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Tax Court Puts Spotlight on Actor-Related Expenses

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A new Tax Court case turned on whether the taxpayer’s activities constituted a “business” or a “hobby.” To qualify as a business, your client must show that you’re engaged in the activities to turn a profit.

Sep 23rd 2021
Columnist
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A new Tax Court(Gaston, TC Memo 2021-107, 9/2/21) case found that clients may be able to deduct expenses relating to acting, even if they're not the next Streep or DiCaprio.

The tax difference in the new case is critical. If you incur legitimate business expenses, they can offset taxable income, even if you show a loss for the year.

Conversely, if the activity is treated as a hobby, your deduction is limited to the income received from the hobby and expenses must be treated as a miscellaneous expense. Under current law, deductions for miscellaneous expenses are suspended for 2018 through 2025. So now you get zero tax benefit for hobby expenses.

Facts of the new case: After working for Mary Kay for 45 years, the taxpayer pursued an acting career. She had a brief prior history in the entertainment history and also had a family connection.

To further her acting, the taxpayer retained an assistant who helped her identify casting opportunities and manage her applications. She also engaged various casting services, retained an agent and a business management company, secured professional headshots, advertised her skills and took acting and voice lessons.

Between the prep work, securing auditions and playing the few roles she secured, the taxpayer spent at least 40 hours per week on acting. Although she worked hard at the craft, she also enjoyed it.

The taxpayer didn’t generate a profit from the acting activities in the tax years at issue. However, she did manage to secure some film credits and appeared in several commercials. The IRS denied her deductions for acting-relating expenses.

As usual, the Tax Court examined the following nine factors set out in the regulations to determine if the taxpayer’s activities rose to the level of a business.

1. The manner in which the taxpayer carried on the activity

2. The expertise of the taxpayer or his or her advisors

3. The taxpayer’s time and effort expended in carrying on the activity

4. The expectation that assets used in the activity may appreciate in value

5. The taxpayer’s success in carrying on other similar or dissimilar activities

6. The taxpayer’s history of income or losses with respect to the activity

7. The amount of occasional profits, if any, which are earned

8. The financial status of the taxpayer

9. The presence of personal pleasure or recreation

After analyzing these nine factors, the Tax Court concluded that the activities constituted a business. In doing so, it focused on the taxpayer’s prior acting experience, the time she spent working on acting and her forays into films and commercials.

Finally, the Court noted that it often takes longer to establish yourself as an actor than it does to succeed in most other professions. Taxpayer, take a bow!

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