This article written by Christopher Knab is one that we constantly read. 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.
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
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):
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.
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:
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:
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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