I thought I would offer a few Tax Tips to keep in mind when that time of year rolls around.
The reasons this topic fills most people with dread, is lack of preparation, little advance planning and minimal education about the topic. It's not necessary to become an accountant, but it is certainly helpful to have some basic understanding of how the money you earn and the expenses you incur in order to operate as a professional touring musician, impact upon your tax liability.
The I.R.S. has a number of informative booklets that they make available in both hard copy form and from their web site. http://www.irs.ustreas.gov, or your may order them by calling 1-800-829-3676. Some of these forms provide valuable information for anyone attempting to run a home-based small business and then another more specific to the entertainment industry.
IRS Publication 587- Business Use of Home
If you are receiving payment when you play music, you are in business. Since most musicians operate their small business from their homes, this publication offers specific information about what deductions are allowable. You may be aware of many of them and some may be new to you. I'll mention just a few major items that ought to be included in your planning.
The Office- Whether you have a dedicated office space within your home or you use the kitchen table when meals are not happening, there is potential that the space may qualify as a deductible expense. The rules are very strict. For instance, personal items may not be kept in the space allocated for business use. This will disqualify the deduction. The booklet describes the exact amount of the deduction based on the room's percentage of business usage and its percentage of square footage in relation to the rest of the home.
Utilities- Heat, Water and Sewage and Electric- A portion of your bills may be deducted based upon the business usage.
The Phone- If you do not have a separate phone to use for your business, then you may only deduct the long distance or local call charges specific to doing the business. You may not deduct the basic service charges for the home phone.
Insurance- It's a great idea to have a separate business insurance policy. Check with an insurance agent about adding a rider to your homeowners or renter's policy. This is deductible. Perhaps you have a separate instrument insurance policy; this is a deductible item. Most homeowner's policies will not necessarily cover your instruments. There are special companies who provide instrument insurance. Clarion is one such company. ASCAP also provides an instrument insurance policy plan.
Stage Clothes- Stage clothes may be deducted if you do not where them off-stage. If you are not into dressing up for your shows and don't have separate stage attire, then you may not deduct the cost of your clothing.
Office Supplies, Office Furniture and Equipment- These are all deductible expenses. Check with you accountant though, some larger more expensive items may have to depreciated rather than deducted as an expense in the year they are purchased. If you purchase a new editing suite, recording equipment or various items of furniture, you may have to depreciate the expense over a specific number of years.
The home office is one the many areas where individuals operating a home-based business have been caught by the IRS for taking unqualified deductions. Use the booklet to plan ahead and work closely with your tax preparer, accountant or CPA.
While I'm on the subject, one of the most important associations you can make as you build your career is to find a really good Tax Professional. Check around and interview a number of people to determine if they have any other clients in the music and entertainment industry. It will be helpful to you if they are familiar with tax rules that may apply specifically to your industry as well as to the fact that you are a self-employed, home-based business.
One of the best business aides I've found for the touring musician is QuickBooks Pro by Intuit. If you are looking for an incredibly easy system by which to keep track of all your accounts, income and expenses along with inventory, this is the tool to use. I have no ties to the company or the product. When my accountant recommended it to me, I was looking for some method that allowed me to keep tract of my book sales along with checking and invoicing. QuickBooks has a business category specifically for writers/artists who keep an inventory of product, such as books, CDs, t-shirts, etc. It was easy to set up and maintain. When tax time comes around QuickBooks offers a variety of reports that precisely tabulates your year's transactions that can be printed to hard copy or to file and handed or emailed to your accountant. Throughout the year you can print various reports to help you stay on top of the business. There are other applications available, but none so friendly.
I offer these tips so you won't be caught off-guard. I've personally known a number of musicians who have found themselves in the unfortunate position of having their returns audited. The time and energy it takes to go through an audit is exhaustive not to mention expensive. If you plan ahead for your next tax year, work with your tax professional throughout the year to evaluate your financial progress for each quarter, you will get through tax season easily and maybe even save a little money.
Jeri Goldstein is the author of, How To Be Your Own Booking Agent The Musician's & Performing Artist's Guide To Successful Touring 2nd Edition UPDATED. She had been an agent and artist's manager for 20 years. Currently she consults with artists, agents and managers through her consultation program Manager-In-A-Box and presents The Performing Biz, seminars and workshops at conferences, universities, for arts councils and to organizations. Jeri has released a 3-hour seminar on CD-ROM, Marketing Your Act. The Seminar is set up in 5 modules with information about Marketing, Creating Effective Promotional Materials, How To Access the Media, A Marketing Template and Niche Marketing. No expensive conferences to attend-learn at your convenience to boost your career. Her book, CD-ROM and information about her other programs are available at are available at Performingbiz.com or phone (434) 591-1335 or email Jeri.
* If you would like to reprint any of these articles, please contact Jeri Goldstein for permission.