This page contains questions and answers to the most frequently asked questions taxpayers have about the Business Tax and the Creative Artist Exemption. All sections refer to the LAMC (Los Angeles Municipal Code). All references to the City mean the City of Los Angeles.
LAMC Section 21.29.(b) was amended by adding a Business Tax Exemption provision for "creative artists" who generate up to $300,000 in total taxable and non-taxable in-City and out-of-the-City gross receipts attributable to their qualifying "creative activities." If the total taxable and nontaxable gross receipts from in and out-of-the-City that are attributable only to "creative activities" exceed $300,000, the exemption does not apply. Please note that the creative activities exemption is only available to registered businesses and not new businesses. The creative artist exemption requires that businesses file a timely renewal form.
This exemption applies strictly, only to individual "creative artists" (individual, individual acting as a loan-out corporation, or individual acting through a limited liability company), when performing "creative activities" for "entertainment or aesthetic purposes." It only applies to those receipts the creative artists earn from their creative activities and does not include income from any other source.
Glossary of Terms
- 1099 - Income reported to the IRS on a 1099 or by a corporation for work performed in the City is taxable if it does not qualify for an exemption(s) (e.g., the creative artist exemption).
- Apportionment - Businesses performing activities both in and outside the City of Los Angeles may be able to apportion receipts in computing the taxes due.
- Business Tax Registration Certificate - The City's tax certificate issued to all businesses that are either located in the City, or do business in the City.
- Creative Artist Exemption - Artists listed in the creative artist exemption ordinance are exempt if they earn less than $300,000 of global/worldwide gross receipts generated from creative activities and they apply for the exemption in a timely manner.
- Engaged in Business - The conducting, operating, managing or carrying on of a business, whether done as owner, or by means of an officer, agent, manager, or employee.
- Loan-Out Corporation - Refers to an individual who operates through a corporation and is the sole shareholder and employee of the corporation.
- Measure year - Measure year shall include the global/worldwide gross receipts for the calendar year preceding the tax year unless there is a specific election to use the business' fiscal year.
- New Business Exemption - A qualifying new business that starts between 1/1/2010 and 12/31/2015 is eligible for an exemption of the business tax for up to the first three years of operation. Businesses must file in a timely manner in order to receive the exemption.
- Small Business Exemption - Small businesses with total global/worldwide gross receipts of less than $50,000 in 2005 and $100,000 in 2006 and forward are eligible to apply for an exemption. Businesses must file a renewal in a timely manner in order to receive the exemption.
- Tax Year - The year in which taxes are due.
- W2 - The IRS form for reporting employee income. This income is not taxable.
Note: The tax reduction for gross receipts effective January 1, 2006 is not reflected in the responses below. Rates in the FAQ's below are used as an example (see the updated rate table for applicable rates). If the category you are filing is not referred to in these questions, you can access the rates for all categories.
1. Question: The exemption for creative artists took effect on July 1, 2005. I am an artist covered by the exemption. Do I have to file and pay City business taxes on taxable income for prior years?
Answer: Yes, If you never paid the tax, the City has the right to collect business taxes as far back as eight years from the date of registration.
Note: LAMC Section 21.29(a) provided a $5,000 threshold for a small business exemption for tax years 2003, 2004, and 2005. Ordinance Amendment #176342 raised the threshold to $50,000 on July 1, 2005 applicable for the 2006 renewal period. The threshold for the exemption was raised to $100,000 on July 1, 2006 and is applicable for the 2007 renewal period and beyond. These exemptions require timely renewal filing.
Example: If your total global/worldwide gross receipts were less than $5,000 in years 2002, 2003, and 2004, you can claim the small business exemption for each of the 2003, 2004, and 2005 tax years. If your City gross receipts were less than $5,000 but total global/worldwide gross receipts were greater than $5,000 then you are liable for the tax based on your taxable income.
2. Question: What are some examples of gross income that are not included in determining the $300,000 global/worldwide gross receipts threshold and taxable gross receipts?
