One of the cruel realities of performing artists is while they often do not earn much, they have extremely complicated tax returns. This can involve a stack of 1099s, W2s, and filing in multiple states, royalties statements, and even international returns. Performing artists also have greater out-of-pocket expenses than the average worker, and one of the complicating factors in their tax return is how to divide deductions between schedule C (self-employment income) and schedule A (business expenses). According to Sandra Karas, treasurer of of the Actor’s Equity Association, performing arts tax preparation for an artist earning less than $40,000 a year can exceed $800.
Congress recognized this situation when it created the Qualified Performing Artist deduction in 1986, allowing performing artists to deduct business expenses “above the line” to calculate Adjusted Gross Income (the same treatment as student loan interest). That way performing artists could avoid the guesswork involved in spreading deductions over the two schedules and still take the standard deduction.
The problem is that Congress capped the adjusted gross Income of this deduction at $16,000. This was a living wage in 1986, but inflation means that only very very few performing artists actually get to take advantage of the deduction unless they live very close to the poverty line. In fact, President Obama in his proposed 2011 American Jobs Act proposed tightening the deduction even further, limiting the deduction to 28% of adjusted gross income.
If Congress does not raise the cap, the existence of this deduction will be pointless, and Obama’s proposal will do nothing to save the government any significant money. For several years, the standard 1040 form did not even have a line to enter these business expenses. The IRS instructed artists to hand-enter a line between two lines on the form and write in the code “QPA.”
The government does not stand to lose much by raising this cap and indexing it to inflation. Raising the cap to $34,500 would cost the government $892.50 per performing artist, but it would also make the process of filling out the tax returns much easier and faster and it would raise the proportion of collected tax allocated to performing artists’ Social Security history.