The Taxman Cometh

I had the honor and privilege of sitting in on a small business audit at the IRS the other day.  A good portion of the audit was spent on going over the “cost of goods sold” for abstract paintings created during 2009 and 2010.  Apparently, although there have been artists since pretty much the beginning of civilization, there is still a huge grey area in tax law when it comes to artists, art, and defining the cost of goods, sold or unsold.

My parents, like scores of other SoHo residents, had the most complicated tax returns with countless schedules, income credits and other mysterious forms that are also attached to my own 1040’s but that I barely understand mysel.   My father’s friend paints food (he makes pictures of food, he doesn’t color cucumbers purple), so does that mean every meal he eats is inspiration and therefore deductible?  My ex-plumber (he retired) and SoHo old timer declared long ago that his LIFE, every moment of it, is his art, so is everything deductible for him, including toilet paper and vodka?

One would have thought that there have been many precedents that would have at least begun to account for what it is that those creative types do in their downtown lofts all day.  After all, this is the IRS.  They are an inclusive institution.  However, although there are a few cases presently making their way up the tax courts, I was told that things are still, for the most part, pretty loosey-goosey (my words, not theirs!), a term not usually used to describe the taxman.

In 1987, a new tax law was passed that permitted only the cost of goods actually sold in that tax year to be deducted.  An article by Douglas C. McGill in the April 7, 2008 New York Times states that:

The intent of the law, according to sources who were close to the process of its drafting, was to apply a uniform set of rules to all ”producers of personal property,” in the language of the law, whether they were large or small businesses, mass manufacturers or freelances….In essence, the law ends the practice of automatically deducting all expenses in the year they are incurred. Instead, artists and other freelances will now be required to follow a more complex accounting method called capitalization.

This law was contested by Artists for Tax Equity, a lobbying group, and an exemption was made for fine artists, who were and are still permitted to deduct the total of the cost of “goods,” whether sold or not.  The argument was that if artists had to “manufacture” work that they think will sell in a particular year, this would hamper artistic experimentation and innovation and that the law did not distinguish between the mass manufacturing of products and the creation of unique works of art.  So it seems that, at least in this instance, artists are not strictly considered manufacturers of goods, but rather creators of something that is more difficult to define and price in monetary terms.

It is ironic that the opposite argument was made, according to Sean Sweeney of the SoHo Alliance (as quoted in a previous post about loft regulation), when:

the SoHo Artists Association, the forerunner of the Alliance, was formed in 1968 to reach a compromise and to get artist-living here legalized. The construct or the conceit used to justify their living here was that artists do manufacture — they manufacture art!    So, the only ones who could live in SoHo/NoHo were manufacturers of art, i.e., artists basically, although musicians could live here if they composed (manufactured) music, but could not live here if they solely used it as a rehearsal space. Same with dancers.  Choreographing enabled you live in your loft. You manufactured dance. Using it just for dance practice did not.

Although it seems that there are two conflicting definitions here of what an artist is and does, to me, these two definitions do not point to a double standard or any kind of hypocrisy.  Rather, I feel that our language and culture have not yet come to terms, so to speak, with the role of the artist in society, absurd as that may seem.  So how can we expect our regulating bodies to do the same?

I grew up in a culture where trading, bartering, scavenging, sharing, and borrowing were quotidian.  Bank accounts, insurance, degrees, passports, leases, and contracts were optional at best.  My preschool tuition was paid in time and love and havarti cheese.  My father’s artwork was composed, in partnership with another artist, of objects found around the house and in the streets.  We paid our $125 rent in cash every month to a big man behind a big desk whose office was just above a liquor store, no questions asked, not complaints made.

So as I sat through the seemingly endless audit where we were actually able to produce proof of every penny spent on paint, canvas, and brushes, I was tempted to ask our auditor (a very humane and reasonable face of the IRS, by the way) why, when the rules are so vague to begin with, they were questioning the compliance of someone with so little income to justify what he made when there were much bigger fish whose finances are much more fishy.  I guess it was because it is far easier to catch a goldfish than an eel.

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