BYGREG MERMEL, CPA
Complex intellectual topics inevitably become stripped of details as they flow out to a non-specialist public. By the time a concept becomes common wisdom, it is often over-simplified. As a result, what "everyone knows" about the Big Bang theory or Beethoven’s symphonies is none too accurate. That surprises nobody. But many people are shocked when their tax knowledge lacks needed specificity.
Could You Be A Little More Specific?
Consider moving expenses. "Everyone knows" moving expenses are deductible. But that’s not always, or even usually, true.
For a business, the cost of moving is always a deductible business expense, whether you are Boeing moving your corporate headquarters from Seattle to Chicago, or consultants moving three blocks in River North. For individuals, moving expenses are an iffy deduction: You are allowed the deduction if and only if certain requirements are met.
The first "if" is distance. If the move is not over 50 miles, you have no deduction. Common wisdom is that the move must be out of town, but that is not true. I have had clients qualify merely moving across Los Angeles.
And You Are Moving Because...?
The second "if" requires that you move in connection with a change in where you work. If you are just commuting to the same job from a different direction, you have no deduction. This presents some definitional problems. Obviously, somebody who is working for the same employer, but in a different city, qualifies. But many people move to a new city without having a job lined up, and not just actors. The rules require that one be a full-time employee for 39 weeks during the first 12 months at the new location, or self-employed full-time for 78 weeks during the first 24 months at the new location.
Would you like me to give you a comprehensive definition of "full-time"? Well, I can’t, and neither can the Internal Revenue Service. The regulations speak vaguely about hours of work that are not unusual for the occupation involved. Would working for a pittance on a low-tier Equity contract qualify? My guess is that it would, but I cannot prove that.
The 39 and 78 week rules may seem like an unreasonably tough standard, until you consider the underlying reason. What they want to prevent is someone from taking a temporary job solely to get a moving expense deduction. Without this rule, a retiree could move from Chicago to Florida, work at the tourist office for a week, and claim the deduction. Like the hobby loss rule (PerformInk Aug. 30), the time requirements are not intended to trap struggling actors. Unlike the hobby loss rule, there is a useful exception for actors: Failure to meet the weeks-worked test is excused if it is due to involuntary separation from employment. Translation of "involuntary separation": The show closes. In any case, I rarely see the rule rigorously enforced.
Did You Spend Wisely?
Only certain kinds of moving expenses are deductible. For individuals, the only deductible moving expenses are the cost of getting you and your possessions from here to there. Those can be interpreted broadly, and I regularly remind clients to count the cost of boxes and tape. But there are also limitations. Your meals en route are not deductible, and your automobile expense if you drive is limited to 10 cents per mile. More important, some costs that were once deductible are not now: The cost of scouting trips (to look for housing), temporary quarters in the new city, the transaction costs of selling your old home or buying a new one, and the cost to settle an unexpired lease.
Were You Spending Your Own Money?
The last "if" is one that applies to many types of deductions: If the expenses were not reimbursed. Big companies often pay their employees’ moving expenses, leaving the employee with no deduction. This is good: A dollar of deduction might save you 30 cents in taxes, but a dollar of reimbursement saves you a dollar. Often, these companies will reimburse even those expenses that are not deductible. That creates a tax problem, because those reimbursements are treated as income to the employee. Big companies usually address this problem by "grossing up" the payroll, that is, reimbursing the employee for the taxes as well. Because the tax reimbursement is also income and creates a further tax liability, the math is ugly, but it does work.
Did You Really Move?
For people in the arts, the travel expense rules tend to interact with the moving expense rules. Say you go to New York for a particular project. You get lucky: That show runs a while, and you go into something else a week or two after that closes. Eventually, you realize that you really live in New York and your subtenant becomes your Chicago roommate’s new roommate. How can we tell the IRS exactly when you moved if it just sort of happened? Fixing some sort of date matters for several tax reasons. Until you have moved, you are temporarily away from home on business, and that means your New York living expenses are deductible. (The IRS treats you as having moved if you have a single out of town job that lasts more than one year, if you should be so lucky as to get one.) You may still have some moving expenses, such as coming back to Chicago to pack and ship your belongings, and the date of the move marks the beginning of the 39 or 78 week work test.
And if you are in New York City, non-residents do not pay city income taxes. On the official move date, you cease being a non-resident. New York City income taxes run about two-thirds of the New York State taxes, which are already considerable if you have above-average income. Should you move to New York and become successful, you may well want to move again—this time to New Jersey.
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.