A version of this article originally appeared on Performer Magazine.
Disclaimer: The information contained in this article is general legal information only. Consult your attorney for all specific considerations.
Every year, you spend considerable amounts of money advancing your career. From gear to travel expenses to promotional materials, your annual out-of-pocket expenses can be substantial. The time is now to get your finances in order, not 11:00 p.m. on April 14. Whether you're a solo musician sparsely gigging for weddings or a revenue-generating band touring the country, it's most likely in your best financial interest to have your taxes filed by a professional. In preparation of filing, however, you’ll need to take care of several things on your own to maximize your return. Here are some issues to consider.
The method of filing taxes will depend on whether you are a solo musician, in a group, or operating as an incorporated/registered business. Generally speaking, if you haven’t registered your business, you'll be considered to be operating as a sole proprietor or an unorganized partnership. If this is the case, your taxes are relatively easy to file, because you'll file as an individual. Any profits made will be divided by the number of band members and taxed to the individuals. If you've incorporated your band as a corporation, however, it will be treated as its own entity and taxed independently. Finally, if your band is a limited liability company (LLC), you'll file taxes through individuals (like a partnership) but also file forms for the entity itself (like a corporation). While your tax professional will hammer out the specifics, your filing status is important in regards to how you choose to organize your band, how you keep your records in the future, and when your taxes are due. (For example, self-employed musicians are required to pay estimated taxes for the year ahead.)
You're taxed on your adjusted gross income, which, simply put, is your total ("gross") income, minus applicable deductions. Deductions are important because they lower the amount of "taxable" income. For example, if your band makes $25,000 in a year, but you spent $20,000 in deductible expenses, your taxable income is reduced to $5,000. Needless to say, the more deductions, the less taxes. If your band's expenses outweigh your income, there are certain instances where that loss can be applied to your "day" job – lowering the amount of total taxes paid.
So, what's deductible? The IRS determines what can be deductible by laying down a framework for a "business expense," stating, "To be deductible, a business expense must be both ordinary and necessary. An ordinary business 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."
As a musician, ordinary/necessary business expenses include (but are not limited to):
If you have "mixed use" items – items that you use for both personal and business purposes (car, home office, etc.) – you may only deduct the amount or percentage used for business.
Whether it's in Quicken, Excel, or a notebook, the more organized you are, the better. Make a record of any expenses you incur in the course of your musical year. If you can, categorize your business expenses (i.e., travel, gear, promo, food); this will make itemizing your deductions easier down the road. Receipts are always worthwhile, although they're not as important for smaller expenses (under $100). Organization can be the key to maximizing your deductions and avoiding audits by the IRS.
One of the biggest expenses you'll have during any given year is likely gear-related (guitars, amps, recording equipment, etc.), also known as tangible business expenses. One often-missed deduction comes in the form of "depreciation" – that is, the value loss of these expenses over time. The IRS calculates the time period for depreciation, and the equation is fairly easy. Essentially, take the value of the tangible business expense and divide by the years denoted by the IRS. The result will equal the amount of the deduction. For example, if a pre-amp is purchased for $1,000 and depreciates over 10 years, your deductible on the item is $100 per year.
Anytime you travel to a gig, rehearsal, or business meeting, you can deduct a portion of your driving expenses. If you have a touring van or bus that is strictly used for band business, this can be as easy as a quarterly odometer reading.
In addition to the information above, it's best to keep records of everything. From drinks after a performance to having your guitar spruced up, all of your expenses could mean something at the end of the year. The list above shows you some of the possible deductions available, so don’t miss out – keep your records!
All things considered, you can't beat the advice of a professional. Seek out a good accountant and a lawyer specializing in taxes. Initial consultations are often free of charge, and you can determine whether professional services are worthwhile before signing up. For more information, visit www.irs.gov and click on the Entertainment/Music Industry tab on the Businesses page.
Adam Barnosky is a practicing attorney and writer specializing in entertainment law and business development. He has worked with musicians, actors, and playwrights in Boston and New York City. Follow him on Twitter @adambarnosky.