mileage allowance.” In 2016, this annually defined allowance is 54 cents a mile (57.5 cents in 2015). To take this deduction you do not need receipts, only records that show the distances driven and the business purpose of the trips. These would include travel to performances, trips to the store picking up equipment and supplies, rehearsals, acting jobs, directing jobs, performances (both as player and observer), etc. The best tool for tracking and calculating this expense is your appointment book or calendar. If your calendar has a record of rehearsals and performances it can be used as a tool to estimate your mileage deduction (odometer readings are appreciated by IRS but NOT required). The second method is to write off direct expenses. In this method you actually depreciate the cost of the vehicle (over 5 years) and then tally up gas slips, repairs, insurance, etc and use that amount as a basis for your expense. This method requires more work and organization. If you were writing off a tour bus, cube van or other larger vehicle, the second method would be preferred. In my practice I often find the mileage allowance method generally yields the highest deduction for straight automobile use. In any case the IRS allows the taxpayer to calculate the best method year by year and take the one that yields the highest deduction (within limits).
Equipment purchased is generally “depreciated” and written off over 5 or 7 years on Form 4562. Depreciation is a technique for expensing or writing off purchases that have a useful life of greater than one year. In other words, a notebook computer is intrinsically different in nature than office supplies. Expenses such as dues, promotional photos, scripts, music books, CD?s & tapes, videos & DVDs, etc. will be written off (or deducted) in the year of purchase. Most equipment is written off in five to seven years. These “depreciable lives” are defined in the IRS code. The main tax strategy when it comes to depreciation is the use of what is often called “the section 179 election.” The IRS allows taxpayers to “expense” up to $500K of equipment in 2015 and 2016. In this case the performer is allowed to write-off his or her $2,000 Powerbook? computer in one year rather than wait five years to do it. Remember, this “section 179 expensing election” only accelerates the deduction into one year; in either method the artist is able to write-off (depreciate) the full cost of the purchase.
The Home Office or Studio
The home office has been a contentious subject in my profession for a number of years. With recent legislation the home office has finally returned to its rightful place as an allowable deduction for many performers. In fact, a recent tax court case helped seal this fact. If you use a room (or rooms) in your home exclusively for your business you will probably qualify for the home office. The use of the room can be as a rehearsal space, storage area for equipment, teaching space, rehearsal area, storage of scripts and library material, home recording and/or video studio, record keeping for the business, marketing, etc. The home office is a fairly straightforward deduction to calculate on form 8829. It simply utilizes a formula based on the square footage of the business portion (the home office) of your home vs. the total square footage of the house or apartment and applies that percentage to all associated costs. The costs could include apartment rent, mortgage interest, real estate taxes, condo fees, utilities, insurance, repairs, etc. Other rules that come into play here include the “exclusive use” requirement. This rule states that the home office must be used only for the business ? no “mixed use” allowed. In other words the home office cannot be part of a larger room such as the living room unless the business part is partitioned off in some way. The home office can be a powerful write-off as it allows the musician to deduct a part of what were non-deductible personal expenses. Look into the new “Simplified Method” beginning in 2013.
Other Unique Deductions
Performers and actors have other unique deductions that are considered personal for most other taxpayers. These include concert tickets, CD?s, stage makeup and wardrobe, lessons & classes, videos & DVDs, etc. Remember not to get greedy on items like concert tickets, shows and CDs. The IRS loves to attack deductions such as these. But they are allowed since performers must keep up with trends in their profession. Most tax preparers call it “research,” but be prepared to justify it. In any case do not deduct EVERY concert or show you attend in the year; they can?t all be “research,” some must be for personal enjoyment. This also holds true for videos and CDs, some purchases must be for personal pleasure alone.
Remember that this outline is not intended to be the whole story. For more information please purchase our newly updated 5th Edition book “The New Tax Guide for Writers, Artists, Performers, & Other Creative People”” which contains more information as well as dozens of real life tax situations for the performer. The Federal Tax Code is very complicated and your specific applications should be reviewed with a tax professional before filing your taxes. The actor and performer are unique in the world of taxes. When you are shopping for a tax preparer please make sure they have some experience in taxation for performers. Also, organize your numbers using our attached worksheets (and bring along this article), it will make the process easier and cheaper and will help you maximize your deductions. Ask your preparer about other tax saving strategies for self-employed individuals such as retirement plans, health insurance and deduction timing. For more information please purchase our book “The New Tax Guide for Artists of Every Persuasion” which contains more information as well as dozens of real life tax situations for the performer.
Assuming you are operating with profit motives rather than as a hobby (which limits deductions to income received, see bottom of this post for more discussion on this)???.
