A US MUSICIAN'S GUIDE TO TAX SEASON
Tax season is here again, and that means musicians must turn their attention from counting bars to counting earnings. Freelance musicians should be especially aware this time of year. An independent musician’s tax return can be somewhat complicated because most self-employed artists get paid with “gross” dollars with no taxes withheld. This requires them to be disciplined enough to save and prepare for April 15.
If you’re a US citizen, remember that your worldwide income from all sources is considered taxable income. Income you receive from club dates, wedding gigs, music lessons, session work, drum-loop programming, royalties, or any other music related or nonmusic related work, is also taxable income.One way the federal government makes sure you’re not receiving income “under the table” is to require the entities paying you as an independent contractor to report to both you and the IRS how much money you were paid during the year via Federal Form 1099-MISC, which you should receive by January 31, following the end of each tax year.
A common fallacy among musicians is that every dollar a musician spends is a tax deduction, or business write-off. However, if you lose money for too many years in a row, the IRS doesn’t consider what you do a business anymore—you’re now considered a hobby. The costs involved in pursuing a hobby are deemed personal and, accordingly, are not deductible, no matter how promising your album project is.
Let’s assume your music career qualifies as a business. You can benefit from a variety of deductions. The general rule is that you can take deductions for any expense that is an ordinary and necessary expense incurred in connection with running your business. The following are some of the more common allowable and deductible expenses encountered by most musicians:
Rent for Studio, Rehearsal, Office Space—Rent is commonly considered to be a reasonable business expense. However, when planning your home recording or teaching studio, make sure it’ll be used only for business purposes and will not double as a living area. The size of the deduction is usually based on the percentage of the work area space compared to the total space of the premises.
Equipment Purchases and Leasing—Yes, you can write off your equipment purchases all in one year instead of having to depreciate the equipment cost over several years. However, you must make an election to do so on your tax return, and there is a dollar limit on how much you can write off in a given year. Plus, the immediate write-off (also known as Section 179 expense) cannot create a taxable loss for the business. Be sure to speak to your tax advisor about how much you can deduct as the deductions and limits change each year.
Recording and Studio Costs—Many expenses incurred in recording projects are potential deductions, such as the studio rental, tape costs, engineer or producer costs, editing, mixing, or mastering service fees, and other related expenses. This assumes, of course, there is or will be income from the sale of the recorded material.
Professional Services—Fees paid to accountants, lawyers, studio-design consultants, and session players are all potential write-offs. Because these professionals are working for you, you must provide them each (and the IRS) with a Form 1099-MISC at the end of the year. This is required if you paid $600 or more to any unincorporated independent contractor during the year.
Meals, Travel, and Entertainment—Given the potential for abuse, you can understand why the limits of ordinary and necessary travel expenses are being tested by the IRS. Hotel and truck rental costs are probably allowable, as are trips to music trade shows or conferences. Remember, only 50% of your business meals can be written off, so don’t be so anxious to pick up the tab!
Supplies—Many musicians neglect to write-off their supplies. Cables, strings, drum heads, sheet music, office supplies, blank CDs, and DVDs can add up to a substantial deduction.
Education and Conferences—Anything you do to further your skill and knowledge in connection with your career is a potential write-off. This includes educational materials such as reference books and subscriptions to trade magazines.
Advertising and Communications—Don’t overlook deductions for costs associated with advertising and promotional efforts. Photography, photocopying, faxing charges, postage, and overnight mail fees, telephone bills, Internet access, and web hosting add up to a substantial amount of money and are possible write-offs for your business.
The list of potential deductions goes on and on, depending on how creative you and your tax advisor wish to be (within the limits of what is ordinary and necessary, of course). You’re best insurance against an IRS audit is to have your return professionally prepared by a tax return preparer who understands your profession and the music industry.
Traveling musicians must pay attention to state tax laws, as most states will seek tax revenue from musicians who have earned money in their states. If you live in Massachusetts, do live gigs in Connecticut, and session work in New York, be prepared to file an income tax return for each state. A number of software programs are available to help you keep good records (e.g., Quicken and QuickBooks by Intuit). Remember, federal and state tax laws are changing daily, so be sure to enlist the aid of a competent tax advisor to assist you.
