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 Tax
Tips for Musicians
by Christopher Knab
Back to The Academy
Musicians - you probably
spend a lot of money supporting your craft every year, paying for instruments and amps,
photos and photocopies, practice room space and van rentals. Wouldn't it be nice to deduct
some of lose expenses on your income taxes? Maybe you can.
Business or Hobby?
First you need to figure
out if making music is your hobby or your business.That is, do you do it for pleasure, or
to make a living? If it's a business, you can probably deduct the cost of your equipment
and other expenses and fees on your tax return. If it's a hobby, you can only deduct only
up to the amount of income you earned from the hobby. Intuit offers expert advice on their
website, with several sections dealing with common questions about the hobby/business
differentiation.
Sections include
"What you need to know about turning a hobby into a business," "How do I
convince the IRS that I'm serious about my business?" "What can I do if my
business is audited?" and "What if my business really is a hobby? Can I write
off my expenses?"
What if it's more than a
hobby, but you're not in it for a profit (and haven't made a profit)? See this page from
the New York State Society of Certified Public Accountants, particularly the section about
3/4 the way down the page, entitled ACTIVITIES NOT ENGAGED IN FOR PROFIT. (Keep in mind
that this site was created for people who are accountants, not for those of us that need
accountants.)
Play the Part
If you have decided that
yes, your music is indeed a business venture, you need to know that the IRS says "The
music business... present(s) unique problems in an income tax audit." Translation:
tread carefully. While you are entitled to deduct expenses from your business, you have to
make sure to learn what you can and cannot claim, ensure that you report all your earnings
from music and document everything.
Solid Business Advice
- Make sure you are
operating like a business.
- Keep good books and
accurate records.
- Advertise.
- Get business cards.
- Get a business license or
separate taxpayer ID number (TIN).
- Incorporate your band.
Open a P.O. Box.
- Join Musicians'
organizations and/or unions.
- Copyright your work.
Register your songs with a performing rights organization (such as ASCAP, BMI or SECAC).
How You File
To deduct business
expenses, fill out a Schedule C and file it with your Federal Form 1040. If you're
self-employed, you will probably have to also file a Schedule SE. (According to IRS
Publication 533, you must pay self-employment taxes if your net earnings from
self-employment activities were over $400.)
On Schedule C, Line A,
you'll need to know your principal business code. It's listed in TurboTax under
"Services: Personal, Professional & Business," then under "Amusement
& Recreational Services." (So that's what the IRS thinks musicians are!) Code
9811 is for musicians - as well as theatrical performers, agents, producers and those in
related fields.
Having a hard time
getting the forms you need? Try the IRS' Tax Fax
Services or download
them over the Internet. Many of these forms are in PDF format, which requires you also
download the free Adobe Acrobat reader.
What can you deduct?
If you spent money to
run your music business, you should be able to deduct it from your income taxes. The IRS
says in Publication 535: "To be deductible, a business expense must be both ordinary
and necessary. An ordinary expense is one that is common and accepted in your trade or
business. A necessary expense is one that is helpful and appropriate for your trade or
business."
Here are some categories
to think about (while keeping in mind that you'll have to separate business use from
personal/pleasure use, at least in the eyes of the IRS):
- Instruments
- Equipment/gear &
accessories (amps, pedals, effects, straps, carrying cases)
- Consumable supplies (such
as drum skins & sticks, guitar strings & picks)
- Music business books,
record company directories, venue directories
- Subscriptions to trade
magazines (such as Billboard and CMJ))
- Sheet music and
"How-To" books and manuals
- Promotional: CD/tape
duplication (for demos), photos, bios
- Office supplies: paper,
envelopes, photocopies, stamps
- Fees related to
maintaining your website and e-mail access for your music-related activities
- Rent for storing your
gear and for your practice space
- Membership in
professional organizations, associations & unions
- Professional fees
(attorney, manager, agent, accountant)
- Copyright and
registration fees
- Lessons & instruction
- Travel expenses
Losses by theft
Some of these expenses
can be deducted in full, while others must be depreciated. See IRS Publication 946
("How To Depreciate Property") for more information.
Can you deduct for a
home office?