Answer: The following items represent income that is not considered as gross receipts since the City does not tax employee-related or passive income:
- W2 Wages
- Retirement or pension income
- Dividends from passive investments
- Interest from passive investments
- Social Security
- Certain Residual Income (see explanation in Question #20)
3. Question: Can I qualify for both the small business and creative artist exemption at the same time?
Answer: No. Once global/worldwide gross receipts exceed the small business exemption threshold regardless of the activity, the taxpayer may not claim exemption under LAMC Section 21.29(a)Small Business Exemption. Hence taxpayers cannot simultaneously apply for the two exemptions, under LAMC Section 21.29(a) and (b), the general small business exemption and the creative artist exemption, unless each business is a separate entity.
LAMC Section 21.29(a) Small Business Exemption stipulates that in order to receive the exemption, all taxable and non-taxable gross receipts (global/worldwide) must meet the gross receipts threshold (excluding receipts listed in Question #2 above). This means that all global/worldwide gross receipts must fall within the small business exemption gross receipts threshold to qualify, which includes those gross receipts that are exempt under the creative artist exemption.
Taxpayers who have gross receipts derived from the creative artist category or are eligible for the small business exemption should claim the exemption that is most beneficial to them.
4. Question: I have a loan-out corporation. Is its gross receipts taxable?
Answer: Individuals (sole proprietors), individuals who have formed loan-outs and individuals who have formed limited liability companies as defined in LAMC Section 21.29(b) are subject to the tax for the creative activities defined in that section that are performed in 2004 and any prior years in statute, and need to file the 2005 and prior year's tax returns. When filing the 2006 business tax renewal, (based on 2005 activities) the entities that meet both the creative artist and creative activities definitions identified in the ordinance will not be subject to tax on those creative activities if they file timely and their gross receipts from those activities do not exceed $300,000.
5. Question: Which gross receipts may be included in the $300,000 exemption cap?
Answer: Gross receipts from the creative activities performed by creative artists, as defined in LAMC Section 21.29(b) may be included in the $300,000 exemption cap.
Those gross receipts reported on a 1099, whether performed in the City of outside of the City are counted towards the $300,000 cap. During 2016, if your creative artist gross receipts exceeded $300,000, you would pay the tax on the portion earned in the City for the 2017 business tax renewal. If administrative activities are conducted within the City for work performed outside the City, those gross receipts are subject to apportionment and are included in your tax measure. Examples of administrative activities are accounting, billing, collecting, etc. When work is performed both in and outside the City the gross receipts may be apportioned under specific City Clerks Rulings. City Clerk's Ruling 15 applies by its terms to LAMC Section 21.49 Professions & Occupations, but the Office of Finance's policy is to extend it to LAMC Sections 21.48 Miscellaneous Services and LAMC Section 21.45 (LGR2) Radio Television Broadcaster.
City Clerks Ruling14 applies to LAMC Section 21.42 (LGR1) Wholesale Sales, LAMC Section 21.044 (LGR2) Retail Sales, and Ruling 17 applies to LAMC Section 21.46 Rental of Personal Property for activities that occur both in and outside of the City.
6. Question: I am an existing business registered with the Office of Finance. How do I apply for the creative artist exemption?
Answer: All annual business taxes are due January 1st and delinquent on March 1st. You must file renewals prior to March 1st. If the global/worldwide gross receipts for the creative activities of the creative artist as defined under LAMC Section 21.29(b) do not exceed $300,000, the creative artist may claim the creative artist exemption at the time that the business tax renewal is filed in 2017 by the following: (1) checking the appropriate box on the renewal form; (2) answer the question regarding total global/worldwide gross receipts attributable to creative activities; (3) then indicate the amount of gross receipts for creative activities that were generated from activities performed in the City
Note: Please report all non-creative activities in Column A of the tax renewal form and compute the taxes accordingly.
7. Question: Where do I apply for the exemption?
Answer: You must be registered in order to qualify for an exemption.
If you already registered, you may request the exemption on the renewal form. Electronic renewal filing is available.
If you are not registered, you must call or visit one of our branch offices so you may receive assistance in obtaining a Business Tax Registration Certificate. You must also report and pay any applicable taxes for the last three years (see Question #21 for more information).
8. Question: I earned $200,000 as a creative artist and $150,000 as a consultant. Is all of the taxable because I earned over $300,000?
