PS238 is a long-running comic series by Aaron Williams that is available online and in print. The comic is set at the titular public school, which is a special school for children with superpowers, called metaprodigies. Earlier this month we got an email from Sean asking us to take a look at PS238, and there are legal issues aplenty. We’re going to start with a bit of tax. Very minor spoilers below.
(Since we’re talking about tax, we should reiterate our disclaimer: this is a discussion of a fictional scenario, not legal advice, and does not constitute the formation of an attorney-client relationship. If you need tax advice, hire a lawyer or an accountant.)
I. The Setup
One of the students at PS238, Tyler Marlocke, doesn’t have superpowers, but he’s enrolled there because his superpowered parents are certain that he’ll develop superpowers any day now. To give him a fighting chance against the other children (particularly in gym class), the school assigns him a mentor: The Revenant, a gadget-based superhero. During one of his training sessions he goes to the Revenant’s home, which is located above a high-end gym for people with superpowers. The Revanant explains the unusual location thus:
Keeping a bunch of exercise equipment at home just clutters the place and since “vigilante detective” isn’t covered under the tax code, keeping my “office” at home isn’t deductible.
The naturally raises the question: would a superhero’s headquarters be tax deductible, and if not, why not?
II. Superhero Tax Deductions
What the Revenant is referring to is the fact that many (but not all!) business expenses are tax deductible. Home offices (i.e. a proportional share of the rent or mortgage payment) can also be tax deductible, but it’s tricky to get right and can possibly increase the risk of an audit. The situation gets even more complicated when considering “mixed purpose expenditures” that are both profit-oriented and personal (e.g. traveling for business but also to visit friends or relatives). In the Revenant’s case, an important question is whether his vigilante detective activities are for-profit or are merely a hobby. The general rule is given by 26 U.S.C. § 183(a):
In the case of an activity engaged in by an individual or an S corporation, if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section.
§ 183(b)(1) expands on the general rule slightly, allowing “the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit.” This includes deductions for real property tax payments, mortgage interest payments, casualty losses, theft losses, and personal items such as charitable contributions and medical expenses. It does not, however, include business expenses or a home office.
Going a little further, § 183(b)(2) states that certain deductions for not-for-profit activities are allowed to the extent that income from the activity exceeds the deductions available under § 183(b)(1). Since most superheroes don’t make any money from their heroics, however, that effectively means no additional deductions.
“For profit” means more than just wishing for a profit. The case law speaks in terms of “a bona fide expectation of economic gain,” having the “primary purpose … to make a profit” or the “dominant hope and intent of realizing a profit” or a “reasonable potential for profit.” Estate of Baron v. C.I.R., 798 F.2d 65, 72 (2d Cir. 1986). Anything else is usually called a hobby, although it doesn’t have to be done for pleasure. See, e.g., Krause v. C.I.R., 99 T.C. 132 (1992).
The IRS has developed nine factors used to determine whether an activity is for-profit:
(1) Manner in which the taxpayer carries on the activity.
(2) The expertise of the taxpayer or his advisors.
(3) The time and effort expended by the taxpayer in carrying on the activity.
(4) Expectation that assets used in activity may appreciate in value.
(5) The success of the taxpayer in carrying on other similar or dissimilar activities.
(6) The taxpayer’s history of income or losses with respect to the activity.
(7) The amount of occasional profits, if any, which are earned.
(8) The financial status of the taxpayer.
(9) Elements of personal pleasure or recreation.
T.R. § 1.183-2(b). Several of these factors weigh against the Revenant (and indeed most superheroes), and it seems likely that his activities would be considered a hobby rather than an activity carried on for-profit. What’s more, a home office must be used for a trade or business, which requires more than just a for-profit activity.
The practical upshot of all of this is that the Revenant should hire an accountant. Certain deductions may be made despite the non-profit nature of his crime fighting activities (e.g. real property tax on his office, casualty losses from destruction of equipment). But he’s probably correct that the IRS would not consider his “vigilante detective” activity to be a business, and his office probably could not qualify as a home office if it were part of his house. The same is true of many other superheroes, including, most obviously, Batman.