If you're a performing
artist, Certified Public Accountants tell us that no, you can't take a home office
deduction: For musicians, the principal place of employment is where the performance
occurs, not the home practice area."
If you run a studio out
of your home, or your principal business is not to perform but to record or sell your
music otherwise (such as by the sale of CDs or tapes, or if you operate principally as a
songwriter/jinglewriter), that rule may not apply.
Be Prepared
I remember hearing that
self-employed people are at more of a risk for an audit, and I can believe it. Add into
that equation that you're an artist (which may make the business side of things a little
harder to substantiate) I’d suggest that your expenses may well exceed your profits,
and you're live bait. That's not to say it's not worth claiming legitimate expenses
because you run the risk of an audit, just that you need to be accurate and be prepared.
You need to also be
ready to answer questions like these below, culled from an IRS audit guide. This document
was secured by AIM's Tax Center from the Internal Revenue Service through the Freedom of
Information Act. (As it is part of a government document, I'm reproducing this list here.)
Important Questions
that the IRS might be concerned about:
- Explain all the different
roles you play in the music industry. (Such as performer, songwriter, studio musician,
recording artist, etc.)
- What form of organization
have you designed to be involved in these ventures? (Such as sole proprietorship,
partnership, corporation, etc.)
- Are you self-employed for
any of your activities? (File Schedule "C" and "SE").
- From what sources do you
receive income?
- How are these sources of
income reported to you? (Form W-2, Form 1099, statement, settlement sheet, contractual
agreement, partnership Schedule K-1, etc.)
- Who keeps up with all
your records and where are the records currently located?
- What type of expenses do
you incur?
- Who keeps up with your
expenses and where are the supporting records located?
- What contractual
agreements do you have through your business? Furnish copies.
- Have you been examined
[audited] previously? If so, what were the results?
- What assets have you
purchased that you use in your business?
- How have these assets
been handled for tax purposes?
- Have you ever made or
received any "payoffs" to obtain or maintain a position in the music industry?
- Do you ever receive cash
payments? If so, what is done with the money? (Used to pay bills, deposited into a bank
account, etc.)
More of the document is
on the AIM website, and is well worth reading, at least to get an idea of what the
gameplan might be in case of an audit.
Proving It
So now you know - if you
didn't already - that the IRS are absolute sticklers for detail. Document everything! I
suggest you make a copy just for your tax file of pretty much anything related to your
music, such as:
- Every letter and every
press release you sent
- Responses from record
companies, radio stations - anyone - to verify that you have been active in the pursuit of
your music
- Gig fliers/postcards
(even the postmarked "return to sender" ones are helpful for this)
- A copy of your mailing
list
- All press mentions - and
if you have none (or very few), keep the ad or newspaper listing from any shows you play
- All receipts and invoices
for everything you pay out or earn that's band-related. Make sure everything has a date
and any other supporting information written down on it somewhere.
- If you haven't already
kept detailed records, start now - and do your best to reconstruct everything up to this
point NOW, rather than some random point in the future when you might get audited. Really
put some effort into keeping this up - if you don't, and you get audited with a poor end
result, you could owe back taxes and penalties otherwise, and any future music-related
deductions will be closely scrutinized.
- When in doubt, ask a
professional or don't deduct it. (I recommend that you keep those "questionable but
not deducted" receipts, though - if you ever get audited, they might be helpful.)
Keep all of your tax-related records for at least seven years.
Is It Worth It?
You definitely should
take whatever deductions are allowed - we don't get many tax breaks in the country...
well, not unless you're rich. ;-)
While I'm not a tax
professional, these tips represent some of what I've learned when filing several IRS
Schedule C's over the years. When all is said and done, and especially if you have earned
a lot or are deducting a lot of money, you might be better off doing what the guys
Hyperreal suggest: get yourself a tax attorney and/or have her or him advise you. This is
particularly true if you're not used to filling out tax forms.
Many happy returns!
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Christopher Knab is an independent music business consultant based in Seattle, Washington. He
is available for private consultations on promoting and marketing independent music, and can be reached by email at: chris@chrisknab.net
Chris Knab's book, 'Music Is Your Business'
is available from the Music Biz Academy bookstore.
Visit the FourFront Media and
Music website for more information on the business of music from
Christopher Knab.
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