Are Your Paintbrushes Deductible ?

by Lydia Loren with assistance from Sean Clancy

Last week the United States Tax Court issued an important ruling concerning the ability of artists to deduct art-related expenditures.

Basics:  Section 162(a) of the Internal Revenue Code allows as a deduction “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”  The tax court has held that to be entitled to deductions under this section, the taxpayer must show that she engaged in the activity with an actual and honest objective of making a profit.

The Complication: When an artist is employed in a capacity that involves their abilities as an artist, determining if the artist’s activities outside of their employment are a separate “trade or business,” or merely a hobby or related to their employment can have serious tax consequences. Fundamentally what is at stake is that ability to deduct related expenses and to “take a loss” against other earnings.

The Ruling:  The court found that the artist’s job as a salaried professor was separate from her activities as an artist. The analysis of the facts of this case is worth a read (warning, it is a bit ofa long opinion).  But, in the end, this is an important rulingespecially for artists who also teach.  As the tax court noted: “For any practitioner who teaches–whether a lawyer, an accountant, an economist, or an artist–there is an obvious intersection between the individual’s profession and his or her teaching. But the two activities have different job requirements and entail different skills.”

Some factors that convinced this court that the artist was trying to profit from her art included the following:

• She kept all original receipts and invoices related to her art business;

• She kept detailed and relatively accurate records, going back over 40 years, listing prices and buyers for her work;

• She hired a bookkeeper during four of the five years at issue;

• She worked to enhance her credentials and professional stature by developing a history of sales, gallery representation, solo exhibits, positive critical reviews, and prestigious awards, fellowships, and residences;

• She maintained a mailing list for announcements and promotional materials;

• She kept a written catalog that included information about her works;

• She worked to increase her market by selling through different galleries and pursuing new creative themes over time;

• She and her advisors had demonstrable expertise;

• She devoted roughly 30 hours per week to her art business during the academic year and worked on her art full time during the summer; and

• She maintained an inventory of at least 1,500 pieces of art available for sale which demonstrated—along with her past history of sales—a reasonable expectation that her work would appreciate in value.

As the court says, she “devotes to her art activity a level of seriousness that takes it well beyond the realm of ‘recreation.’” Her work did not stop at the creative stage but went into the more mundane aspects of marketing her art and running her business.

Left for Later:  The case is a complicated one, involving attempts by the artist to deduct a wide-range of what might be normal living expenses.  This ruling did not address the specifics of what the artist might be able to deduct, expressly leaving those for another phase of the trial.

Likely Not Deductible:  It should be noted that the court expressed significant doubt that“a number of the deductions she claimed were not, within the meaning of section 162(a), “ordinary and necessary expenses” of conducting her art business but were “personal, living, or family expenses” non-deductible under” the Internal Revenue Code.  Included in the list of likely non-deductible expenses were “telephone and cable television bills, newspaper and magazine subscriptions, gratuities to doormen in her apartment building, taxicabs to the opera, museums, and social events, restaurant meals with friends and acquaintances, and international travel to gain inspiration from paintings in European museums.”

New York Times Press Coverage.