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TBA Online: News & Features: Top News

Assessing the Impact of the Tax Overhaul on Working Artists

Wednesday, February 7, 2018   (0 Comments)
Posted by: Rotimi Agabiaka
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by Rotimi Agbabiaka

In all her years as a tax-preparer, Diana Grenier has never seen this many people so on top of getting their taxes done. 

“When we hit this point in the year people are usually like ‘Oh I’ve got tons of time, April is so far away,’” she says. “But actually as soon as all of this tax talk was taking off in the fall people started reaching out to us saying ‘I want to get my taxes done now.’”

 

Diana Grenier. Photo by Matt Walding.

This tax season’s punctuality was prompted by the sweeping tax overhaul proposed by Congressional Republicans and signed into law by President Trump in December. The Tax Cuts and Jobs Act, which features large, permanent tax cuts for corporations and smaller, temporary tax breaks for individuals and small businesses, faced criticism for making significant changes to provisions that middle-class workers have relied on to save money on their taxes. Several of these changes have a particularly pointed effect on working artists and arts advocacy groups have been vocal in their opposition to the new law. 

“This is a bill that gives most of the benefit to the rich at the expense of the middle class and the poor,” says Brandon Lorenz, national director of communications for Actors’ Equity. “If you’re a middle class performer you are most likely going to pay more [in taxes than before].”

Because the law was crafted and passed in what critics describe as a hasty and secretive manner, tax preparation professionals are still studying it to determine all its effects on their clients.

“Over the holidays, instead of just relaxing we’ve spent a lot of time studying the new tax legislation, parsing it out, figuring out what does it really mean,” says Grenier. “We even have taken some of our clients and are using them as models, trying to figure out what [their taxes] would look like [under the new law].” 

Armed with greater knowledge, Grenier and her partners at Treehouse Taxes are offering a series of free workshops (some with suggested donation) in Oakland and San Francisco with Dancers Group, ArtSpan, and Independent Arts & Media to help arts professionals learn about the upcoming changes and better prepare their taxes.

Professionals from the Oakland/Brooklyn-based firm have offered similar workshops in the past but this year they take on an added urgency as artists scramble to respond to changes that could have a major impact. So far the prognosis hasn't been good.

Causing some of the greatest concern is the new law’s limit on deducting unreimbursed employee business expenses. Theatre artists have previously been able to deduct such costs as union dues, agent fees, training classes, travel for auditions, and other expenses, which can cost as much as 30 percent of a working actors income, according to Sandra Karas, the treasurer for Actors’ Equity. Under the new law, workers will only be able to deduct these costs up to two percent of their annual gross income, a provision that could significantly raise the tax bills of working actors.

Karas reworked the 2016 tax returns of some Equity members in order to evaluate the law's impact and found that an actor who earned about $97,000 (about three-quarters from pension and investments) paid $12,434 in taxes, but would have paid $14,769 under the new law—an increase of $2,335 or 19 percent. Another actor who earned about $28,000 paid taxes of $513 but would have paid $1,726 if the new law had been in place—an increase of $1,213 or 336 percent. And a married couple, both performers, who earned about $65,000 (or about $32,000 each) paid $1,228 in taxes but would have owed $4,535 under the new law—an increase of $3,307 or 269 percent. In other words, their taxes nearly quadrupled.

A possible solution, and one that is currently used by higher-earning entertainment professionals, is for an individual to incorporate herself into her own company that employs her and “loans” her services to the theatre or film productions she works on. Such a setup is referred to as a loan-out corporation or S-corp and would require the individual to file a corporate tax return in addition to their personal tax return. While loan-outs might now seem attractive to a middle-class earner, they come with significant costs. In addition to a fee for setting up the S-corp, the annual cost of maintaining corporate compliance and paying local and state business fees is estimated at $2000 to $2500.

“So the amount you might save in taxes through the S-corps might get absorbed by those additional costs,” says Grenier.

Another option some artists are considering is shifting more of their income away from employee income to independent contractor income. This is because the new law allows sole proprietors—along with owners of partnerships or other so-called pass-through entities—to deduct 20 percent of their revenue from their taxable income. Independent contractors (i.e. workers who get paid with a 1099, rather than a W-2) are usually classified as sole-proprietors for federal tax purposes. 

The complication here is that while performers have high business expenses like independent contractors, they are often paid like employees with W-2s, something which the entertainment unions have fought for tooth and nail.

“The law that governs you as an employee is the law that prohibits discrimination and sexual harassment and ensures you get workers comp,” says Mary McColl, executive director of Actors’ Equity. “We have fought for a hundred and four years to make sure that our members, when they work, are employees for those reasons.”

Mary McColl. Photo courtesy of Actors' Equity.

In addition to the provisions limiting employee business expenses, there is another aspect of the tax overhaul that concerns arts advocates. By discouraging itemized tax deductions and doubling the estate tax exemption to $22 million for couples, the law is projected to shrink the number of taxpayers itemizing charitable deductions by more than half, according to the Tax Policy Center. This could have adverse effects on theatres that rely on donations to stay afloat.

“If charitable contributions go down … that means there is less money for [theatre companies] to produce, less money to hire actors and stage managers,” says McColl. “When there is just even a dip in what you are able to bring in not just from corporations and from foundations but from individuals who are giving you $150 a year … that’s the money that actually keeps the lights on.”

These changes won't apply for taxes filed this year and tax professionals are urging concerned artists to research all their options in order to best prepare for next year's filing season, understanding that the law will have varying effects depending on an individual’s situation.

“We're encouraging people when they go to their tax preparer this year, don’t feed all the anxiety,” says Grenier. “Do your 2017 taxes and then ask your tax preparer to help you anticipate what this could look like in the new year because it might not be that different. For some people it might even be a little better.”

At their upcoming tax workshops, Grenier and her partners aim to empower artists to boldly navigate the taxing business aspects of showbiz. “We’ll be walking them through how to shift their mindset: that they are actually in business for themselves,” she says. “ And understanding what they narrative of their life is and what their business is.”   

Upcoming Treehouse Tax Talks:

February 12: Dancers Group in San Francisco, http://dancersgroup.org

February 20: ArtSpan in San Francisco, https://www.eventbrite.com/e/artspan-artist-workshop-taxes-for-artists-with-treehouse-taxes-tickets-40162804028

February 22: Independent Arts & Media (East Bay) in Oakland, https://www.eventbrite.com/e/tax-workshop-for-individual-creatives-with-treehouse-taxes-oakland-tickets-42410696535

Rotimi Agbabiaka is the Features Curator for Theatre Bay Area. He is an actor, writer, director, teaching artist, and a collective member of the San Francisco Mime Troupe. Learn more about him at rotimionline.com