You cannot deduct the cost of clothing purchased for modeling. You can deduct the cost of theatrical costumes such as those worn by Vegas Show Girls. Creating a separate wardrobe room in your house and keeping your clothing separate just moves it from one location to another: by NOT adding it to your regular wardrobe you are not eliminating the fact that you COULD add it to your regular wardrobe. ??? Note: a male photographer could make an argument for deducting wardrobe purchased for his studio to be worn by female models (and vice versa for female photographers/male models), but this thread is for models buying clothing for themselves. Photographer expenses are for a different discussion.
You cannot deduct the cost of health spa visits, gym fees, haircuts, or your makeup. These are inherently personal expenses and are not deductible even if required for your job. There are rare occasions where gym fees are deductible for such professions as world wrestling or for medicinal purposes. Paying a makeup artist to do your makeup is different because you could argue that you are paying for his/her service to DO your makeup, rather than buying makeup and keeping it in your bathroom for personal use at another time.
You cannot deduct the cost of cosmetic surgery (see code section below).
Health Spa Expenses
You cannot deduct health spa expenses, even if there is a job requirement to stay in excellent physical condition, such as might be required of a law enforcement officer
Work Clothes and Uniforms
You can deduct the cost and upkeep of work clothes if the following two requirements are met.
– You must wear them as a condition of your employment.
– The clothes are not suitable for everyday wear.
It is not enough that you wear distinctive clothing. The clothing must be specifically required by your employer. Nor is it enough that you do not, in fact, wear your work clothes away from work. The clothing must not be suitable for taking the place of your regular clothing.
Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc.).
Musicians and entertainers can deduct the cost of theatrical clothing and accessories that are not suitable for everyday wear.
Case: Rick Richards, et ux., TC Memo 1999-163
As before, we initially must decide whether Mrs. Richards’ actress-model activity was engaged in for profit. Upon reviewing the entire record, we conclude that during 1994, Mrs. Richards was engaged in the actress-model activity with the requisite profit objective.
4. Actress-Model Expenses
Expenses for the Academy Players Directory, agent fees, photo session, and duplicate photos are all ordinary and necessary expenses of an actress-model activity. Petitioners submitted documentation to show that they incurred these expenses in 1994, and, therefore, we find that petitioners are entitled to deductions of $60, $262, $267, and $231, respectively for these expenses.
Petitioners claimed a deduction of $960 for miscellaneous expenses for hair and wig preparation, cosmetics, clothing, alterations, cleaning, supplies, fur coat storage, gifts, supplies, and meals. Petitioners did not offer any documentation or testimony on the breakdown of how much was spent on each item. Furthermore, some of these expenses are not deductible business expenses. 6 Therefore, without any help from the record, we cannot determine the [pg. 99-1006] amounts of any of these expenses, and petitioners are not entitled to a deduction of $960 for miscellaneous expenses.
For the remainder of the expenses, must- see movies of $480 and telephone expenses of $326, 7 we hold that they are not deductible expenses for the same reasons explained under Mr. Richards’ writing activity.
It is well settled that clothing that is suitable for general or personal wear does not qualify as a business expense under sec. 162. See, e.g., Green v. Commissioner, T.C. Memo. 1989-599 [¶89,599 PH Memo TC]. Such costs are not deductible even when it has been shown that the particular clothes would not have been purchased but for the employment. See Stiner v. United States, 524 F.2d 640 [36 AFTR 2d 75-6217] (10th Cir. 1975); Donnelly v. Commissioner, 262 F.2d 411 [3 AFTR 2d 481] (2d Cir. 1959), affg. 28 T.C. 1278 (1957). Furthermore, expenses related to hair salon visits and cosmetics are inherently personal expenses under sec. 262.
Case: STINER v. U.S., 36 AFTR 2d 75-6217, (CA10), 10/15/1975
Stewardess denied deduction for cost of accessories to uniform. Her shoes, boots, gloves, handbag and cosmetics weren’t unusual and she could put them to ordinary use.
The general rule for cosmetic surgery, as stated in the Internal Revenue Code
IRC Sec. 213(d)(9)(A) for medical and dental expenses states that “Medical expenses” does not include cosmetic surgery, which is defined in 213(d)(9)(B) as any procedure which is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.
Q. Ok so how do I determine if my modeling is a hobby or a for-profit endeavor?
A. See this page on the IRS website for some questions to ask yourself http://www.irs.gov/irs/article/0,,id=186056,00.html
Q. So explain to me again, why does it matter if it’s a hobby or for-profit endeavor?
A. See the page above, IRC Sec 183 limits the deductions you can take to income received. So you cannot take hobby losses. Example: You make $2,000 and have $3,000 of deductions which is a loss of $1,000. If you are modeling as a hobby then you cannot take that $1,000 loss, you will only break even at $0.
Q. Do you have some helpful tips to make sure I can prove to the IRS that I am carrying my modeling on with a for-profit motive?
A. A few things are good for documenting for-profit motive but consult with your local CPA for a more detailed discussion:
– Get comp cards and/or business cards
– Create a home office
– Make a modeling website
– Get signed to an agency
Note, these won’t guarantee proof they are just good ideas to help you out.