In early August, the Internal Revenue Service (IRS) issued proposed regulations under the Tax Cuts and Jobs Act (TCJA) that provide guidance to owners of pass-through businesses as to eligibility for a federal tax deduction of 20% of the income generated by the businesses under new Section 199A of the Internal Revenue Code (IRC). Although the stated purpose of the proposed regulations is to provide clarity on eligibility for and the means to compute the deduction, this guidance created ambiguity and confusion in several areas, including the applicability of the new deduction to persons who are involved in the entertainment industry but who do not perform on stage or in front of a microphone such as directors, producers, makeup artists, editors and the like.
One of the important limitations to the pass-through deduction in the TCJA is that owners of pass-through businesses that conduct a specified service trade or business (SSTB) and whose income exceed the so-called income limitation ($207,500 for single taxpayers and $415,000 for married taxpayers who file jointly) are not entitled to claim the 20% deduction. The TCJA provides that a SSTB includes a trade or business that involves the “performance of services in the field of performing arts”.
The proposed regulations indicate that persons who help create performing arts such as singers, actors, musicians and entertainers do provide services in the field of performing arts but that those whose skills are not unique to the creation of performing arts are not engaged in providing services in the field of performing arts:
Proposed § 1.199A-5(b)(2)(vi) is informed by the definition of ‘performing arts’ under section 448 and provides that the term ‘performance of services in the field of the performing arts’ means the performance of services by individuals who participate in the creation of performing arts, such as actors, singers, musicians, entertainers, directors, and similar professionals performing services in their capacity as such. The performance of services in the field of performing arts does not include the provision of services that do not require skills unique to the creation of performing arts, such as the maintenance and operation of equipment or facilities for use in the performing arts. Similarly, the performance of services in the field of the performing arts does not include the provision of services by persons who broadcast or otherwise disseminate video or audio of performing arts to the public.
Preamble to §1.199A-5-A(2)(i)(e) to Proposed Regulations.
Regrettably, the actual Proposed Regulations do not provide further guidance beyond the information contained in the Preamble. Prop. Reg. §1.199A-5(b)(2)(vi). The only examples in the Proposed Regulations relate to a singer and the royalties received for singing the song and a joint venture formed by an actor who contributes her name and likeness to the partnership in return for an interest in the entity. Both examples were found to generate income from an SSTB.
Several commentators conclude that income generated by persons who do not actually perform on stage or in a studio should not be characterized as a SSTB and have criticized the IRS’s position in the Proposed Regulations that people who are involved in the area of performing arts but who are not performing artists- such as directors, producers, makeup artists, costume designers and set designers- are engaged in the performance of services in the performing arts and thus cannot take advantage of the deduction if their income exceeds the income threshold ($415,000 for joint taxpayers). In fact, one commentator suggests that “the expansion [beyond application to pure performing artists] will create uncertainty and litigation”.
In further support of the argument that the definition of SSTB in IRC Section 199A should be limited to performing artists only, a footnote in the recently released explanation of the TCJA (called the “blue book”) indicated that the list of services in IRC Section 199A that are SSTB is similar to those listed in IRC Section 448 and that the performance of services in the field of performing arts for purposes of IRC Section 448 “does not include the provision of services by persons who themselves are not performing artists”. Hopefully, the IRC Section 199A Final Regulations will be consistent with the blue book’s implicit indication that Congressional intent is that SSTB under IRC Section 199A should be consistent with the interpretation of a similar set of services under IRC Section 448.
As a result of this uncertainty, persons who are “non-performing” artists and who provide services in the entertainment industry as independent contractors must wait on final regulations from the IRS under IRC Section 199A to determine if they can claim the 20% deduction for owners of pass-through businesses under this TCJA provision.