Taxes and Recordkeeping: Part 2

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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WHAT TO DO AT TAX TIME

Next January you will be in much better shape financially. You have categorized your expenses and asset purchases, filed all those receipts, and reconciled your bank accounts monthly. Now you will be able to go to your tax accountant confidently, or, if you decide to tackle the project on your own, you will be well-prepared.

The software programs for preparing your tax returns have become really popular, probably because they are quite good. They are user-friendly; you can learn a lot about taxes just by reading the helpful tips and answering honestly the questions posed. I have used TurboTax for Home and Business for the past several years. And while I am not a licensed tax professional, it’s perfect for the self-preparation of my personal tax returns. Taking the time with the program to read the instructions will enable even the novice to prepare his own tax return with confidence. The TurboTax website, www.turbotax.com is a great resource for a planning checklist as well as tax tips.

The following information will help you relate your business records to what’s happening on the tax return:

Income: The IRS has a check and balance system in place that keeps us all honest. That method is the W-2 and 1099 forms that we receive each January from our employers or contract for hire work. The employer or company that paid you is required to submit those forms to you. Then the employer or company is required to submit to the IRS a copy of those forms as well. When you file your tax return, the IRS matches the W-2 or 1099 information you list on your return with the ones the employer or company sent in.

As a performer, you will get paid for your performances by venues or promoters. They are required to give you a 1099 for anything over $600 that you earn. Now, it’s not your responsibility to make sure the venues submit a 1099 to you, but it is your responsibility to report the income even if they don’t.

Tracking your income by payer will help you at tax time. The tax prep software programs prompt you to enter your income by 1099 received, followed by income you received that didn’t produce a 1099.

Expenses: The following is a list of some business deductions that are available to you if you keep good records [This list is not meant to be comprehensive, but to give some suggestions for things that need special recordkeeping]:

Car and Truck--That is, either actual expense for gas, fuel and repairs used in connection with your business, or a mileage method based on actual miles driven for your business. Personal use of your auto does not count in either method. In 2002, the mileage deduction was 36.5 cents per mile. By taking this deduction you are stating that you have substantiated all the business miles driven. This goes back to Rule No. 2: Documentation. Get a little notebook, or the office supply places have actual mileage logs and track the miles. List the date, beginning and ending odometer reading, and the business destination.

Meals and Entertainment--Generally this deduction is limited by the IRS to 50% of the cost of allowable meal and entertainment expenses. Allowable expenses are defined as “either (1) directly related to the active conduct of a trade or business or (2) associated with such business if the expense is for entertainment directly before or after a substantial and bona fide business discussion.” [Source: Master Tax Guide 2002, Paragraph 910]. Of course, with the IRS there are usually exceptions to the rules. Two exceptions that do not allow you to take a deduction are (1) if neither the taxpayer nor the taxpayer’s employee is present at the meal, and (2) if the food and beverage are lavish or extravagant under the circumstances. One exception that does allow the deduction in full is for food and beverages for employees furnished on the business premises.

Home Office--This one gets a little tricky. According to the Master Tax Guide, “The place in the home must be used exclusively on a regular basis (1) as the principal place of any business carried on by the taxpayer, (2) as a place of business that is used by patients, clients or customers in meeting or dealing with the taxpayer in the normal course of business, or (3) in connection with the taxpayer’s business if the taxpayer is using a separate structure that is appurtenant to, but not attached to the home” [Source Master Tax Guide 2002, paragraph 961]. If you meet one of the above, you can continue thinking about a home office/studio deduction. The pro-rata portion of the utilities that apply to the square footage of the home office may be deductible. You may also be able to take depreciation, but please consult with your tax professional before making that determination.

Production Costs of Recorded Material-- Self-producing a project means that you have incurred the costs of the recording, production, mastering and manufacturing of that product. You need to know what the total cost of the project is because all of the costs associated with the production may need to be capitalized for tax purposes. This means that the cost of the production is written off for tax purposes under what is called the income forecast method. You estimate what you think the project will sell over its lifetime and then depreciate the production costs according to what percentage of this total it actually has sold during the year. These costs may have been incurred in two or more calendar years and therefore may have special rules for handling. This is another area where checking with a tax professional can give you the best tax advantage for your situation.

BOTTOM LINE

Any expense incurred in the operation of your business is probably a deductible expense, at least to some extent, as long as you have the proper receipts and documentation to substantiate the business nature of the expense. How easy it is to figure out what those expenses are depends largely on your recordkeeping skills.

Running your own business means taking care of all the parts of your business, and that includes good records. I hope the information provided here will help you feel more comfortable taking charge of your finances. Taxes can be very intimidating, but knowing you are properly prepared takes the worry out of tax season.

Don’t be afraid to ask questions. There are a number of websites that provide tax help, including www.irs.gov Use them to educate yourself and add value to your business. Ask questions of your tax professional to help you apply even greater information gathering in your recordkeeping.

You may not want to prepare your own tax return, but being prepared will save time for the tax professional you hire and will therefore save you money. I do believe in paying your fair share of taxes, but I do not believe in paying more taxes because you didn’t keep good records. After all, you’ve worked hard for your money--keep it. 

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