—This article was prepared through the expertise of Alan Friedman, CPA and partner of Friedman Kannenberg & Company, P.C. (http://www.fkco.com/), Certified Public Accountants specializing in providing accounting, tax, and consulting services to musicians and bands, independent record labels, recording studios and engineers, and other music industry businesses, individuals, and trade organizations.
http://afmindie.org/2010/02/a-us-musicians-guide-to-tax-season/
If you’re a US citizen, remember that your worldwide income from all sources is considered taxable income. Income you receive from club dates, wedding gigs, music lessons, session work, drum-loop programming, royalties, or any other music related or nonmusic related work, is also taxable income.One way the federal government makes sure you’re not receiving income “under the table” is to require the entities paying you as an independent contractor to report to both you and the IRS how much money you were paid during the year via Federal Form 1099-MISC, which you should receive by January 31, following the end of each tax year.
A common fallacy among musicians is that every dollar a musician spends is a tax deduction, or business write-off. However, if you lose money for too many years in a row, the IRS doesn’t consider what you do a business anymore—you’re now considered a hobby. The costs involved in pursuing a hobby are deemed personal and, accordingly, are not deductible, no matter how promising your album project is.
Let’s assume your music career qualifies as a business. You can benefit from a variety of deductions. The general rule is that you can take deductions for any expense that is an ordinary and necessary expense incurred in connection with running your business. The following are some of the more common allowable and deductible expenses encountered by most musicians:
Rent for Studio, Rehearsal, Office Space—Rent is commonly considered to be a reasonable business expense. However, when planning your home recording or teaching studio, make sure it’ll be used only for business purposes and will not double as a living area. The size of the deduction is usually based on the percentage of the work area space compared to the total space of the premises.
Equipment Purchases and Leasing—Yes, you can write off your equipment purchases all in one year instead of having to depreciate the equipment cost over several years. However, you must make an election to do so on your tax return, and there is a dollar limit on how much you can write off in a given year. Plus, the immediate write-off (also known as Section 179 expense) cannot create a taxable loss for the business. Be sure to speak to your tax advisor about how much you can deduct as the deductions and limits change each year.
Recording and Studio Costs—Many expenses incurred in recording projects are potential deductions, such as the studio rental, tape costs, engineer or producer costs, editing, mixing, or mastering service fees, and other related expenses. This assumes, of course, there is or will be income from the sale of the recorded material.
Professional Services—Fees paid to accountants, lawyers, studio-design consultants, and session players are all potential write-offs. Because these professionals are working for you, you must provide them each (and the IRS) with a Form 1099-MISC at the end of the year. This is required if you paid $600 or more to any unincorporated independent contractor during the year.
Meals, Travel, and Entertainment—Given the potential for abuse, you can understand why the limits of ordinary and necessary travel expenses are being tested by the IRS. Hotel and truck rental costs are probably allowable, as are trips to music trade shows or conferences. Remember, only 50% of your business meals can be written off, so don’t be so anxious to pick up the tab!
Supplies—Many musicians neglect to write-off their supplies. Cables, strings, drum heads, sheet music, office supplies, blank CDs, and DVDs can add up to a substantial deduction.
Education and Conferences—Anything you do to further your skill and knowledge in connection with your career is a potential write-off. This includes educational materials such as reference books and subscriptions to trade magazines.
Advertising and Communications—Don’t overlook deductions for costs associated with advertising and promotional efforts. Photography, photocopying, faxing charges, postage, and overnight mail fees, telephone bills, Internet access, and web hosting add up to a substantial amount of money and are possible write-offs for your business.
The list of potential deductions goes on and on, depending on how creative you and your tax advisor wish to be (within the limits of what is ordinary and necessary, of course). You’re best insurance against an IRS audit is to have your return professionally prepared by a tax return preparer who understands your profession and the music industry.
Traveling musicians must pay attention to state tax laws, as most states will seek tax revenue from musicians who have earned money in their states. If you live in Massachusetts, do live gigs in Connecticut, and session work in New York, be prepared to file an income tax return for each state. A number of software programs are available to help you keep good records (e.g., Quicken and QuickBooks by Intuit). Remember, federal and state tax laws are changing daily, so be sure to enlist the aid of a competent tax advisor to assist you.
—This article was prepared through the expertise of Alan Friedman, CPA and partner of Friedman Kannenberg & Company, P.C. (http://www.fkco.com/), Certified Public Accountants specializing in providing accounting, tax, and consulting services to musicians and bands, independent record labels, recording studios and engineers, and other music industry businesses, individuals, and trade organizations.
http://afmindie.org/2010/02/a-us-musicians-guide-to-tax-season/
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