IRS Grants Artists Partial Tax Relief : Ruling Relieves Bookkeeping Burden, but ‘It’s Not a Gift’

The Internal Revenue Service on Friday granted partial tax relief to creative artists, writers and photographers protesting their treatment under the 1986 Tax Reform Act. But “we are not out of the woods yet,” a key artist representative said.

As Congress was preparing to consider even more aggressive action on artist complaints over the stringent requirements of capitalization, the IRS gave the creative community the option of tossing those requirements overboard.

Under the new regulations, individual artists and writers will not have to match specific expenses to specific works of art and they will no longer be required to deduct their expenses only when the work is sold. Both the IRS and artists agree that the change should considerably reduce complex paper work and record-keeping.

According to the optional rule announced in Washington by the Treasury Department, an artist may spread out deductions over three years--deducting 50% of operating expenses in the first year, 25% in the second year and 25% in the third year.

The option, the IRS noted, is also available to those artists who have already filed their 1987 returns. A person who has filed may call it back and file an amended return.

The new ruling “certainly alleviates the complexity concerns these people have had,” Tom Evans, an associate tax legislative counsel for the Treasury Department, told reporters.

However, Daniel Abraham, legislation vice president for the Graphic Artists Guild in New York, which spearheaded the anti-capitalization drive, said there’s a catch in the option.

Under the capitalization system, the only exception was for advertising, marketing and promotional costs, which free-lance artists and writers could deduct before dealing with the capitalization requirements.

Under the new rules, should an artist choose to bypass capitalization, all expenses including promotional costs would fall under a lump sum, and only then could the first 50% be deducted. “If you use that ‘safe harbor’ that we issued, you include all your business costs and spread that over three years,” an IRS attorney said.

Of course, the attorney added, an artist could still comply with capitalization and directly deduct advertising and promotional costs.

Abraham derides the so-called “safe harbor” of the IRS. “They are giving with one hand and taking back with another,” he said. “First of all we lose our advertising, marketing and promotional costs. What it (also) means is that we still cannot deduct fully in the year the expenses are incurred.”

Acknowledging that the IRS has at least “removed much of the burden of bookkeeping,” Abraham noted: “This represents a recognition of the IRS of the unworkability of capitalizing our expenses. We are heartened that it shows that we can’t do the record-keeping, and they can’t monitor the compliance. That’s why they have done this. It’s not a gift from them.”

Meeting in New York with other leaders of Artists For Tax Equity, a coalition of 40 artist organizations nationwide that have lobbied since January for changes in the tax law, Abraham pledged to carry on the fight.

“We’re still going to push for the change in the law,” he said. “We’re still at the mercy of the IRS whims. Although it is a temporary improvement by removing the full burden of capitalization, it does not solve the problem. It still singles out artists for inequitable tax treatment.”

Under capitalization, artists would treat their expenses the way manufacturers do. “Manufacturers do multiple identical things,” Abraham noted. “We don’t.”

Prior to tax reform, artists used the time-honored and relatively simple method of deducting expenses against income.

The IRS said the non-capitalization option may be used by taxpayers who incur production expenses associated with films, recordings, books, photos, paintings, sculpture an other fine-art products--but not jewelry. The rule applies, the IRS said, “where the personal efforts of the individual are mainly responsible for the creation of a work of art.”

The IRS also noted the change would have no significant effect on government revenues.

On Capitol Hill, an aide to the House Ways and Means Committee, who had not seen the new regulations, said the IRS’ option “sounds like a pretty good resolution for the moment.”

In the congressional hopper, there is a bill introduced last month by Rep. Tom Downey (D-N.Y.), former chairman of the Congressional Arts Caucus and a member of Ways and Means, the tax-writing committee. The Downey bill would totally exempt from capitalization writers, photographers, a whole range of visual artists--those who create “a picture, painting, sculpture, statue, etching, drawing, cartoon, graphic design or original print edition”--and film makers whose costs during a given taxable year do not exceed $75,000.

That issue was expected to come before Ways and Means after the Memorial Day recess.

Asked whether the IRS ruling would affect the bill, a legislative aide to Downey declined comment “until we’ve seen the regulations.”