For All You Part Timers

tycobb73 · #1 10-22-2007, 11:00 AM

If your main income isn't from playing music, do you still fill out tax info on music related expenses and income? I've bought 2 basses, a head, cabinets, etc. Probably totalling $3000+. I'm an accountant and dont remember the hobby vs. business rules but could relearn them fairly quickly. But do any of you do this? Or should I just let it go? What are your experiences? I'm expecting it will be a long time before I recoup my investment since I only want to play out 4-5 times a month.

agreatheight · #2 10-22-2007, 11:11 AM

I *think* the rule goes something like this - you can call it a business if you are profitable three of five consectutive years, and legally it is a hobby if you aren't. Overall profitability doesn't matter.

NOTE: I am not an accountant or a lawyer, just a guy trying to remember what my acct told me when I started my business a few years back.

RiddimKing · #3 10-22-2007, 11:11 AM

You're the accountant... Seriously, I believe it's all about how you conduct yourself: if you treat the music like a business, with recordkeeping, membership in professional and business organizations, establishing a website, advertising for band members, attempting to secure paid gigs, etc., then you are entitled to write off expenses, even if they initially exceed your income from the business. Large corporations often spend millions on R&D, etc for years before they show a profit--it's all about how you do it that makes the difference between a hobby and a business.

tycobb73 · #4 10-22-2007, 04:22 PM

I am the accountant and can understand the rules easilly, but wanted some real world experiences to hear if it is worth it or what issues you've run into.

agreatheight · #5 10-22-2007, 04:58 PM

I don't bother. I am a part-timer playing maybe 30 - 50 / gigs year, and only a few pay well, lol. The amount of time it would take to write all that stuff up would likely negate any write off. It's not worth *my* time, plus I look at it as a hobby. If I looked at it as a business my focus might shift and make it less fun. Business is work (and you can't drink at work, lol). If I played more or made more money I might look at it differently. I might also look at it differently if my expenses were higher. So for now, I don't sweat it.

hbarcat · #6 10-22-2007, 08:38 PM

If you're counting your part time music performance and related expenses as "losses" in order to deduct from your taxable income from your full time job, then you need to follow some very strict rules. In particular, you have to tangibly demonstrate that you're serious about actually making money as a musician and need to be able to prove to the IRS that you're putting in the time and effort required to be profitable. This means you have to run your musicianship efforts as a genuine business with all that entails.

I've set up my own sole proprietorship just for the few gigs I do (I have a full time factory job), pretty much just to be able to account for money coming in from gigs and money going out for printing flyers and stuff, and also to keep it strictly legal. I don't bother deducting anything like equipment or mileage because I don't make squat as a musician these days and can't consider myself "serious" about the music biz right now. There's no way it would fly with the IRS.

Phalex · #7 10-23-2007, 06:23 AM

I claim everything I make. I don't want any trouble. I usually spend a thousand or more on new equipment and consumables for my income generating hobby, and I have yet to spend enough money to be able to write any of it off. If you find out anything different, by all means let me know. Matter of fact I'll be playing on Leonard St this weekend if you want to stop by and say howdy.

Tony G · #8 10-23-2007, 06:35 AM

I don't claim any music related expenses or income. I play out an average of twice a month, and get paid in cash. I have a day job and that is my income. I suppose if I played out and had to sign a contract and get a check, I might start claiming it on taxes, but that hasn't happend yet.

PSPookie · #9 10-23-2007, 06:42 AM

From Publication 17: You can generally deduct hobby expenses, but only up to the amount of hobby income.

I believe the 3 of 5 rule previously mentioned is also correct. If your hobby generates a net profit in 3 of 5 years then it is considered a business. Similarly, if your business has a net loss for 3 of 5 years it is considered a hobby.

I am not a CPA etc. but I did complete several of the HR Block courses and worked for a season as a tax preparer a few years back. I hope this helps.