Answer: This exemption applies very strictly, only to individual "creative artists" (individuals, individuals acting as a loan-out corporation or individual acting through a limited liability company), when performing "creative activities" for "entertainment or aesthetic purposes." It only applies to those receipts the creative artists earn from their creative activities and does not include income from any other source. If the total taxable and nontaxable gross receipts from in and out of the City that are attributable only to "creative activities" exceed $300,000, the exemption does not apply. Therefore, the $200,000 earned for creative activities is exempt and the $150,000 earned as a consultant is taxable.
Example #1: In 2016, an author grosses $295,000 in income for writing a script, based on a novel he previously wrote, for a movie that will start production in 2017. That same year, the author was invited to do public appearances to talk about the novel, the script, and the forthcoming movie, for which the author received $250,000. The author's total earnings for 2016 were $545,000.
Question: Even though the author's total income exceeds $300,000, does he qualify for the creative talent exemption?
Answer: Yes, the $295.000 the author earned for writing the script is money paid for his creative talent and would receive a business tax exemption for these gross receipts. The $250,000 he earned for public appearance is not exempt and therefore reportable and taxable.
Example #2: In 2016, a recording artist sold two of his renditions to a movie studio that plans to use them in an upcoming movie production. The artist received $305,000 from the studio for his work.
Question: Does the recording artist receive a creative talent exemption?
Answer: The artist does not qualify for the creative talent exemption because his gross receipts attributable to creative activities exceed the $300,000 threshold. Therefore, this artist must report and pay tax on the full $305,000.
9. Question: I just started working in the City. Is there an exemption for that?
Answer: Currently there are no exemptions for new businesses.
10. Question: I am currently unemployed but earned income in the prior year. Do I pay taxes?
Answer: A taxpayer needs to file a business tax renewal prior to March 1st if he or she intends to engage in business in the City during the current year. If your global/worldwide gross receipts were less than $100,000 in 2016, then file for the small business exemption in 2017, in which case no tax is due. Beginning in 2006, if you earn less than $300,000 in creative activities as a creative artist during the prior year, you should request a creative artist exemption when you file your business tax renewal. You must not cancel your Business Tax Registration Certificate if you intend to engage in business. If the Business Tax Registration Certificate is cancelled and you ultimately engage in business during the current year, you will be subject to any tax due and applicable late charges.
11. Question: I have never obtained a Business Tax Registration Certificate. In the past when I was employed, my employer reported my earnings on a W2. I did not earn income as an independent contractor, and I did not engage in business last year or in the previous three years. What do I do if I find work in 2016?
Answer: When you start engaging in business or receive 1099 income, you are required to register with the City and obtain a Business Tax Registration Certificate (BTRC), at which point you may be eligible for the New Business Exemption. If you are unsure whether you will receive W2 or 1099 income, you should obtain a BTRC. You must also file a tax renewal statement each year. If you have maintained your status as an employee and have no 1099 income, you remain exempt from registration and renewal of the BTRC
12. Question: My gross receipts exceeded $300,000 as a creative artist working in TV. What category do I file under?
13.Question: I am an actor working in a motion picture and I have formed a loan-out corporation. What category do I file under?
14. Question: I write theatrical motion pictures and earned over $300,000. I also have some income from TV work that was reported on a 1099. What category do I file under?
Answer: If you are an individual writing theatrical motion pictures, you will file under LAMC Section 21.49 Professions and Occupations. If you are a sole-employer, sole-employee corporation (loan-out corporation), you may file your work in theatrical motion pictures under LAMC Section 21.48 Miscellaneous Services, Temporary-Help Agency. For gross receipts derived from TV work, you will file under LAMC Section 21.45 (LGR2) Radio and Television Broadcaster. Please see the rate table for current tax rates as these rates may change in the future.
15. Question: I work in multimedia. What category do I file under?
Answer: LAMC Section 21.41 (LGR1) Multimedia Businesses. Please see the rate table for current tax rates as these rates may change in the future. The term multimedia business shall mean a business that does the following:
Produces films, disks, tapes, software or other recording devices, whether visual or audio, through the integration of two or more media, which include, without limitation, computer generated graphics and video, film, slides, video tapes, audio tapes and photographs.
