by Greg Mermel, C.P.A.
Today, our off-menu column special is a combination plate, featuring two complementary but smaller topics—the same idea as "primi" and "secondi" in Bologna, or "surf 'n’ turf" in Peoria.
Qualified Performing Artist
No, being a Qualified Performing Artist (QPA) does not mean that you made the first cut at the dance audition. Rather, QPA is a special tax provision that lets some performers write off expenses that they otherwise could not. Before you get all excited, you need to know that not many actors fit the provision, and that fewer do each year. When I see QPA on a tax return, it is almost invariably accompanied by an error notice from the Internal Revenue Service (IRS) and an actor with a hang-dog look on his face.
Employees—that is, people paid with taxes taken out of their checks—are limited in their ability to deduct business expenses. The amount has to be more than two percent of your adjusted gross income, and it is combined with other itemized deductions (such as home mortgage interest, charity, property taxes and state income tax) so that there is no tax savings unless the itemized deductions are more than the standard deduction. Enough hurdles that I get breathless just typing it.
It was not always so. Before 1986, employees could deduct their business expenses "off the top," just as the self-employed still do. Actors tend to have far more business expenses than, say, the average factory worker who does not have to deal with agents, managers, travel, classes or demo tapes. When the change was proposed as part of the 1986 Tax Reform Act, the performing unions—Equity in particular—jumped in and fought the good battle.
How did they emerge from battle? They came neither carrying their shields nor being carried upon them. The Tax Reform Act allowed certain performing artists to deduct their expenses off the top. To qualify, you must have earned at least $200 from each of two or more employers—that’s easy. You must have expenses of more than 10 percent of what you earned as a performer—that’s even easier. And your income for the year cannot exceed $16,000. Not your income as a performer, all of your income—including your spouse’s income if you are married.
Even when it was new, this was a low figure. I remember wondering back then how anybody with so little income could scrape up the initiation fee to join the union. Because of inflation, $16,000 buys a lot less now than in 1986. The buying power of $16,000 in 1986 is roughly equivalent to that of $26,000 now.
Ponder those amounts for a minute. See why I see fewer legitimate QPA situations each year?
I Hate to Say "I Told You So"
Actually, that’s not true. I love to say "I told you so," and you do, too, even if you don’t admit it. And I really called this one correctly.
A year ago, Congress passed a big, sloppy, messy tax bill, which provided for a payment of $300 to $600 to most taxpayers. "Rebate" or "tax relief" were some of the official euphemisms for this payment. While Jay Leno was joking about the absurdity of spending our way out of a recession at $300 a head, and serious commentators complained about politicians literally buying favor with the American public, I looked at it and said, "This will be a catastrophe at tax return time. Nobody understands this." And I was right.
How bad is the confusion? The IRS says it has identified almost two million returns with a particular rebate-related error that produced too-large refund claims. I have heard several other misinterpretations among my clients, some of which could cause taxpayers to pay too much. I wonder how vigorously the IRS will seek those out?
Let me start by saying what it is not. The money you received was not taxable income. It was not a refund of your 2000 taxes. It was not a gift from an elected official, or from the tooth fairy for that matter.
That money, rather, was an advance refund of some of this year’s taxes, that is, the 2001 taxes that you are only now filing returns for. Last year’s tax bill created a bottom tax rate of 10 percent, occupying the lower part of what had been the 15 percent bracket. Rather than wait until now to give you that refund, they issued a check for the difference between the two rates (i.e., five percent of six thousand or twelve thousand dollars, depending on whether one is filing as single or married). Since you already had the money, the 10 percent bracket does not appear in this year’s tax tables.
Not everyone got a check, however. Those who could be claimed as a dependent last year were not eligible, and since the payment amount was based on the income reported in 2000, those with little or no income that year received little or no payment. Some of these folks are eligible for the lower rate based on their 2001 actual data, so the IRS had to construct a rate reduction credit formula. Essentially, what this does is add to this year’s refund the additional amount due those who received less than the full amount last year.
The logic is simple: Rebate check plus rate reduction credit must equal $300 or less if single, $600 or less if married. But as noted above, almost two million people who received the full rebate have also tried to take the maximum credit.
I wonder how many of those were actually mistakes?
OK, Make it Two-and-a-Half
There’s not much to write about my "Checklist of Potentially Deductible Items" for those in the arts, except that if you want one, just call or write my office, and we’ll send you one.
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or 773/525-1778 (888/525-1778 outside the Chicago area).
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.