Oh, yeah . . . if you do claim the gear, you will probably have to use a depreciation schedule.

unbasslichkeit · #10 10-23-2007, 02:59 PM

I filed Schedule C as an independent contractor for the first time in 1983, when I was playing more or less full-time. I've continued to do so every year since then, whether I've had a full time day job or not.

I've also been able to file C-EZ the last couple of years as I haven't bought any new (i.e. depreciable) equipment worth mentioning and my band income is within the filing limits.

So far, Uncle has not taken issue...

on edit: I just thought of an interesting question for the tax accountants -- If you buy a fully assembled P-Bass from a store, it's a depreciable item. If on the other hand you buy all the P-bass parts and either DIY or have a tech put a bass together for you, can you deduct the cost of the parts and labor individually, or do you still have to count it as a whole bass for tax purposes??

Matthew Bryson · #11 10-23-2007, 03:37 PM

I know somebody who's had some experience. The band in question is a serious hobby band with a web site (non myspace) and all that. This guys spends some serious money on gear. He does not feel that he can write off any gear this year (or in the future) because he already has one time in the past.

He did what we're talking about here - he legally made his music / band a "business" and wrote off a bunch of business expenses. The business did not even come close to making a profit, but who cares. He was still able to get a tax benefit from this unprofitable business.

The way he sees it, it's a one shot deal and he's already done it.

The thinking is that you can start up a business and lose money, nobody will think anything is strange. We can all do it once.

If you try to keep writing off music gear for your "business" that loses money year after year, yet you continue to invest in gear you might have to explain to an auditor what is going on.

I'm waiting for the year that I buy lots of nice new gear before I start my music business.

lpdeluxe · #12 10-23-2007, 04:50 PM

I don't make a bunch of money from music, but if I can take a loss from it to get a break on taxes, I'll do it. The hobby rule essentially means you can take a loss for 3 years, then it's no longer a business.

The hell of it is, very few of us, even someone like me in a working band with a more-or-less regular income, will EVER make back our investment in gear and all the other expenses.

If I drive 130 miles round trip with $1K worth of gear (not counting the PA, lighting system, and everyone else's stuff) to make $100, then I think it's worth while to calculate the mileage allowance and depreciation and repairs and strings and tuners and whatnot on the chance that I'll reduce my tax payment at the end of the year.

It sure makes ME feel better....

Bass Thunder · #13 10-23-2007, 09:21 PM

I think you have a couple of obstacles you need to understand and overcome.

1) Being an accountant you should already know that any magical "write off" goes to adjusted taxable income and not a tax credit. So the best you can do in your example is reduce taxable income by the $3,000 which would net out a tax savings of only $300-$1,000 approx (depending on your tax bracket and deducting $3,000 as a one-time expense).

2) For a bass player, your equipment would be a capital asset depreciated over a useful life (5 years?), not expensed in one year like "supplies". So the deductible depreciation expense drops to $600 per year over 5 years, for example, not $3,000. Now you're talking $60-$200 net tax savings.

3) Any business must have a "reasonable expectation" to earn money - that's what makes it a business and not a hobby. The longer you DON'T make money, the LESS reasonable your expectation becomes.

4) Self employed must also pay their own social security tax.

5) Schedule C is an IRS red flag.

6) You can deduct anything you want, as long as you're prepared for audits and penalties. You are responsible to back up any claims you make to the IRS.

I would say if you're just playing a few bar gigs a month, you may want to pocket the cash and call it a hobby.

This assumes you have other income and tax liabilities that need "write-offs".
Good Luck

Bass Thunder · #14 10-23-2007, 09:42 PM

Quote:

Originally Posted by unbasslichkeit

on edit: I just thought of an interesting question for the tax accountants -- If you buy a fully assembled P-Bass from a store, it's a depreciable item. If on the other hand you buy all the P-bass parts and either DIY or have a tech put a bass together for you, can you deduct the cost of the parts and labor individually, or do you still have to count it as a whole bass for tax purposes??

