Are You Ready to File Your Taxes?

Photo Source: Carolyn Franks

Expenses for actors often exceed the income they receive from performing. In fact, it’s not uncommon for actors to go months or even years without recording a profit from their chosen profession. But when it comes to filing taxes, it’s problematic for performers to notch consecutive years in the red. Or at least it used to be.

Last fall Susan Crile, a painter and printmaker based in New York, challenged an Internal Revenue Service decision that categorized her as a professor with an art hobby rather than a professional artist with a day job at Hunter College. The IRS’ decision was based on her recording an average income of roughly $16,000 a year from 1971–2013. Having written off her art-related expenses, the IRS said Crile had underpaid her taxes by $81,000 during that time. A tax court disagreed, though, and sided with Crile, saying she “met her burden of proving that in carrying on her activity as an artist, she had an actual and honest objective of making a profit.” The ruling is instructive.

For cash income (nonemployee income by cash, check, credit card, trades, etc.), most auditors work on the basis that if you lose money more than two out of five years you fall under the “hobby loss rule.” This means that in Uncle Sam’s mind you really aren’t in business to show a profit and therefore under the rule, your deductible expenses cannot exceed the amount of your income.

The ruling in the Crile case means that actors can continue to write off their expenses beyond the five-year window, even if they’re not recording a profit. But there’s still the risk they can be audited.

In all too many audits, the hobby loss rule (no greater than a two-year loss out of five) is the single rule most examiners follow. But the auditor isn’t correct in using this singular premise if you can prove you’re in business to show a profit, even if you haven’t done so yet. Moreover, there are other factors the IRS must look at when it makes a decision on your business deductions.

The most important thing is whether you are actively engaged in the process of pursuing income in the industry. Obviously a restaurant can write off expenses if the doors are open, but is it in business if no one comes in to be served? Of course it is, albeit not for long.

It’s easier to prove “involvement” if you have an agent and you’re a member of one of the actors’ unions, but we all have to get started somewhere.

Represented or not, are you being submitted for auditions? (Keep records of your submissions.) Or better yet, are you actually attending auditions? (Again, record where, when, the role, and with whom you auditioned.) You may not have control over getting hired but you do have control over becoming part of the process of getting hired.

Your records should show you’re pursuing a career in the industry to make a living (i.e., profit)—otherwise the IRS can consider your expenses a hobby and limit your expenses to the amount of your income.

Chuck Sloan, owner of Chuck Sloan & Associates, is a Los Angeles–based tax expert who works with actors.

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