By Peter Jason Riley, CPA
Musicians and taxes don’t seem to mix very well. Taxes and administrating the business of music are often last on the list of concerns for the working musician. The artist temperament simply does not interface well with the exacting rule-filled world of federal and state taxation. Musicians avoid the whole matter and consequently leave themselves vulnerable to bad advice. The secret to overcoming this phobia is to develop an understanding of the mechanisms of the tax code and some simple, effective ways of complying with this onerous task. I often use the analogy that you may not need to know how to fix your car but it is helpful to know how it basically works. In so doing you will pay less in taxes and you will be less likely to fall prey to erroneous tax information and disreputable advisors.
Most working musicians are considered "self-employed" in regard to filing their taxes. In a legal and taxpaying sense this means that your "business" as a musician and you as an individual taxpayer are one and the same. There is no legal separation such as one would have in a corporation or other legal entity. The musician/performer usually files a "Schedule C" as part of their regular 1040 income tax form (this is where you report all those nasty 1099’s you received last year!). The performer may also file form 8829 for the home office deduction and will be required to pay self-employment tax (Schedule SE) on their net income (profit) as well as federal income tax. All these forms are part of the year-end 1040 income tax filing. The self-employed musician will also usually be required to pay estimated quarterly taxes on Form 1040-ES (if the tax liability is to exceed $1,000).
The goal is first and foremost to lower your taxes! The musician/performer has a number of tax deductions that are unique. In the balance of this article we will try to break them down to their component parts to make the issues understandable. For the IRS, all deductible business expenses are those that are:
- Incurred in connection with your trade, business, or profession
- Must be "ordinary" and "necessary"
- Must "NOT be lavish or extravagant under the circumstances"
It does not take much analysis to see that these guidelines are not an exacting science. Bruce Springsteen’s recent stay at the Four Season’s Hotel in Boston would for many other working musicians be considered "lavish and extravagant" by the IRS. Mr. Springsteen can no doubt justify the expense due to his need for security and privacy that most musicians would not need. Is a vintage 1955 Fender Stratocaster purchased for $75K "lavish and extravagant" when you can easily buy a new one for less than $1,000? Good question; it may even be considered an "antique" and as such the depreciation write-off may not even be allowed. (By the way, in two recent appeals, courts determined that antique instruments are allowed depreciation as long as they are being played—see the section on equipment.) As you can see, there is plenty of space for interpretation between the cracks here. These are the types of questions that can arise on audits so be prepared.
The performer has a bag of basic expenses that easily fit the above criteria: travel (hotel, meals, etc.), vehicle and transportation, equipment, supplies, stage clothes, home office expenses, legal and professional fees, recording costs, etc.
Want to continue to read more or want specific information, go to artstaxinfo.com .
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