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How does the income tax subtraction modification work?
Qualifying residing artists will not pay any State or local income tax on qualifying income (although they still pay federal tax). Qualifying residing artists deduct the qualifying income on the tax form before their state and local taxes are calculated. A copy of this form (502 AE) can be found here.
How does one define a qualifying residing artist?
A qualifying residing artist must own or rent real property in the State of Maryland and derive income from the sale or performance within any A&E District of an original and creative work that the individual wrote, composed, or executed in any A&E District.
Will the income from the sales made by a qualifying residing artist in an A&E district outside of the one in which the artist creates, writes, composes or executes a work of art be counted toward the income tax subtraction modification?
Yes. Income derived by an artist from the sale, performance or publication of an artistic work within any of Maryland’s 24 A&E Districts may be considered for the income tax subtraction modification if the work is created, composed or executed in any A&E District.
Can a qualifying residing artist whose business is organized as a Limited Liability Company (LLC) take the income tax subtraction modification?
Even though an LLC is an entity, it is not an individual and therefore does not meet the statutory definition of a “qualifying residing artist.” However, according to the state income tax law, a one-member LLC may be treated as an individual and thus may be eligible for the income tax subtraction modification.
Are an artist's Internet sales counted for the purposes of the income tax subtraction modification?
Income received by an artist from Internet, mail order, and catalog sales of an artistic work created within any district qualifies for the income tax subtraction modification, as long as the artistic work is also shipped from within a Maryland A&E District.
For authors who write books, what constitutes a sale and how will it be verified?
Authors who write books can claim the subtraction modification only for income derived from books created, written or executed within and sold within an Arts & Entertainment District. Income derived from royalties, licenses, or other future revenues from the sale of reproduction or publishing rights does not qualify for the subtraction modification. Authors are responsible for documenting eligible income through their record keeping, including receipts.
What type of documentation is required for an artist to take advantage of the income-tax subtraction modification?
Artists should retain invoices, receipts, certificates, photos and any other documentation to substantiate the sale and nature of the work sold.
For Property Owners:
What percent property tax credit is available in Chestertown’s A&E district and how long will it last?
Each local jurisdiction decides what percentage of the added assessment value it will exempt from property taxes after a building is improved for an arts purpose. Each also sets the number of years, from 1 to 10, the exemption stays in effect. For Chestertown’s district, the Town Council and Kent County Commissioners committed to exempt the full 100 percent of the assessed improvement for the full 10-year period.
Will the property tax credits be granted to new buildings as opposed to buildings that are just renovated?
Yes, new construction qualifies.
How about an addition onto a building?
All plans for additions to buildings for A&E District use will need to be reviewed by the Maryland Department of Assessments and Taxation (D.A.T.) to determine what proportion of the new space will be dedicated to an arts purpose.
What is the relationship between the number of years property tax credits may be granted and the designation term?
The state designates A&E Districts for 10-year periods that are then subject to renewal. Even if Chestertown’s A&E district were to expire, the tax credit granted to a property would continue to be in effect for a full 10 years.
Is the property tax credit for real estate or personal property?
The tax credit is for real property only.
If residential space is donated in-kind, can it be considered rented?
Some amount of consideration must be paid for a property to be considered rented.
How substantial must renovations to an A&E enterprise be for the A&E property tax credits to apply? (Example – there is a café that renovates space or adds space for a jazz band. How much of the café, space-wise, must be dedicated to jazz bands for the property tax credit to apply?)
In general, for the property tax credits to apply, the entity (such as the jazz café) must meet the definition of an “arts and entertainment enterprise” which is statutorily defined as a for-profit or nonprofit entity dedicated to visual or performing arts. Hence, if at the completion of renovation, the establishment is still not primarily “dedicated to visual or performing arts,” it will not be considered an A&E enterprise and will not be eligible for the property tax credit. The State Department of Assessments and Taxation will determine what portion of the assessment should be subject to the credit. This will be determined on a case-by-case basis.
How is the property tax credit determined?
The State Department of Assessments and Taxation will determine the increased value of the renovated arts related space. Please note that personal property (example: special lighting) and some improvements do not substantially add value to the real property. The local tax credit is applied to the taxes attributable to the additional value of the renovation.
How are renovations assessed?
The Department of Assessments and Taxation first becomes aware of any renovations when a building permit is issued. If a residential unit were subdivided out of the overall property, then this one property would receive an individual assessment that would reflect the increased value for that particular unit. Otherwise, for renovations that require the use of a building permit and are on units that are not legally subdivided, the assessment will be made on the total building structure’s value. Further details may be obtained from your local office of Department of Assessments and Taxation (Maryland DAT Office 410-767-1184)
What benefits apply to a gallery or non-profit in the A&E District?
An art gallery, much like any other arts or entertainment enterprise, could qualify for property tax credits, and the artists who show their work there might qualify for the income tax subtraction modification. Depending on the function of non-profits, if they pay property taxes, they may qualify for the property tax credit.
Does the state reimburse the county and town for the loss of revenue caused by the property tax credits?
No, there is no such provision for reimbursement. The property tax credit, as well as the admissions and amusement tax exemption, reduces county and town tax revenues.