A little-noticed provision in the recently passed tax act has given songwriters something to croon about.
Starting next year, songwriters will be able to claim capital gains treatment when they sell a catalog of their work. This is a stark departure from current law, under which such sales are taxed at ordinary income tax rates that can be as much as 20 percentage points higher.
“This fixes an inequity in the tax code,” said Brad Cohen, a partner at Reish Luftman Reicher & Cohen, a Los Angeles law firm. “Now the creator of a song will be treated like the developer of an apartment building when he sells an asset he’s created.”
More important, writers will get the same tax breaks as their producers, who often partner with them on songs, said Rick Nowels, a Los Angeles songwriter who has collaborated on more than 50 tunes, including “The Game of Love” with Santana.
Currently, a producer with a 50% interest in a song’s royalties would pay a 15% tax on the sale of that song, but the writer’s 50% interest in the sale of the same song would be subject to a marginal tax rate as high as 35%.
“This new law gives the same tax advantage to the person who creates the copyrights as it does a corporation who is in the business of buying and selling copyrights,” he added. “That’s the fair way to tax a songwriter.”
The rule was included in a $70-billion tax bill that was signed into law last month. The main focus of that law was to extend popular tax breaks that would otherwise expire. A handful of new provisions, however, were added, including two changes affecting songwriters.
One allows the writers to claim a capital gain when they sell rights to their collected works. The other allows buyers to write off the cost of these purchases more quickly.
The end result may be that more songwriters will sell their collected works and get more money for them, said Mark Luscombe, principal tax analyst for CCH Inc., a Riverwoods, Ill.-based publisher of tax information.
Luscombe added that this was an unusually difficult year to win changes in the tax code. Debate over the cost of the bill delayed passage for months. Meanwhile, numerous “extenders” that would have given a longer life to popular tax breaks, including those that help parents finance college and that give teachers write-offs for buying classroom supplies, were taken out of the legislation because Senate leaders couldn’t find the money to pay for the tax breaks.
The Songwriters Capital Gains Tax Equity Act -- as it was known before being tacked onto the bigger Tax Reconciliation Act -- became an exception because of an unusual lobbying strategy, said Bob Regan, president of the Nashville Songwriters Assn. International. Regan’s group was the chief proponent of the bill.
“We had no lobbying budget. We went up to Capitol Hill with our guitars,” he said. “I would walk the halls with a guitar on my back, make my case and then play them a song.
“I think they enjoyed seeing us coming because they see slick lobbyists every day,” he added. “There’s no way you can compare that to somebody singing you a song that was played at your daughter’s wedding.”
The songwriters also weren’t asking for much. The two provisions are expected to cost a total of $33 million over 10 years -- not enough to account for even 1% of the bill’s $70-billion cost.
Understanding what the songwriters wanted -- and ultimately got -- requires some knowledge of the music industry.
Generally speaking, songwriters earn a few pennies every time a song they’ve written is purchased on a record or CD or is played on the radio. Those payments are called royalties and they’re taxed just like wages at marginal rates that range from 10% to 35%.
That’s not going to change.
Some musicians, however, decide to sell collections of works that have become enduringly popular over the years. These sales give another party -- whether an individual or a company -- the right to collect the royalties in the future in exchange for a one-time payment to the writer.
Under current law, those one-time payments also are taxed at ordinary income tax rates. That created a problem for two reasons, Cohen said.
First, because these one-time payments compensate the artist for years of future royalties, they often can be high enough to push the songwriter into a top marginal tax bracket. That can be a huge disadvantage because songwriters are generally not a well-heeled group.
According to the Nashville songwriters group, the average songwriter earns $4,700 annually. That level of income generally would not be taxed at all. So, the prospect of suddenly losing 35% of sale proceeds to federal income taxes -- and losing even more to state taxes -- discouraged sales.
“Songwriters couldn’t sell their copyrights during their lifetimes because the tax was so outrageous,” Cohen said. “The artists would just hang on to these things until they died. Then, often, their kids would have to sell them to pay the estate tax when they inherited the rights.”
What was worse, Regan said, was the inequity. Songwriters increasingly partner with producers, which leaves each with half of the copyright to their songs. Until this law goes into effect, the producer pays preferential capital gains tax rates on the sale, whereas the artist pays vastly more.
“I sold a catalog six or seven years ago. My publisher got taxed at the capital gains rate. I got whacked at 39%,” Regan said, referring to the then-top marginal tax rate. “It was just inherently unfair.”
Kathy M. Kristof, author of “Investing 101" and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For previous columns, visit latimes.com/kristof.