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The Five Biggest Tax Mistakes Musicians and Bands Make
February 28, 2022
by Alan Friedman, CPA, Partner, Friedman, Kannenberg & Company, P.C.
As with most professions, there are two sides to the business of making music: the artist side and the business side. While most gigging musicians and bands possess the creative knowledge to make a living in the art of making music, some may lack the business acumen to handle the tax reporting side.
That generally leaves them with three tax preparation paths to choose from: 1) just wing it from year-to-year; 2) spend countless hours learning about current tax law, new tax law changes, and how to navigate tax preparation software that promises to make the tax returns as easy as brain surgery; or 3) hire a professional and hope they’re competent and trustworthy.
Unfortunately, some of the most financially savvy musicians have fallen prey to bad tax advice from someone they once called their trusted tax advisor. It’s not like musicians are unaware of, or want to ignore, important tax reporting and paying responsibilities. It’s just they’d prefer spending hundreds of hours tinkering in Pro Tools with their favorite compressor plug-in and crafting the prefect snare drum sample, rather than learn how to fill out Federal Form 8962, calculating their Premium Tax Credit on subsidized health care costs purchased through the Health Insurance Marketplace. And who could blame them?
Knowing these realities, this article is dedicated to briefly identifying, explaining, and solving just a few of the tax myths and blunders musicians and bands typically make. To that end, this article will hopefully shed some light on these misunderstood matters and provide some answers to keep you out of hot water with the IRS and, even better, help you keep more of what you earn. Accordingly, here are my five favorite myths and blunders.
1) Misreporting or underreporting income. A lot of musicians think they do not have to report any cash income from gigs, or any check-issued income less than $600. After all, we all know cash, or any amount received under $600 for the entire year from a single payer, isn’t reported to the IRS on a 1099 form.
Make no mistake, the purposeful underreporting of income—whether it be cash, checks, barter, or any other form of remuneration—is tax fraud. If you are caught, it carries stiff penalties, on top of tax and interest, plus potential imprisonment. Think about it. If you had 100 gigs that paid you $500 each, do you really think you don’t have to report $50,000 of income just because you didn’t receive a 1099?
Additionally, you’re potentially missing out on social security and Medicare benefits, retirement saving deductions, the ability to borrow money for a house or car, and of recent, certain federal and state pandemic subsidies. There are legitimate ways to reduce taxes without lying under penalties of perjury on your tax return. Report all your income; the day you get audited, you’ll be happy you did.
2) Ignoring state income tax reporting. It should come as no surprise that many states are broke and constantly looking for the proverbial “low-hanging fruit” to collect additional state tax revenue. In recent years, that fruit has been sales tax; but that issue has been cured to a large degree by requiring online retailers (like Reverb and Musician’s Friend) to collect sales tax on internet sales when the retailer’s sales exceed certain thresholds. The states’ new fruit is collecting income tax on income earned in their state.
Touring bands and musicians need to be aware that, anytime they travel into a state to perform, they are required to report and pay that state’s income tax. No, you’re not paying state tax twice on the same income, you’re merely spreading the tax you pay based on “where” the income is earned. This is one of those complex tax reporting requirements that should prompt any musician or band touring in multiple states to seek professional tax advice.
3) Haphazard auto deductions. Generally, musicians travel a lot by car to gigs, rehearsals, recording studios, music stores, and music lesson facilities. Yes, the cost of any travel to produce income is deductible, but the burden of proof is on the musician, not the IRS. Whether you’re taking an auto deduction by adding up all your annual auto related costs, multiplied by the business use of your auto, or by simply multiplying the business miles you drove times the applicable IRS mileage rate ($0.56 for 2021, $0.585 for 2022), either method requires you have an accurate accounting of the business miles you drove. Don’t ever think about showing up for an IRS audit without an auto log of who, where, why, and when you drove for business. The absence of an auto log is a surefire way to get the entire auto deduction thrown out, resulting in additional tax, interest, and penalties.
4) Incorrectly writing off recording costs. While most music expenses incurred in the production of income are deductible, there are a couple exceptions. Recording costs happen to be one of them. Because these costs are incurred to produce an intangible asset (recorded music) that theoretically generates income over a period of time longer than a year, the IRS requires taxpayers to follow what’s called “UNICAP rules” under IRC 263(a)(b). These rules require recording costs be deducted over an elongated period of time. However, you can make what’s called a “safe harbor” election on your tax return under Notice 88-62, which allows these costs to be deducted over a three-year period: 50% in year one and 25% in years two and three. Again, these rules have limitations and musicians should seek professional tax advice on this topic.
5) Royalties are subject to self-employment tax. Lastly, many taxpayers and their tax return preparers believe royalty income is reported on Federal Form 1040 Schedule E, Page 1, which is taxable but not subject to any social security and Medicare tax (aka “self-employment” tax). While that may be true for certain types of royalty income, if the taxpayer is a songwriter and in the business of writing music, royalty income is considered trade or business income and subject to self-employment tax. That income should be reported along with the musician’s other gig, recording, touring, and lesson income on Federal Form 1040, Schedule C.
As you can see, these rules are ever-changing and complicated to most mere mortals, not just musicians. For sure, this tax season will be a challenging one, as the government is already warning on their website. This is mostly due to the various pandemic-related government subsidies with inconsistent federal and state taxation. While some musicians may feel confident in preparing their own returns, most should seek professional tax advice. At least you will feel confident your tax returns are prepared correctly, plus your tax prep fee is a tax deductible business expense to the self-employed musician.
Tax advice for informational purposes only, not intended to be a substitute for advice from your personal tax professional.
Allowable US Tax Deductions
Office Expenses
- Home expenses (rent, mortgage interest, property taxes, utilities, home insurance, some repairs) based on the amount of pro-rata space used for your music business
- Rehearsal or rental space
- Postage and courier fees
- Office supplies used for earning income
- Industry-related subscriptions, magazines
- Buying music for research
- DVDs, CDs, or digital recordings purchased for a specific educational purpose
- Telephone and internet costs
- Streaming services
Travel Expenses
- Flights
- Hotels
- Uber/taxi
- Parking
- Business meals and meals while on the road (normally 50% deductible, but temporarily 100% for certain types of meals)
- Car expenses (gas, repairs, insurance, etc.), but only a portion based on the business miles driven as a percentage of the total miles driven. Check IRS Automobile Mileage Rate Allowance; be sure to keep a vehicle log.
Instrument/Equipment Expenses
- Instrument or equipment purchased (normally depreciated, but may possibly be expensed all in one year)
- Instrument insurance
- Replacement parts or instrument repairs
- PA or gear rentals
Performance Expenses
- Wardrobe used in performance (only if theatrical or costume in nature)
- Cleaning/repairing stage clothing (subject to limitations mentioned above)
- Fees paid to other players or accompanists (subcontractors)
- Agent or manager commissions
- Headshots or promotional photos
- Advertising
- Cost of recording demos
- Sound recording costs (subject to special amortization rules)
Fees
- Union dues (only for the self-employed)
- Professional association memberships
- Legal and accounting or other professional fees
- Interest on loans taken out for music-related business purposes
- Agent commissions
Note, there may be some limitations or particular rules relating to these deductions.
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