Tax Deductions for Musicians

As featured in: Performing Songwriter, May 2004.  Visit performingsongwriter.com to order back issues or subscribe.

By Beverly Bartsch

The other night I was at a party celebrating a friend’s milestone birthday—just 40! Several of the party attendees were selfemployed, and the conversation turned to taxes. One gentleman had suffered the horrible loss of his wife and daughter in a car accident, and the years that have followed have been very hard on him. I don’t know his whole story, but as we talked, he asked the question, “What do I do if I haven’t filed a tax return in a few years?” While I’d like to believe the IRS has compassion, it’s not widely documented that it does, so the best advice offered was to come clean: Go ahead and file those prior years’ tax returns.

If you are self-employed instead of having a paycheck with taxes withheld, how do you know if you actually need to file a tax return? I’ve referred to it before, this handy reference called the U.S. Master Tax Guide, and I’ve distilled much of the information in this article from it.

According to p. 109, a tax return must be prepared for those citizens or resident aliens who have met the specified minimum amount of gross income shown in the chart below:

There are a lot of “ifs” that follow this chart. For instance, for a married couple filing joint returns that do not share the same household as of the end of tax year, the rules all change.

However, for most musicians, singersongwriters or others like my friend who are self-employed, there is one criteria of importance: An individual is required to file a return if net earnings from self-employment in the previous year are at least $400.

That “if” statement is based on an individual’s net earnings. Net earnings are gross income less any allowed deductions. So what are allowable tax deductions? Chapter 9 of the U.S. Master Tax Guide goes into the specifics, but here’s a list to get you started (as always, I want to remind you to consult with your tax professional regarding your specific needs.)

Ordinary and necessary expenses- An expense is “ordinary” if it is one that is common in the particular business activity, and “necessary” if it is appropriate and helpful to the taxpayer’s business.

Capital expenses- These are the big ticket purchases such as gear. Generally these are deducted by means of depreciation.

Compensation paid- This is defined as paying the salaries or other compensation for personal services of those in the taxpayer’s employ. Compensation paid to a relative is deductible if the relative performs services or job functions that would otherwise be performed by an unrelated party. This deduction is limited to the amount that would have been paid to a third party. Let’s say you hired your extremely talented 16-year-old daughter to be the merchandise vendor during your 2003 summer tour. You could have hired somebody at the rate of $250 per show. Instead, you’re paying your daughter $250 per show. That’s a legitimate expense for your business. If you paid her $1,000 per show, that amount could be labeled excessive and may be excluded up to $750.

Employer payroll taxes- Social Security, Medicare taxes and federal unemployment taxes—after the application of any state credits—are deductible as a business expense. Also deductible are state unemployment insurance premiums.

Entertainment and meals expenses- Generally only 50 percent of allowable meal and entertainment expenses are deductible. An expense is allowable if it is “directly related to the active conduct of a trade or business” or is associated with the business by being an expense for “entertainment that directly proceeds or follows a substantial and bona fide business discussion” [Guide, p. 910].

Business gifts- These gifts are limited to $25 per recipient per year. Giving your band members $50 gift certificates to a local restaurant means that only one-half of your gift is a tax deduction.

Interest expense- Interest “incurred in a trade or business or in the production of rental or royalty income is deductible from gross income” [Guide, p. 937].

Transportation and car expenses- Basically, miles traveled for business are deductible, except for commuting miles. If you travel to the same office day in and day out, those miles are not deductible, however if you run to pick up gear or drop off a demo, and those miles are in excess of your normal commute, then those would be deductible, as long as they are not reimbursed to you. There are two methods for the deduction: actual expense for gas, fuel and repairs used in connection with your business, or mileage method based on actual miles driven for your business. Personal use of your auto does not count in either method. In 2004, the mileage deduction is 37.5 cents per mile. By taking this deduction you are stating that you have substantiated all the business miles driven. Get a little notebook- or the office supply stores have actual mileage logs that help you track miles- list the date, beginning and ending odometer reading, and the business destination and purpose. The business portion of tolls and parking fees may also be deducted.

Home office/studio expenses- 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” [Guide, 2004, p. 9611. 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 applies to the square footage of the home office may be deductible.

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. The cost of the production is written off for tax purposes under the income forecast method, in which 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.

Fire and casualty insurance premiums- These are deductible as ordinary and necessary expenses (and yes, you should have your gear insured!).

Legal expenses- Fees related to legal representation for contract negotiations and other legal representation in the course of business are deductible; litigation does not need to be involved.

Tax return preparation fees- The portion that is attributable to the business is deductible.

As I’ve mentioned before, the key to finding and taking tax deductions is keeping good records and having a tax professional who understands your business and can make sure you actually get to use those deductions.

Granted, a party isn’t usually the place one talks about taxes and tax deductions, but knowing my friend now has a bit more information to help him get the tax-return black cloud removed- that’s worth celebrating. If you have put off handling your taxes, do it now, before another year gets added to the pile of “I don’t want to deal with this.” The sooner you do, the sooner you too can celebrate.