I'm not a tax accountant but I may be able to help you answer your own question.

A quick answer would probably be EITHER. Depending on your income and complexity, the parts could be "supplies" (because they are not functioning instruments) and the labor would be a separate cost. It may even go over easier with the IRS if you bought the supplies in 2 calendar years - Dec 31 and Jan 1 for example.

Or you could keep track of it all through a "Construction in Process" accounting. Basically a contra account to the finished asset. When the parts have been assembled with labor costs, the CIP is cleared and the capital asset debited, and start accumulated depreciation on the full value (parts + labor). You would probably have to discount the labor somewhat if you do it yourself.

QORC · #15 10-24-2007, 05:11 AM

Quote:

Originally Posted by tycobb73

If your main income isn't from playing music, do you still fill out tax info on music related expenses and income? I've bought 2 basses, a head, cabinets, etc. Probably totalling $3000+. I'm an accountant and dont remember the hobby vs. business rules but could relearn them fairly quickly. But do any of you do this? Or should I just let it go? What are your experiences? I'm expecting it will be a long time before I recoup my investment since I only want to play out 4-5 times a month.

absolutely. I keep track of all of it and report it. I would hate to be audited later

brianrost · #16 10-24-2007, 05:36 AM

Quote:

Originally Posted by tycobb73

If your main income isn't from playing music, do you still fill out tax info on music related expenses and income?

Yes.

Humabass · #17 10-24-2007, 06:11 AM

I receive a W-2 from the church I play at. Generally, what can I deduct and should I claim it as a business? I make significantly more than I spend on gear and supplies.

Chebass88 · #18 10-24-2007, 06:22 AM

I've heard & use the rule that if you earn under $600 per year, you don't need to fill anything out. You can operate at a loss for 3 years, but after that, it begins to be scrutinized. I just leave all of it blank.

KJung · #19 10-24-2007, 07:02 AM

Quote:

Originally Posted by RiddimKing

You're the accountant... Seriously, I believe it's all about how you conduct yourself: if you treat the music like a business, with recordkeeping, membership in professional and business organizations, establishing a website, advertising for band members, attempting to secure paid gigs, etc., then you are entitled to write off expenses, even if they initially exceed your income from the business. Large corporations often spend millions on R&D, etc for years before they show a profit--it's all about how you do it that makes the difference between a hobby and a business.

This is not true unfortunately. As was posted above, a 'business' is one that makes a profit at least once every three years (I think that is the IRS rule), regardless of the total amount, or whether you are 'professional'. As long as you make a minimal profit every few years after all write-offs, then your playing (part time, full time, bad or good) is considered a business by the IRS.

It also does not matter if playing is your primary business or not... you just file a separate schedule C in your return.

KJung · #20 10-24-2007, 07:07 AM

Quote:

Originally Posted by Humabass

I receive a W-2 from the church I play at. Generally, what can I deduct and should I claim it as a business? I make significantly more than I spend on gear and supplies.

Now that's interesting. Since you receive a W-2, you are an employee and do not own your own business. So, I'm not sure you can deduct anything, unless you can prove that it is a 'business necessity that is required but not provided by your job' (try to prove that one in an audit

). If you are a contractor (i.e., a freelance musician, or part of a band that splits up the money), then you would be 'self employed' and would have the opportunity for business deductions.

A couple of other things have changed over the past 10 years that make it much easier to deduct stuff for those of us that make a reasonable amount of money playing:

1) You can completely deduct your gear purchases in the year that you purchase them... no more depreciation (I think up to $30K... they might have raised it even higher now). Nice!

2) The rules for deducting a portion of your mortgage, etc. for a 'home office' has been very much relaxed. It is now seen as reasonable for a musician to deduct a small part of his/her house expenses the same as a 'home office' for a self employed business person working out of the home.

Of course, check with your accountant to verify the above, but my accountant keeps pretty much up to speed with all this stuff, so I'm pretty sure all of the above is correct.