YOUR TAXES : PART FOUR: SPECIAL SITUATIONS : There’s no people like show people : Unique problems of performers lead to rare exception in the tax bill

Every now and then, a residual check still shows up in Howard Caine’s mail as payment for a rerun of an “Alfred Hitchcock Presents” episode he appeared in 25 years ago. The veteran Los Angeles character actor, best known for his role as Major Hochstetter in the long-running TV comedy “Hogan’s Heroes,” has played dozens of parts in his 30-year career, but he’s still always looking for work.

“Who the hell knows where your next check is coming from?” he said. For purposes of payroll and taxes, the studios and the Internal Revenue Service label actors as employees, “but the point is, when it comes to finding the next job, we’re self-employed.”

Ronnie Lang, a studio musician in Los Angeles for 40 years, is in a similar situation. He may play several gigs a week, each for a different employer. For instance, he’ll be in the orchestra pit at the Academy Awards later this month. “Some jobs may last four hours, others may last a month,” the sax, flute and clarinet player said, and he may get half a dozen paychecks in a week--or none.

The financial life of performing artists--from actors to drummers to clowns at birthday parties--was deemed so unique that it led to one of the few loopholes written into last year’s tax reform bill. “It’s known as the starving artists provision,” said Paul M. Danis, senior tax manager at the accounting firm of Ernst & Whinney in Los Angeles, and it’s meant to recognize the unusual income and expense situation of most performers.

Under the old law, everyone who worked for somebody else was allowed to deduct legitimate business expenses not reimbursed by employers. A carpenter could deduct the price of new tools, for example, and a nurse could deduct the cost of uniforms. What’s more, such expenses were considered an “above-the-line” item, which meant that lower-income workers who didn’t itemize their deductions could still subtract employee business expenses from gross income.

But for years, legislators have been concerned about abuse of the employee business expense deduction. And under the new bill, almost everybody will be limited in taking it. From now on, only those who itemize deductions will be able to subtract their unreimbursed employee expenses, and then only to the extent that those expenses exceed 2% of adjusted gross income.

When word of that proposed change began filtering through the nation’s entertainment industry last year, it set off a firestorm of worry and protest.

“Entertainers spend an inordinate amount of their income seeking employment, from agents’ fees to photo portfolios to individual props and costumes,” said Ira Goldman, an aide to Sen. Pete Wilson (R-Calif.), who was among the first to propose a special exception for performing artists in the new tax bill. “And since we knew that big stars would find a way to continue deducting their expenses, we thought we should do something so all performers could do the same.”

Indeed, industry unions estimate that the average performer spends 20% of his or her income each year on job-related expenses--far more than the typical American worker.

The prospect of losing the deductibility of those expenses brought most of the major unions together for an unprecedented lobbying effort in Washington. It culminated in a star-studded day of testimony on Capitol Hill last summer by big-name entertainers, including actors Charlton Heston and Colleen Dewhurst. Washington’s usually blase attitude changed: “We were dazzled,” one congressional aide acknowledged.

What rankled the entertainment unions most was that taxpayers classified as self-employed would still be able to deduct their expenses under the new bill while performers would not.

Said Mark Locher, national public relations director of the Screen Actors Guild: “Performers are free-lancers, because they must have agents to get work and agents charge 10%.” What’s more, he added, every time a performer works, he or she has to “start all over again, and that means photos, resumes, union dues, travel expenses and professional lessons.”

The unions, including SAG, Actors Equity, the American Federation of Musicians, the American Guild of Variety Artists and the American Federation of Radio & Television Artists, hired Shea & Gould, a high-powered Washington law firm, to lobby the congressional conference committee that was debating tax reform.

Under the original Senate bill, “performers were being hit very hard,” said Allen Halperin, a tax partner at Shea & Gould. “The minimum tax rate was being hiked, unemployment insurance (which many performers collect between jobs) was being made taxable and, to top it off, employee business expenses were being severely limited. They would have been clobbered.”

Halperin said the hardest task was changing the general perception of the industry “as the star with the swimming pool,” when in fact most performers make less than $25,000 a year and many must hold down other jobs or depend on a spouse’s income to make ends meet.

“The majority of performers live in expensive cities like Los Angeles or New York,” he said. “Most can’t afford to own houses, and they don’t have many other deductions, except for business expenses.” To help persuade legislators that a loophole for performers was justified, the unions proposed that only those with income below a certain level be permitted to take advantage of it.

The lobbying effort paid off. Although a few other big unions grumbled that it wasn’t fair to labor generally, the entertainment industry won its special battle. Prodded by Sen. Daniel P. Moynihan (D-N.Y.), the conference committee--with virtually no opposition--wrote a provision into the final tax reform bill that permits performing artists who make $16,000 a year or less from all sources to continue deducting employee business expenses related to their performing careers.

They must have had at least two employers in the arts during the year and have earned at least $200 in the business. Furthermore, all expenses are deductible only if they exceed 10% of gross income from the performing arts; if they’re less than 10%, they’re not deductible at all.

Despite its “starving artists” nickname, it’s believed that the deduction will be available to a majority of performers in the United States.

Many actors earn very little from performing and must take relatively low-paying jobs such as waiting tables in order to have the flexibility to take parts when they come up and to invest time in learning their craft.

Originally, the entertainment unions had sought an income cutoff of $25,000 a year, which was reduced by the conference committee. But even at the $16,000 level, SAG’s Locher estimates, 80% of the nation’s performing artists will qualify, “and about 91% of (Screen Actors Guild) members fall into that category.”

Major stars often use professional incorporation as a means to write off their expenses, as do many other highly paid professionals such as doctors and lawyers. But the vast majority of performers can’t afford that, Locher said, so the “starving artists” provision was essential.

Even though Howard Caine has worked for years and is well known, he still has to send out glossy color photos of himself and videocassettes of his performances to casting directors every week. He still makes treks to New York to renew contacts in the theater business and to interview for parts. And he still pays his agent 10% every time he works.

“I never know what my earnings are going to be,” he said, “only what my expenses are.”