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When you’re being paid more than $500 million for your collected works it’s hard to say that you still just one of the “tramps like us.” That being said, if I could afford it I would pay that to be the rightful owner of everything Bruce Springsteen ever wrote.
It’s not that he isn’t already making a good living off these compositions. Like most income, those royalties are taxed at ordinary rates, currently 37% federally. Since you are an astute reader, well versed in tax law, you probably think that a sale of such musical compositions by their creator – either individually or in bulk – is also taxed at ordinary income rates. And, generally speaking, you would be correct.
The Internal Revenue Code specifically says that “a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by a taxpayer whose personal efforts created such property” is not a capital asset. You may recall an earlier article where we talked about the tax treatment of self-created know-how.
If, however, you are a composer, the IRS has provided an election to treat the sale of a musical composition or copyrights in musical works as capital gains. Inventors and authors don’t qualify for this favorable tax treatment.
At the moment, Bruce is saving 17% by making the sale in 2021. But his potential savings are even greater. Over the past few months, Congress has explored raising the capital gains tax rate to as high as 43.4%, adding a 5% and 3% surtax on income over $10 million and $25 million respectively. Were the sale subject to any of these, along with state income taxes, the government would be more than a 50% partner in the sale – more than enough to make “the dogs on Main Street howl.”
The election is at the same time both simple and quite technical. You make it by reporting the gain on Schedule D. But, you have to make the election separately “for each musical composition (or copyright in a musical work) sold or exchanged during the taxable year.” That means the purchase price will be allocated to EACH song covered by the sale. If one could access Mr. Springsteen’s Form 1040, we would finally know what someone thinks each song is worth, individually. We can argue later but I’ll take “Thunder Road” any day of the week.
Count on Friedman LLP
Whether or not you are a prolific composer, you deserve superstar support as you address the tax issues you face. Count on your Friedman LLP advisor to help you navigate financial challenges, realize your goals and feel like “the Boss.”
