In December 2017, President Trump signed a massive tax-reform bill into law. The bill was portrayed as providing big tax cuts, and indeed, it cuts tax rates and makes other changes that will result in lower tax bills for many Americans, and (particularly) for American corporations. But for ICSOM musicians? Not so much. In fact, for many of you, the bill will result in a higher tax burden—in some cases, a substantially higher tax burden—that will put a serious dent in your take-home pay.
The reason is the elimination, beginning in tax year 2018, of the current deduction for what the IRS labels “Employee Business Expenses”. Under prior tax law, if you were an employee, the IRS allowed a deduction for “ordinary and necessary expenses” incurred in connection with your job. An expense is “ordinary” if it is “common and accepted” in your field; it is “necessary” if it is “helpful and appropriate” for your business. The expense didn’t need to be required by your employer to be deductible.
Many members of ICSOM orchestras have been taking advantage of that deduction for years. It isn’t hard to see why. Orchestral musicians incur substantial expenses in connection with their employment: union dues, work dues, concert clothing, unreimbursed travel expenses (including audition travel expenses), repairs and supplies for instruments, and—most importantly—the instruments themselves. Prior law—which includes the 2017 tax year for which many have not yet filed—allowed a tax deduction for all of that. If you’re a string player in particular, chances are you paid a very large amount of money for your instrument(s) and bows. You’ve been allowed to depreciate that property and deduct the value of that depreciation as an Employee Business Expense over a period of years or even, in certain circumstances, in a single year.
No more. To put this in context, some background is required. Musicians typically receive one of two types of income: wages, which are earned when you are classified as an “employee”; and self-employment income, which you receive when you are an “independent contractor”. Wages are reported to you each year on a W-2 form, whereas self-employment income is reported on a 1099-MISC form. There is a difference. For self-employment (1099-MISC) income, you file Schedule C, which operates much like a business’s profit/loss statement: your 1099-MISC amounts are reported as revenue, and the expenses you incur in connection with your independent-contractor activity are applied against that revenue, resulting in a profit (or loss) for that activity. That resulting profit (or loss) is what you report as your “income”.
These days, few professional symphonic musicians, and no ICSOM musicians, would be classified as independent contractors in their symphony work. You are employees, which is a threshold requirement for working under a union collective bargaining agreement (Note: See “Congratulations, You’re an Employee. (Right?)” in the June 2016 issue). So, the money you receive in exchange for rendering services to your orchestra is not self-employment income, but wages. The amount of wages you are paid (as indicated on the W-2 form) is your income, period. Expenses incurred in connection with your employment—Employee Business Expenses—are deducted after you calculate your income from all sources, and only if you “itemize” your deductions on Schedule A, and only to the extent those expenses exceed 2% of your adjusted gross income. (Schedule A is where deductible expenses like mortgage interest, property taxes, and state income taxes are tabulated.) Employee business expenses are calculated on Form 2106, and the amount transferred to Schedule A.
Note that no one is required to itemize their deductions—the IRS provides for a “standard deduction” amount that can be taken in lieu of calculating all your deductions. But if you have a mortgage, pay high property taxes, or have substantial employee business expenses—like many ICSOM musicians—you have been better off itemizing.
Or, at least until now. The new tax bill makes a number of changes that seem aimed at dis-incentivizing taxpayers from itemizing. The standard deduction amount has been nearly doubled, from $6,350 for individuals to $12,000, and from $12,700 for married couples filing jointly to $24,000. At the same time, the deductibility of certain itemized expenses has been severely curtailed: for example, there are new caps on how much you can deduct in mortgage interest, property taxes, and state income taxes; and the Employee Business Expense deduction has been eliminated altogether.
The result? More taxpayers will take the standard deduction instead of itemizing. But taxpayers who have in the past claimed a large amount of itemized deductions—for example, an ICSOM violinist who is depreciating an expensive instrument and has substantial other work-related expenses—are now left without any avenue to use those expenses to reduce their tax burden. Even at the slightly lower tax rates that Congress included in the new tax bill, the tax they end up paying to the IRS will be higher—in some cases, much higher. Hence the pay cut.
Paradoxically, the new tax bill contains other provisions, many too complex to describe here, that actually benefit taxpayers who receive self-employment income and file Schedule C. “Aha,” you might be thinking, “I’ll just deduct my music-related expenses on Schedule C instead!” After all, many orchestra musicians perform outside work—chamber concerts, one-off gigs, teaching, etc.—that affords them income separate and apart from wages earned as an employee in their orchestra job. So, couldn’t the hypothetical ICSOM violinist simply put his or her instrument’s depreciation expense on Schedule C, and reduce taxable income that way?
That would be risky. If you’re considering that, I urge you to consult a CPA or tax attorney first. The IRS generally takes a dim view of taxpayers who try to re-classify income or expenses in such a way as to reduce their tax burden. There is certainly no IRS guidance suggesting it would be permissible to apply expenses to a Schedule C activity if those expenses are incurred primarily in connection with a different job altogether—particularly if most of the taxpayer’s income comes from that job. If a substantial amount of income results from non-symphony, Schedule C activity, then perhaps some of the expenses could be allocated to Schedule C; but that is uncharted territory so expert advice would be critical. Also consider, however, that if you don’t have a large amount of Schedule C income and you apply a large amount of expenses against that income, you’ll run big losses in your Schedule C “business”, year after year. That is not only a potential red flag for the IRS; it also runs the risk that the IRS would classify your activity as a mere “hobby”, for which expense deductions are disallowed altogether.
There really is no silver lining here for ICSOM musicians; it’s pretty much all bad news. And unfortunately, it might get worse. Charitable donations are deductible only if itemized on Schedule A. As noted above, the new tax bill contains a built-in disincentive to itemize. Accordingly, some tax experts predict that fewer people will make charitable contributions—i.e., they won’t get the benefit of the deduction anymore if they have no reason to itemize. That would result in less contributed revenue for non-profit organizations such as . . . symphony orchestras.
There are counterarguments, of course: perhaps the motivation for donating to non-profits is not quite so tied to tax deductibility; perhaps cultural non-profits have a more loyal following than other charitable organizations; and perhaps the fact that contributed revenue in symphony orchestras comes primarily from larger gifts, which easily exceed the standard deduction amount and thus remove the dis-incentive to itemize, will limit the effect of the changes. But at any rate, a challenging bargaining landscape may become even more challenging. Musicians will come to the table seeking higher wages to compensate for the pay cut Congress just imposed; and management will come to the table fearing the prospect of receiving less revenue with which to pay those wages. That isn’t a setup for easy negotiations.
What can be done? Hopefully, a critical mass of those most adversely affected by these changes—not just musicians, but all those hit hard by the new restrictions on deductible expenses—can effectively lobby Congress to come up with necessary revisions to the law. In eight months, there will also be midterm Congressional elections. If there hasn’t already been enough incentive for musicians to “get political”, perhaps the consequences of the tax law will provide even more of a nudge.