Provides computer programming services on a contract or fee basis to the producer of films, disks, tapes, software or other recording devices, whether visual or audio, through the integration of two or more media, which include, without limitation, computer generated graphics and video, film, slides, video tapes, audio tapes and photographs, such services to include computer software design and analysis, modification of custom software, digital imaging and other related programming services; or
Develops online and internet services, including the design of website for clients.
The activities of a motion picture, television or radio producer, as defined in LAMC Section 21.109 of this article, a radio or television broadcaster, as defined in LAMC Section 21.45 (LGR2) of this article, and an adult entertainment business, as defined in LAMC Section 12.70b is not subject to tax under this section.
16. Question: My gross receipts exceed the $300,000 exemption limit. Over 80 percent of my income is in multimedia, as defined by LAMC Section 21.41(LGR1), and the balance is as a writer of scripts for TV, taxed at a higher rate under Radio and Television Broadcaster. What category do I file under?
Answer: If 80 percent or more of taxable gross receipts are under one tax category, the City allows you to report all your gross receipts and pay the entire tax under that category. You can take advantage of the lower rate for multimedia. If you would pay a lower tax by reporting in two categories, both Multimedia Businesses and Radio and Television Broadcaster, you may select to instead file in the separate categories to lower your tax.
17.Question: Can I use the Single Category Filing (80% under LAMC Section 21.06.1) rule for gross receipts earned both as a creative artist for creative activities and in a non-exempt category and not have to pay any tax if my combined gross receipts were less than $300,000?
Answer: No. You may not combine gross receipts from creative activities identified under LAMC Section 21.29(b), which comprise 80 percent or more of your total gross receipts with non-creative activities in which both together do not exceed $300,000 in order to qualify for the exemption under LAMC 21.29(b) for both activities. The Single Category Filing (80% rule) is applied only to taxable gross receipts. However, if your taxable gross receipts as a creative artist were over $300,000 and that represented 80% or more of your taxable gross receipts, you could use the rate of the 80% category and apply it to your non-creative work if that rate benefited you.
Example: If you have 2016 gross receipts of $260,000 as a television writer (taxed under LAMC Section 21.45 (LGR2) at $1.32 per $1,000 of gross receipts or fractional part thereof) and received $30,000 for work performed as a consultant (taxed under LAMC Section 21.49 at $4.50 per $1,000 of gross receipts or fractional part thereof - see rate table), you may Single Category File all gross receipts under the lower rate for the 2016 tax year, as all these gross receipts are taxable in tax year 2016, the taxable gross receipts are only $30,000 since the $260,000 in writing receipts is exempt if you apply for the creative artist exemption and file timely, therefore not taxable gross receipts. Non-taxable gross receipts are not allowed in the determination of Single Category Filing.
18. Question: I live in the City, but do all of my work in the City of Burbank. Am I subject to the tax?
Answer: Many creative artists have a home office in Los Angeles but do much of their work outside of Los Angeles. If you do business both in and out of the City, you can apportion the out of City gross receipts under City Clerks Ruling15. This ruling is applicable to taxpayers who file under LAMC Section 21.49 and other service-type classifications.
Under Ruling 15, the City assumes that 20% of gross receipts from work done outside the City is attributable to administrative functions performed at a creative artist's home office. These functions can involve accounting, administrative control, billing, and collection. If a creative artist performs all activities outside the City, does not take a home office deduction on their Federal and Sate tax returns (on a Schedule C) and performs no administrative functions within the City, the tax measure is $0.
However, the out of City gross receipts would count toward the $100,000 small business exemption threshold and the $300,000 creative artist exemption since this exemption is based on global/worldwide gross receipts. If these gross receipts exceed the respective thresholds, the person will still owe a minimum tax.
On the other hand, if a creative artist has a home office located outside the City and the creative artist performs work in the City, the creative artist can apportion 20% of the gross receipts for work performed in the City if the creative artist performs accounting, administrative, billing, and collecting functions outside the City. Therefore, 80% of gross receipts for work performed in the City will be subject to tax. If some or no accounting, administrative, billing or collecting functions are performed outside the City by the creative artist, the 20% apportionment can be reduced to as low as zero. Therefore, in the case where none of the four administrative functions are being performed by the creative artist outside the City, 100% of the gross receipts for the work performed in the City will be subject to tax.
