Thursday, January 23, 2014

Tax Break for Songwriters and Musicians

Writers and artists who sell their own works pay taxes on their income of up to 40% (plus the 15% self-employment tax).  But songwriters and musicians who sell their own musical works or copyrights pay taxes of only 15% to 20%, by recognizing capital gains instead of ordinary income.  The songwriters and musicians also do not have to pay the self-employment tax on their capital gains.

Thanks to lobbying from the Nashville Songwriters Association International, the songwriter-musician capital gains tax break was added to the Internal Revenue Code on May 17, 2006, but initially only for a period of 5 years.  A mere 6 months later, the tax break was made permanent by the Tax Relief and Health Care Act of 2006, in order to help the health of songwriters and musicians everywhere.
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If the songwriter or musician loses money on a project, he or she may recognize an ordinary loss (instead of a capital loss) that provides further tax savings.  Songwriters and musicians therefore have the best of all tax worlds compared to all other artists, as long as their work is sufficiently "musical" to qualify for the tax break. There is no authority as to whether One Direction is considered music for tax purposes.

Tuesday, January 14, 2014

What is a Sandwich

In 2006, Qdoba Mexican Grill and Panera Bread were involved in a heated lawsuit over the definition of "sandwich" in a real estate lease.  The court ultimately concluded that a burrito is not a sandwich, because one tortilla is not the same as two slices of bread.

The Massachusetts Superior Court judge obviously did not consult New York State Department of Taxation and Finance Bulletin ST-835, which helpfully explains that some examples of "taxable sandwiches" include:
1. burritos;
2. bagel sandwiches;
3. gyros;
4. hamburgers on buns, rolls, etc.;
5. heroes, hoagies, torpedoes, grinders, submarines, and other such sandwiches; 
6. hot dogs and sausages on buns, rolls, etc; and
7. wraps and pita sandwiches.

The purpose of the bulletin is to make a distinction between grocery food (not subject to sales tax) and take-out food (subject to sales tax).  Thus, a bag of bagels is considered grocery food not subject to sales tax, but a sliced and filled bagel "sandwich" is obviously take-out food subject to sales tax. 

While the New York state government is justified in applying the sales tax to hot dogs, burritos, and other take-out foods, it is not obvious why it had to expand the definition of "sandwich" in order to do so. Who can forget all the sandwich-eating records set by Takeru Kobayashi and Joey Chestnut at Coney Island. 

The use of a common term to mean something else is a too-frequent phenomenon in tax law.  Internal Revenue Code section 168(h)(1)(E) contains this gem:

Section 168(h)(1)(E).  Nonresidential real property defined. For purposes of this paragraph, the term “nonresidential real property” includes residential rental property.

Could Congress used instead in section 168(h)(1)(E) a more general term like "real property"?  Of course not.