Guest author Elaine Grogan Luttrull is the luckiest CPA ever. Through Minerva Financial Arts, a company she founded in 2009, she works to build financial literacy in creative individuals and organizations through education and coaching. Her work focuses on empowerment above all else, connecting financial decisions with creative goals. She serves just over 1,000 people per year through workshops and one-on-one coaching sessions, and her goal is to make all creative individuals both financially empowered and creatively free.
Now that the 2017 Tax Cuts and Jobs Act has existed for nearly two whole months, it’s timely to to answer some of the most common questions we’ve been hearing from creative professionals, specifically visual artists and crafters. So here are three of our favorite questions and answers, in no particular order.
What Should I Do Differently for 2017?
The new tax law was passed at the end of 2017, but all of the changes are effective starting in 2018 (or beyond). As you complete your 2017 taxes, there is nothing different for you to do. (That’s the good news.)
But there are a few things you could check… Especially as you plan for 2018.
- Exemptions. First, see what number you reported on Line 6. This is the number of people listed on your tax return, including yourself, your spouse, and any dependents. This is also the number of exemptions you were eligible to claim in 2017. These are going away in 2018, and if your number is four or more, this might (might!) mean you will owe a bit more in taxes. If that’s the case, you’ll want to set aside a bit extra from each paycheck so you won’t be surprised with a tax bill at the end of the year.
- Business Income. When it comes to your business, see if you have a number on Line 12 of Form 1040 for your Business Income or Loss. (Odds are, you probably do have something on this line.) If you do, that’s great. There are almost no changes to Schedule C, so much of what you will do next year is exactly the same as this year.
- Itemized Deductions. Next look at Line 40 of Form 1040. This is where you report either your standard deduction or your itemized deductions. Not sure which you chose? If the amount matches one of the numbers referenced in the “left margin” of the tax form, that’s the standard amount. If not, you probably itemized and listed deductions on Schedule A.
If you reported the standard deduction and you don’t expect any major changes in 2018, this is good news. Your standard deduction is going up (but if you have more than four exemptions it might not go up enough to cover what you are losing in exemptions). If you itemized, you may need to look a bit more closely at Schedule A, specifically Lines 9 and 27. If you have more than $10,000 listed on Line 9, the state and local tax change is going to affect you. The Miscellaneous Itemized Deductions listed on Line 27 are going away as well. If you have a large number of expenses listed here, you’ll want to plan for changes in 2018.
Are My Travel Deductions Going Away?
No! Believe it or not, your travel deductions are not going away. If you are one of the people with Miscellaneous Itemized Deductions (Line 27 of Schedule A), you will likely be losing quite a few deductions, and for some people (employees who pay for their own travel), this includes travel expenses.
For performing artists who are treated as employees (not contractors), this is pretty awful news, and on many creative forums, this is what people are talking about when they mention, “all travel deductions going away” or “agent fee deductions going away.” But that is only for people who claim business expenses (unreimbursed employee expenses) on this Miscellaneous Itemized Deductions line. Many visual artists and crafters use Schedule C instead of this line to report business expenses.
Remember earlier when we looked at Line 12 of your Form 1040? This is where you reported your Business Income or Loss from Schedule C, which you file if you are a sole proprietor or the only owner (member) of a Limited Liability Company. (We call them “Single-Member LLCs” or “Disregarded Entities” for tax purposes.) If this is true for you, your travel costs (not to mention all other ordinary and necessary business deductions) are captured on Schedule C, and they generally aren’t changing under the new tax law. That’s really good news.
The primary purpose of the trip still has to be business-related, and you’ll still want to check the per diem rates from the U.S. General Services Administration to make sure you are maximizing your deduction, but these aren’t new things for 2018.
In fact, as you review your 2017 taxes, pay special attention to the categories on Schedule C that are the most frequent for your work. (They vary depending on the type of work you do, but travel, supplies, and “other” are probably your biggest categories.) Think about how these connect to your overall creative goals, and if they aren’t consistent, or you think there might be room to tweak your spending, now is a really good time to incorporate that into your 2018 budget.
Do I Get the 20% Pass Through Deduction?
Probably. As you may have heard, there is a 20% deduction for pass-through entities. The natural follow-up question, of course, is “What is a ‘pass-through entity’?” I’m so glad you asked. A pass-through entity is any entity (business form) that isn’t taxed, but rather reports income and expense information to its owners for them to report on their own tax returns. Sole proprietorships, Limited Liability Companies, Partnerships, and S Corporations that are taxed as partnerships all fall into this category. C Corporations are taxed as separate entities, so they are not eligible for this deduction, but it is incredibly rare for an artist to organize themselves as a C Corporation. The other entity types are far more common.
This is pretty good news, and here’s how it works: If you earn $30,000 in sales during the year, and you have $10,000 of business expenses (materials, marketing, travel, etc.), your net income from the business would be $20,000. You would be eligible to claim an extra $4,000 deduction (20% of $20,000) for the year. So instead of reporting $20,000 of net income on Line 12 of your Form 1040, you would actually report $16,000 there.
There are two pretty big limitations to this worth discussing. The first has to do with income. Not income from the business, necessarily, but rather the overall adjusted gross income on your tax return. This is the number on Line 37 on your 2017 Form 1040.
If this number is more than $157,500 (or $315,000 if you are married and file a joint return), the 20% deduction on pass through income is limited. It goes away completely if adjust gross income is more than $207,500 (or $415,000 for married filing jointly).
The second limitation has to do with the type of business you operate. If you operate a “service business,” you cannot claim this deduction at all. However, this limitation only comes into play if your adjusted gross income exceeds $157,500 ($315,000 for married filing jointly). So for taxpayers with adjusted gross income of less than $157,500, there is no limitation for service businesses.
Since you don’t need to do anything differently for 2017, use your 2017 tax return to start planning for 2018 tax changes that might affect you or your business. Most of the changes will not affect Schedule C or your ordinary or necessary business expenses, including travel. (Hooray!) Pay close attention to the number of exemptions you claim, and (if you itemize) your state and local tax deductions miscellaneous itemized deductions. These areas are all changing for 2018. The additional 20% deduction on pass-through income applies to many entities whose net income flows through to the owners’ tax returns, but it phases out once adjusted gross income exceeds certain thresholds.
- Use The U.S. General Services Administration to find per diem rates:
- The instructions to the individual tax form (Form 1040) are really helpful. Here they are for 2017
- Schedule A is where you itemize your deductions (if you itemize your deductions). Review the instructions to see what is captured here.
- Schedule C is where you report your net income from business as a sole proprietor or Single-Member LLC. Check out the instructions for information on what goes where.