An important US Tax Court Ruling for all US artists

This is about a particularly important tax ruling in the USA. It affects in particular all artists who are also teachers. Most particularly it affects all those who earn more from their teaching than they do from their art.

This is a judgement to file away in your tax files!

The "Hobby Loss" Rule: Section 183 – Activities not engaged in for profit

The "Hobby Loss" rule is explained precisely in an IRS document Is Your Hobby a For-Profit Endeavor? FS-2008-23, June 2008

Is your hobby really an activity engaged in for profit?
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.

and 

An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year

The basic principle is that you must be actively engaged in seeking to make a profit to be treated as somebody who can claim business expenses.

The tests used to assess whether or not an activity might be deemed to be a hobby are as follows

1. Does the time and effort put into the activity indicate an intention to make a profit?
2. Do you depend on income from the activity?
3. If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
4. Have you changed methods of operation to improve profitability?
5. Do you have the knowledge needed to carry on the activity as a successful business?
6. Have you made a profit in similar activities in the past?
7. Does the activity make a profit in some years?
8. Do you expect to make a profit in the future from the appreciation of assets used in the activity?

This is a useful checklist for all those planning to claim business expenses for their artistic practice  on their tax returns.

Susan Crile, Petitioner v.Commissioner of Internal Revenue, Respondent

US Tax Court Building

The United States Tax Court has ruled that an artist who is a teacher is not a hobby artist.

The contention of the Internal Revenue Service (IRS) was that the artist was not really an artist so much as somebody who practiced art as a requirement of her job. Thus her claim to business expenses for her artistic practice should really have been filed as unreimbursed employee expenses.

First, he contends that petitioner’s activity as an artist is “an activity not engaged in for profit” within the meaning of section 183 and hence that she cannot claim deductions in excess of the income she derived from that activity.

This falls within the notion that hobby artists are not allowed to claim business expenses if they don't try to sell their work and don't make a profit.  In other words business expenses can only really be claimed by those who can demonstrate that they run a business and act in a business-like way.

The contention of the IRS was that the artist had underpaid tax because her main occupation was as an art teacher and not an artist - and that her art was practiced purely because it was a job requirement.

That's when we learn that the artist in question - a New York painter and printmaker called Susan Crile can be summarised as follows:

• a painter and printmaker who has been exhibiting since 1971
• an artist who has work in the collections of a large number of museums - including the Metropolitan Museum of Art
• an artist who has received two awards from the National Endowment for the Arts (NEA) 
• a Professor of Studio Art at Hunter College, CUNY, New York, NY
• an artist who earned an average annual income from her art of around $16,000 between 1971 and 2013

Fortunately, the Tax Court saw sense and ruled that she could indeed claim business expenses for her artistic practice which has been sustained over a period of many years and predates her current employment position as a Professor of Art!

The important rulings by the Tax Court are that

• the separation of Crile's activities as a Professor of Art and a practising artist was NOT an artificial distinction. 
• the right for a practising artist to claim an income tax deduction on expenses related to status as a professional artist is not jeopardised by low sales or any other full time employment (which in this case happened to be teaching).

However it did NOT indicate that an artist who perennially makes losses would not be treated as a hobby artist - that's a different issue.

As indicated in the New York Times article

Judge Albert G. Lauber of the tax court ruled Thursday that Ms. Crile had “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” and therefore under tax law should be considered a professional artist.

This is the transcript of the hearing.

Here are some articles about the case. They make a good job of summarising the situation so I don't propose to go into more detail in this blog post

• New York Times - Tax Court Ruling Is Seen as a Victory for Artists
• Forbes - Tax Court Judge Appreciates Art More Than Your Average Revenue Agent
• Hyperallergic - Judge Overturns IRS on Artist Tax Deductions
• Art Forum - Tax Court Rules in Favor of Artists