The following are some examples of how Ruling 15 can be applied:
A writer who has a residence in the City, which is used as a headquarters, performs 25% of his work the City and 20% of the work performed outside the City (20% of 75%). If the writer hires an accountant, lawyer and/or agent to handle all of the writer's administrative work (accounting, administration, billing, collecting, etc.), or the writer has no administrative work then the writer may reduce the apportionment under Ruling 15 and pay zero tax on the out of City work.
A writer has two residences at which they do work. One residence is located within the City and the other is located in Vail, Colorado. You perform your creative activities at both locations, but the base of your operations is your residence in Vail where you perform administrative activities. Your total creative activities gross receipts exceed $300,000. During the previous year, 45% of your work was performed in the City and the remaining 55% was performed in Vail. The 45% of the gross receipts in Los Angeles could be reduced by 20% (to 36%) providing that the administrative functions are being performed by the writer outside the City, before applying the tax and the 55% of the gross receipts from Vail are not taxed.
19. Question: What is the Seven-Day Rule?
Answer: This rule is found in LAMC Section 21.00(i)(5) Definition - Engaged in Business. The seven-day rule applies only to taxpayers that have no fixed place of business within the City and whose presence in the City is less than seven days. If you maintain a fixed place of business within the City (a residence can be considered a fixed place of business) where work is conducted, the seven-day rule does not apply. If you live in the City and use your residence as a home office but do all your writing outside the City, the seven-day rule does not apply. If you declare your residence as a home office on your Federal or State tax returns (on a Schedule C) then you are not exempt, unless you can demonstrate that the home office is unrelated to your work as a creative artist. This presumes that there is another business operating from the home whose gross receipts are subject to the business tax.
20. Question: If I receive residuals or royalties from Performance Rights Organizations (such as ASCAP or BMI) for work I performed as a creative artist in 1979, how are they taxed?
Answer:: It depends on many factors:
- If you are no longer engaged in business or retired and you receive only a check for residuals or royalties, they are not subject to tax.
- If you are engaged in business, but in a different tax classification than that from which the residuals/royalties were earned, you are not subject to tax for those residuals/royalties.
- If the services you performed in 1979 were as a W2 employee, you were considered not engaged in business, thus the residuals/royalties are not subject to tax.
- If you remain actively engaged in business and the residuals/royalties earned in 1979 were for services performed entirely outside the City, and you take no home office deductions on your Federal and State tax returns, and perform no administrative functions in the City, the residuals/royalties are not included in your tax measure.
- Foreign tax levies imposed on blank videocassettes by a foreign government are not subject to the tax.
- Residuals/royalties received as compensation for services performed within the City by a person paid on a 1099 are taxable if the person is still engaged in business.
- If you performed services both in and outside the City, the residuals/royalties is subject to apportionment.
Note: In the situation where a creative artist is actively engaged in business, the residuals/royalties still count toward the $300,000 creative artist exemption threshold whether they are included in a person's tax measure or not.
21. Question: I was contacted by the City sometime ago and was told that they would hold the tax in abeyance until negotiations with the Guild were concluded. I sent them a letter. What do I do?
Answer: The exemption is not retroactive. You owe taxes for the last three years for which you conducted business unless you had total global/worldwide gross receipts of not more than $100,000 (Small Business Exemption) in each of those years and filed timely. All principal, interest and penalty is due. Taxpayers have the right to request a waiver of penalties, which may be granted in certain circumstances.
22. Question: I work from home and I'm concerned about privacy. I understand that the City posts the addresses of businesses to the public. What can I do?
Answer: The City does not currently "post the addresses of residential businesses." Taxpayers must inform the Office of Finance if they have a home-based business. However, home addresses are subject to the California Public Records if they are used for business purposes.
23. Question: I'm very concerned that the City can ask to see my work. What should I do?
Answer: The Office of Finance does not ask for titles or to review intellectual properties of writers. The Office of Finance may audit your financial records to verify the accuracy of your tax returns, including financial records and supporting documentation. The Office of Finance's policy precludes the disclosure of a taxpayer's confidential information except as required by law.