I wasn’t around then, but I’m told that when the tax code was formed about 90 years ago, it was little more than 100 pages. It is now about 20,000 pages and climbing. Each year, new tax laws are passed. Some are altogether new concepts, while others just modify existing laws. A pretty sure bet is that with any new law, things will be just a bit more complicated. The latest is the Job Creation Worker Assistance Act of 2002, which was signed into law on March 9th by President Bush. The IRS is still working out the details, but here are highlights of some of the provisions that may affect classical singers directly.
Unemployment Assistance
Do singers often find themselves unemployed? Effective March 9th, 2002, the act provides for up to 13 weeks of temporary extended unemployment benefits. The benefits are available if you filed an initial claim on or after March 15, 2001 in any state entering into an agreement with the Secretary of Labor, and you have exhausted your regular 26-week benefits. Check with your unemployment office.
New 30 Percent First-Year Special Depreciation Allowance
In an effort designed to encourage immediate business spending and to stimulate the economy, the 2002 act provides for an additional first-year depreciation deduction equal to 30 percent of the cost of new capital assets acquired after September 10, 2001. For the performing artist, an example of a capital asset can include stereo and recording equipment, computers used mostly for business purposes, music library additions, and costumes. The code refers to these as “property.” And if you bought any of these property items between 9/11/2001 and 12/31/2001, the act allows you to get the extra 30 percent first-year depreciation on your 2001 tax return. If you already filed for 2001, you have three years to amend it with form 1040X.
Generally, you cannot just deduct the costs of capital assets as you would other types of expenses. The IRS wants you to write them off over many years. The theory is that they keep their value to some extent. They depreciate with time. The exception falls under Section 179, which does allow you to deduct up to a fixed amount of these expenses ($24,000 for year 2002). Many performers tend to spend so much on their trade, they are often in the red, especially in the early stages of their career. For do-it-yourselfers, see revised Form 4562 and “Additional Depreciation Guidance: A Supplement to Publication 946, How to Depreciate Property.” For those who use a professional tax preparer, separate your capital asset expenses from your other expenses when presenting your tax material to them. Have them check to see if it pays to amend your 2001 return. I promise that just mentioning all of this will surprise them greatly and raise their estimation of all singers a notch or so.
Five-Year Carryback of Net Operating Loss (NOL)
Generally, an NOL exists when your business expenses exceed your income. Is this unusual for singers? Under the new act, you can carry back this loss to five years (instead of two under current law) for taxable years 2001 and 2002. You now have the option to go back five years, or only two if that’s better, or none and just carry the NOL forward if that’s better. Here’s how this works:
Say in year 2002, you devote yourself to focusing on your singing career, living off your savings from prior years’ earnings. In 2002, your business expenses exceed your income by $10,000, producing a $10,000 NOL. Five years ago in 1997, before you decided that opera was your thing, your day job as a computer consultant earned you $60,000, and you paid lots of income tax. You can re-do your 1997 tax return, carrying back the $10,000 NOL five years, reducing the $60,000 down to $50,000, thereby lowering your tax and getting a refund. Or if 1997 was not such a good income year, do the same thing for year 2000 if that works out better (the two-year rule). Or if both of those years were not good (you were still a student in school), you can carry the $10,000 NOL to year 2003, reducing your 2003 income by $10,000. Courageous folks with lots of extra time on their hands, and many pencils with big erasers, see Form 1045, Form 1040X, and “Additional NOL Guidance: A Supplement to Publication 536.” Others, just point out to your tax preparer that you may have an NOL, and let them wrestle with the paperwork. Again, make note of their expression, but save your smile until after you leave their office.
Gordon Voorhees is an Enrolled Agent (EA) whose financial planning and tax practice has been located in NYC for over 30 years. His client base is primarily in the performing arts. Enrolled Agents are Federally Authorized Tax Practitioners who have technical expertise in the field of taxation and are empowered by the United States Treasury Department to represent taxpayers before all administrative levels of the IRS. For more information about EAs, you can contact Mr. Voorhees at gvoorhees@classicalsinger.com.
