The 2018 Tax Cuts and Jobs Act for Creative People
By, Peter Jason Riley, Certified Public Accountant
There has been a lot of misinformation regarding the new tax act and its effect on folks in the creative fields. Of course, there are many aspects of this new tax bill, both good and bad, that will impact all taxpayers such as the increased standard deduction, lower tax rates, the elimination of personal exemptions, the cap on SALT deductions and other provisions, but let us focus here on the important parts of the bill, and subsequent regulations for creative individuals.
Section 199A - the new "net business income deduction"
The biggest gamechanger in the 2017 TCJA tax bill is the new 20% net business income deduction (Section 199A). Simply put, this bill provides a new 20% "Qualified Business Income Deduction" calculated on your net business income. It does NOT replace your normal business deductions (wireless, rent, payroll, home office, meals, travel, commissions, supplies, streaming services etc.) but provides an additional "free" deduction based on your net business income. I often characterize this new deduction as simple until it isn't, but I will try here to give the reader a basic understanding.
For folks in creative fields there are 2 limitations in the calculation;
Recent regulations seem to have clarified that individuals in the performing arts (actors and musicians for example) are considered part of the laws "specified service businesses" and are thus prohibited from claiming the 20% deduction UNLESS their taxable income is less than $157,500 if single and $315,000 if married (after that it phases out over the next $50,000/$100,000 of taxable income). If the actor, musician or performing artists income is above these stated amounts then as "specified service businesses" they will NOT receive any tax benefit from 199A.
So, to illustrate with a simple example; if a single taxpayer, a self-employed musician, actor, visual artist or writer with a sole proprietorship has a net Schedule C income of $75K and a W2 of $20K. They will get a brand-new tax deduction equal to 20% of the $75K net business income, or in this case, $15K. The 2018 federal taxable income equation will look like this:
There is an additional, overriding cap to the 199A deduction, the deduction is limited to no more than 20% of taxable income, net of any capital gains income. If the taxpayer in our example did NOT have the additional W2 income shown above the 199A deduction would limited to $12.6K ($63K * 20%) and would look like this:
Generally, based on the above example, we see no reason to set up a formal business entity, such as an LLC or corporation to take advantage of this new tax provision if the creative persons taxable income is below $157,500 if single and $315,000 if married threshold.
Current expert interpretation of 2018 Internal Revenue Service regulations tells us that writers such as novelists, historians, journalists or nonfiction writers are not considered a specified service business. A writer is only considered a specified service business when; "being paid for written material, such as a song or a screenplay, that is integral to the creation of the performing arts, the writer is performing services in the field of performing arts." Likewise, visual artists are NOT considered part of the new laws "specified service businesses" unless directly related to the performing arts, and thus have no income limitation regarding the ability to benefit from the TCJA 199A deduction.
For the more successful writers and visual artists it could be imperative to implement an S corporation tax structure as the need for payroll is critical. The successful writer or visual artists, who, remember is NOT considered a "specified service business" under the 2017 TCJA, can be left with no 199A deduction if they are in a business structure that does NOT have a payroll deduction. That is because in higher incomes (above the $157,500 if single and $315,000 if married threshold) an alternative 199A calculation kicks in; a deduction that is based on 50% of payroll. In this case the writer or artists sets up what is essentially a "loan out" corporation and pays themselves payroll as an employee of their own company.
Please keep in mind that this is a VERY basic overview of this complex law that COULD change with future regulations at any time. Remember I said earlier that Section 199A of the 2017 TCJA tax bill is simple until it isn't, so make sure you address these changes with your tax professional as you do your tax planning. But you can see, the type of creative field you are working in AND the level of income one is expecting is critical in guiding decisions on tax structure in regards to this new 199A deduction.
So, what other things changed for the creative tax filer? Here I will give you a summary of what to expect.Actors, Directors and Performers
The major change in the new tax bill is the elimination of the deduction for employee business expenses (Form 2106). This is going to have a devastating effect for many employed performers as Actors Equity, SAG-AFTRA and other organizations require that compensation be paid on a W-2. As of 2018, these performers lose all ability to take their professional, out of pocket expenses.
As most of you know the QPA (Qualifying Performing Artists) is, and has been, virtually worthless for many years as the qualifying threshold is unrealistically low. This has traditionally moved the deductions for the professional actor, actress, model and performer to Schedule A as miscellaneous itemized deductions, and these are what the new tax bill eliminates.
In planning for this change the performer has 2 options;
Remember actors and other performers are considered "specified service businesses" under Section 199A.Musicians and Singers
One of the key changes in the new tax bill is the elimination of the deduction for employee business expenses. While many successful musicians receive W2 income from touring gigs, they generally also have substantial income from self-employment for teaching, session work or private gigs. There has been no significant change in deductions for self-employed taxpayers; Schedule C stays virtually untouched. All direct business expenses for the musicians' independent, free-lance (1099) work will keep all allowable deductions intact moving into 2018. Again, in 2018 (and going forward) the one change will be the inability to deduct expenses directly associated with W2 employment. In this case, the touring musician with significant out of pocket expenses related to W2 income would be better to receive lower compensation and have the touring company reimburse them their expenses.
Remember musicians, singers and other performers are considered "specified service businesses" under Section 199A.Writers
In our opinion, writers will see little or no change in the deductibility of their direct writing expenses. A vast majority of independent writers are considered self-employed (remember, writer royalties are considered earned/self-employment income for the creator) and there has been no significant change in deductions for self-employed taxpayers; Schedule C stays virtually untouched. Current regulations indicate that writers (those not connected with the performing arts) will also enjoy the full benefit of the new 199A net income deduction under 2017 TCJA tax bill.
Many independent writers also teach. Their teaching income is reported on form W2 and, therefore, the deductions associated with the W2 income will be lost in 2018 but not their direct expenses for writing and research.
Remember writers that are not "integral to the creation of the performing arts" are not considered "specified service businesses" under Section 199A. If you have substantial income as a writer consider structuring your writing business as an "loan out" S corporation and paying yourself payroll to leverage the new 199A deduction.Visual Artists
In our opinion, visual artists will see little or no change in the deductibility of their direct art expenses. A clear majority of independent artists are considered self-employed (remember, an artist's income is considered earned/self-employment income for the creator) and there has been no significant change in deductions for self-employed visual artists; Schedule C stays virtually untouched. Current regulations indicate that visual artists not connected with the performing arts will also enjoy the full benefit of the new 199A net income deduction under 2017 TCJA tax bill.
Many independent visual artists also teach. If their teaching income is reported on form W2 then those teaching deductions, formally taken on Form 2106 as itemized deductions will be lost in 2018.
Remember, visual artists that are not creating art work "integral to the creation of the performing arts" are not considered "specified service businesses" under Section 199A. If you have substantial income as a visual artist, consider structuring your art business as an "loan out" S corporation and paying yourself payroll to leverage the new 199A deduction.
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