Taxes & Tax Deductions for Working Musicians
A musician''s guide for tax time
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. 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 1099s 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 Seasons 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 $75,000 “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. (we’ve attached a list for your convenience). Let’s review some of the more complex and contentious deduction areas, but first let’s discuss income.
Income for the Musician
Income for the musician is: all payments for gigs, income from teaching, sideman work, session work, etc., regardless of whether you receive a 1099 at year-end. It is a common misconception that if you do not get a 1099 then it is not reportable income. This is untrue. If you have income in any form, it is required to be reported on your 1040. The form 1099-MISC tax form is supposed to be filed on any payments made to an individual for services amounting to more than $600 in any calendar year. In the case of bands, club owners typically don’t want to issue multiple 1099s to each member and will want to pay the bandleader and issue the 1099 to him or her. In this case the bandleader will report the entire 1099 income on his/her schedule C form. The bandleader will then issue 1099s to individual band members to account for amounts paid to them and then take the expense deduction. If you will be required to issue 1099s at year-end ($600+ payments in a year) for fellow musicians, roadies, lighting or sound people, etc., be sure to get their tax ID information when paying them. You can do this by having them fill out IRS form W-9.
Travel and Meals
The professional musician is allowed to deduct all expenses associated with overnight travel. These include meals (only 50% deductible), hotel and lodging, reasonable tips, dry-cleaning, phone calls home, etc. Overnight travel is roughly defined by the IRS as travel that is far enough away from home so as to make it inconvenient to return home at night. Travel could include expenses related to performances, recording sessions, auditions, etc. and will include many of the expenditures made on such trips. One question often asked is whether or not the travel deduction applies for mixed vacation/business travel. If the trip is primarily business then deductibility will be maintained. For example: a trip to New York City for a weeklong gig that includes a two-day stopover in Philadelphia on the way home to visit a friend. In this case the entire NYC trip would be deductible but the expenses related to the Philadelphia stopover would not be. Since maintaining receipts on the road is difficult, consider using the IRS “meal allowance” for deducting meals when traveling. This “meal allowance” (adjusted annually by the IRS) ranges from $39 to $64 per day depending on the location. In practice this means that receipts for meals are not required as long as the travel itself can be substantiated. This “allowance” includes all three meals and incidental expenses for the day. Travel for spouses or dependents are not allowed unless they are employees or part of the band.
Meals are deductible (remember, only 50%) as part of the overnight travel. They are also allowed as a separate (non-travel) deduction when they meet the criteria of “ordinary, necessary and business related.” This means that the meal must include direct business discussions. This can mean lunch or dinner meetings with agents, fellow musicians, club owners, promoters, record producers, etc. If a direct business purpose were documented then the deduction would be allowed. These meals could include discussions on band schedules, music arrangements, possible future gigs, recording dates, meetings with lawyers or accountants, and record companies. The best place to keep records for these expenses is in an appointment book. Log into your book who was present, and briefly the nature and substance of the discussion. I suggest that you keep a copy of the person’s business card as further substantiation.
Automobile and Vehicle Expenses
The use of your automobile is probably one of the most common and largest deductions for musicians. The automobile use expense can be taken in two ways. The first method is by using the IRS “standard mileage allowance.” In 2007, this annually defined allowance is 48.5 cents a mile (50.5 a mile in 2008). To take this deduction you do not need receipts, only records that show the distances driven and the business purpose of the trips. These would include travel to gigs, trips to the music store picking up equipment and supplies, rehearsals, etc. The best tool for tracking and calculating this expense is your appointment book or calendar. If your calendar has a record of rehearsals and gigs it can be used as a tool to estimate your mileage deduction (odometer readings are appreciated by IRS but NOT required). The second method is to write off direct expenses. In this method you actually depreciate the cost of the vehicle (over 5 years) and then tally up gas slips, repairs, insurance, etc and use that amount as a basis for your expense. This method requires more work and organization. If you were writing off a tour bus, cube van or other larger vehicle, the second method would be preferred. In my practice I often find the mileage allowance method generally yields the highest deduction for straight automobile use. In any case, the IRS allows the taxpayer to calculate the best method year by year and take the one that yields the highest deduction (within limits).
Equipment purchased is generally “depreciated” and written off over five or seven years on Form 4562. Depreciation is a technique for expensing or writing off purchases that have a useful life of greater than one year. In other words, a set of drums is intrinsically different in nature than a set of drumsticks because the drum set will (hopefully) last longer than one year (Keith Moon types excepted!). Supplies such as drumsticks, guitar strings, cords, music books, CDs and tapes, reeds, etc. will be written off (or deducted) in the year of purchase. Most musical equipment is written off in five to seven years. These “depreciable lives” are defined in the IRS code. The main tax strategy when it comes to depreciation is the use of what is often called “the section 179 election.” In 2007 the IRS allows taxpayers to “expense” up to $125K ($128K in 2008)of equipment in any one year. In this case the drummer is allowed to write-off his or her $8,000 drum kit in one year rather than wait seven years to do it. Remember, this “section 179 expensing election” only accelerates the deduction into one year; in either method the artist is able to write-off (depreciate) the full cost of the purchase.
The Home Office or Studio
The home office has been a contentious subject in my profession for a number of years. With recent legislation the home office has finally returned to its rightful place as an allowable deduction for many musicians & performers. In fact, a recent tax court case helped seal this fact. If you use a room (or rooms) in your home exclusively for your music business you will probably qualify for the home office. The use of the room can be as a rehearsal space, storage area for equipment, teaching space, home recording studio, record keeping for the business, marketing, etc. The home office is a fairly straightforward deduction to calculate on form 8829. It simply utilizes a formula based on the square footage of the business portion (the home office) of your home vs. the total square footage of the house or apartment and applies that percentage to all associated costs. The costs could include rent, mortgage interest, real estate taxes, condo fees, utilities, insurance, repairs, etc. Other rules that come into play here include the “exclusive use” requirement. This rule states that the home office must be used only for the business – no “mixed use” allowed. In other words the home office cannot be part of a larger room such as the living room unless the business part is partitioned off in some way. The home office can be a powerful write-off as it allows the musician to deduct a part of what were non-deductible personal expenses.
Other Unique Deductions
Performers and musicians have other unique deductions that are considered personal for most other taxpayers. These include concert tickets, CDs, stage makeup and clothing, music lessons, etc. Remember not to get greedy on items like concert tickets, shows and CDs. The IRS loves to attack deductions such as these. But they are allowed since performers must keep up with trends in their profession. Most tax preparers call it “research,” but be prepared to justify it. In any case do not deduct every concert or show you attend in the year; they can’t all be “research.” This also holds true for CDs, some purchased must be for personal pleasure alone.
Remember that this outline is not intended to be the whole story. The Federal Tax Code is very complicated and your specific applications should be reviewed with a tax professional before filing your taxes. The musician and performer are unique in the world of taxes. When you are shopping for a tax preparer please make sure they have some experience in taxation for performers. Also, organize your numbers using our attached worksheets (and bring along this article), it will make the process easier, cheaper and will help you maximize your deductions. Ask your preparer about other tax saving strategies for self-employed individuals such as retirement plans, health insurance and deduction timing.
For more information, check out the book The New Tax Guide for Artists of Every Persuasion and visit artstaxinfo.com