Taxes and Recordkeeping: Part 1

As featured in: Performing Songwriter Issue #70, June 2003.  Visit performingsongwriter.com to order back issues or subscribe.

By Beverly Bartsch

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You have finished your taxes, haven’t you? And right now you’re telling yourself that never again will you go through the headache that you just endured. April is too nice to spend bleary-eyed over a shoebox of receipts. On the other hand, you survived and you’d just rather not think about this mess again for another year. But what if thinking about it now means no headaches next year? Doing your taxes boils down to one thing: good recordkeeping. And, yes, it can be that easy.

WHAT TO DO NOW

Rule number 1Get a receipt. Get a receipt for everything, small or large, cash, check or credit card--and keep it.

Rule number 2 Documentation. The IRS requires that for every business expense that you have listed on your tax return, you are certifying that you have the appropriate documentation to substantiate that deduction. On the back of the receipt, take 15 seconds and jot down the following: Who and What/Why. The receipt itself will usually have printed on it the Where (restaurant, place) and When (date and time). But by listing the Who (you, banker Stan and lawyer Jan) and the What/Why (discuss new business venture), you have provided sufficient detail to take the business deduction. This is especially important for business meals.

Rule number 3Separate. Open a checking account that is just for your business. It is much easier to see the two sides of your life when your funds are split between business and personal. Be deliberate about these accounts. Get different colored checks or checkbook covers. Take a marker and write “Personal” and “Business” on the appropriate accounts and never let the personal funds be used for business or vice versa. Your business expenses are anything and everything that is part of producing, promoting, manufacturing, selling and performing your songs. The personal expenses are all those things that are consistent no matter what the job.

Rule number 4Categorize. Every business has a basic set of categories of expenses as well as some that are unique to the particular business. In the accounting world, this is known as your “chart of accounts.” Developing a good chart of accounts at the start of your business helps you budget, track and report where you spend money. Using a chart of accounts that takes into account deductible items for tax purposes saves you time and money. The broad categories are Assets, Liabilities, Income and Expenses. Without going into Accounting 101, just remember the key is to put like items together.
There are many good computer programs on the market that assist a new business owner in setting up an appropriate chart of accounts and then provide the detail structure to maintain the financial records of the business. Quicken and Quickbooks, both by Intuit, are two of my favorite programs. They are userfriendly and still think like an accountant, when that thought is required. Having put your expenses in categories makes it much easier to track your progress as the year goes along, and is especially helpful at year-end.

Rule number 5Reconcile. Do this to your bank accounts every month. If this is something you already do, go get some chocolate to celebrate. If this is not something you’ve ever done, go get some chocolate--you’re going to need it for energy. Reconciling your bank accounts is not difficult, but it does take consistent effort. In my career as a business manager, I have reconciled literally thousands of bank accounts. And trust me, banks do make mistakes. If you’re not looking at the detail in the bank account, you probably end up paying fees for things like NSF checks, ATM withdrawals or just checks that have cleared for a different amount than what you wrote them for. It has happened before, it will happen again. The backside of your bank statement can walk you through the reconciliation process. Read it, understand it and just do it. Don’t be intimidated by the process; it’s your money--protect it.

Rule number 6Track inventory. If you have produced product for re-sale, you are in a business that carries inventory: the finished, packaged CD. At the end of the year, take inventory and know exactly how many of each project you have on hand. This information will come in handy if you are required to report the inventory on hand for tax purposes. This is one area where talking to a tax professional who understands the specific needs of the music business will save you time, money and headaches. Check with your performing rights society (ASCAP, BMI, SESAC) for referrals to accountants in your area.

Rule number 7Maintain. Set aside a time each week to work on your financial records. Weekly maintenance will keep the volume of activity to a manageable level and remind you that it’s your money, your income and your business. Pay the bills, invoice customers as needed, reconcile the bank statement when it arrives and enter the activity in an appropriate software program. The actual amount of time that it takes you to complete these tasks will vary, but with consistent attention to your financial matters you will feel empowered to make good business decisions and to get all the tax deductions that you are entitled to. Right now it’s not too late to get your finances in order for 2003. Set aside a couple of days as soon as possible to review everything that has happened in your business in 2003. Once you’ve got it caught up, maintain it!

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