How Does the IRS Define “Performing Arts” Services From a QSBS Perspective?

Performing Arts Industry

One of the many areas of 26 U.S.C.A. § 1202 that is creating the questions from corporations looking to determine if their company qualifies for the tax exemption falls under Section 1202(e)(3)(A); which broadly states how the IRS defines excluded trades or businesses for the qualification of Section 1202. Before analyzing the qualifications Section 1202(e)(3)(A) defines Qualified trades or businesses in the negative:

“[E]xcluding any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.”

26 U.S.C.A § 1202(E)(3)(A)

Regulations That Clarify the Broad Language of Section 1202(e)(3)(A)

While guidance in Section 1202 is limited, other regulations help clarify how the IRS likely views these trades or businesses in a QSBS/Section 1202 perspective. These regulations are:

  • Temporary regulations under 26 U.S.C.A. § 448(d)(2) provides definitions for certain fields.
  • A number of cases and IRS rulings (Private Letter Rulings) under Section 448and Section 1202 provide additional guidance regarding what constitutes certain trades or business. These cases and private letter rulings can be found at the bottom of the article.
  • Code of Federal Regulation § 1.199A-5 is used to define businesses that qualify under the qualified business income deduction (QBID); however, the IRS looks at these definitions to expand on the broad language found under § 1202(e)(3).

Performing Arts Defined Under the Code of Federal Regulations

Under § 1.199A-5: Specified service trades or businesses and the trade or business of performing services as an employee, the term definition of performance of services in the Performing Arts field as:  

“[T]he 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.”

Reg. §1.199A-5(b)(2)(vi)

The definition is so broad that there may be a reach on make-up artists and camera workers because they, like others, participate in the creation of performing arts. However, there may be an exception found in TAM 9416006, which states that a movie director was not considered to be performing under the “performing arts” services under § 448

Technical Advice Memorandum Providing Guidance on What Activities are Considered the Performance of Services in the Field of Performing Arts

The Technical Advice Memorandum that helps analyze what does not qualify as “Performing Arts” services is found in TAM 9416006 which involves a corporation that hired a film director to provide exclusive work for that specific corporation

The corporation and the director had a contract and will then proceed to do work for the corporation. 

“Although the list of performing artists in section 1.448-1T(e)(4)(iii) is not inclusive, only persons who perform for an audience will be considered to perform services in the field of the performing arts. Persons who perform services that relate to the performing arts, but who do not perform before an audience, will not be considered to perform services in the field of the performing arts.

I.R.S. Tech. Adv. Mem. 9416006 (Apr. 22, 1994)

“[D]irector may contribute artistic skills to the production of a motion picture the activities of a director do not involve performing before an audience. The activities of a motion picture director are related to the performance of services by actors and actresses…”

I.R.S. Tech. Adv. Mem. 9416006 (Apr. 22, 1994)

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.