Musician business type and deductions question.

[stflbn]

I've always been part of very casual bands, or at least since the late 80's/90's when I was doing much more gigging.

Now I'm part of a country/cover band that will be gigging 3-4 or more times a month (still casual by many players standards). I plan to report all income from these gigs and keep good records/receipts.

In the next couple weeks I'll be sinking about $5,000 into a PA for the band. Based on this, can this P.A., mileage, strings, etc be deducted from my taxes at the end of the year? Is this best done just as an addition to my normal personal taxes? Best to start a Sole Propriatership? Other option?


Any suggestions or experienced guidance is appreciated.


(I've been wondering if maybe there should be a music business forum here for this type of post)
.

[KJung]

Yes, you can deduct everything in the year you purchased it, as long as you declare it as 'self employed income' on your tax return, and file a schedule C.

Nothing needs to be depreciated any more (they changed that rule a number of years ago, so everything up to a very high dollar amount... I think well over $30,000) can be deducted totally in the year it was purchased. There is still a '7 year rule' for selling items you deducted (i.e., an item isn't fully depreciated until after 7 years of use, so technically, if you sell that PA in a few years, you would owe a small amount of capital gains on the residual value).

There is a 'rule' that you need to show a 'profit' (it used to be one out of three years) in order for the 'business' to be considered legitimate, but I understand that is pretty loose as long as you have a day gig and pay a bunch of taxes anyway.

There are not tax advantages to creating an LLC, etc., and you probably wouldn't want to go through the hassle of incorporation for the small amoung of money we are talking about.

So, yes, equipment, strings, cables, mileage, dry cleaning and purchase of business clothes like tuxes and work shoes, etc. is deductible on a separate schedule C.

Of course, consult a professional for the exact details. The tax laws change a lot. The 'grey area' is still deducting part of your home expenses for rehearsal space, etc. I'd probably stay away from that if music isn't your primary income.

[stflbn]

Excellent.

My wife has also started a secondary home based business selling jewelry so she'll be deducting internet, home space, etc. No need for me to go that far with mine. I'm not looking to exploit anything... just want to take best advantage of what I can seeing as how I know I'll be making some equipment purchases and such.

[tycobb73]

Everything Kjung said is correct except you do report depreciation. The regualr type of dpreciaton that all businesses use, either straight line, 1.5 declining balance, or double declining balance. The rest is Section 179 depreciation, up to the amount you purchased. Depreciaiton is used for big items only. Smaller items like strings are expensed.

Wether or not you start an actual business is going to determine how you handle it on your taxes. If you form an LLC you can deduct all of your purchases in the first year under what I stated above. But the IRS will become very suspicious if you're not making a profit after 5 years. You can form an LLC for as little as $50. Its easier than everyone thinks. If you don't start a business and keep it as a hobby, you file what is called a schedule C. The thing about hobbies is that you can only declare expenses up to income. If you bought a $5000 PA and only make $3000 that year, you can only deduct $3000 of your PA and other expenses. Because of this it will be more advantagous to depreciate the PA over the expected life, which I'm guessing by kjung's statement above is 7 years for music equipment.

It may sound confusing to anyone not educated in accounting but it is very elementary to us accountants and any CPA should be able to hlep you. In this case you don't need a huge firm. The local guy with the small building in town cna easily handle this.

[KJung]

Originally Posted by tycobb73

Everything Kjung said is correct except you do report depreciation. The regualr type of dpreciaton that all businesses use, either straight line, 1.5 declining balance, or double declining balance. The rest is Section 179 depreciation, up to the amount you purchased. Depreciaiton is used for big items only. Smaller items like strings are expensed.

Wether or not you start an actual business is going to determine how you handle it on your taxes. If you form an LLC you can deduct all of your purchases in the first year under what I stated above. But the IRS will become very suspicious if you're not making a profit after 5 years. You can form an LLC for as little as $50. Its easier than everyone thinks. If you don't start a business and keep it as a hobby, you file what is called a schedule C. The thing about hobbies is that you can only declare expenses up to income. If you bought a $5000 PA and only make $3000 that year, you can only deduct $3000 of your PA and other expenses. Because of this it will be more advantagous to depreciate the PA over the expected life, which I'm guessing by kjung's statement above is 7 years for music equipment.

It may sound confusing to anyone not educated in accounting but it is very elementary to us accountants and any CPA should be able to hlep you. In this case you don't need a huge firm. The local guy with the small building in town cna easily handle this.

This is not correct.

1) Doing an LLC has nothing to do with starting a business. It is not necessary, and has no tax implications whatsoever. The only thing you need to do to 'start a business' is file a schedule C and declare the income as 'self employed income' on your tax return. An LLC is a good idea to protect against lawsuits, but that isn't much of an issue in the music performance business (unless you REALLY suck!).

2) There is NO depreciation for large items (up to around $30,000) any more. That rule was changed around 10 years ago. If you buy $20,000 of basses and amps, you can deduct all $20,000 in the year it was purchased. You are correct though, that anything over the maximum amount (again, it was $30,000 the last time I looked, I believe it is even higher now) needs to be depreciated, but a musician would never reach that level to have to calculate depreciation. So, there is no difference between large items and 'supplies any more', other that there IS some residual value that has to be taken into account if you sell the equipment within 7 years. (minimal capital gains tax).

[tycobb73]

Sorry, but as an accountant I have to disagree. You need to show 179 depreciation. This goes up to $250,000 and real estate is excluded. I just did the for the gentlemen that video tapes all the Grand Rapids Griffins games and has very expensive camera equipment.

If he files an scheudle C and claims it as a hobby he can only file expenses up to his income.

[KJung]

Originally Posted by tycobb73

Sorry, but as an accountant I have to disagree. You need to show 179 depreciation. This goes up to $250,000 and real estate is excluded.

If he files an scheudle C and claims it as a hobby he can only file expenses up to his income.

+1 on the hobby part... correct. As long as you make a profit in one out of 3 (or 5 years... can't remember), then it is not a hobby. Correct, if you spend more than you make every year (year after year), it is a hobby and the rules change. My point was, you surely don't have to set up an LLC to be considered a business. An LLC has no impact on taxes whatsoever, as far as I know, and is purely a 'protection for personal non-business assets' type thing.. which is a good idea in any event). My consulting business is an LLC, but my music business is not. I file two separate schedule C's for each 'business'.

I'm probably not using my terms right, since I am not an accountant. The point is, if you buy equipment that is worth less than around $30K a year, as of around 1998, you no longer have to extend those deductions out over time... ALL of the cost can be taken in the first year. I am 100% sure of that, since it was a HUGE deal for small businesses like mine (both music and my consulting business, that buys computers most years, etc.). I assume you still have to CACULATE the 7 year depreciation schedules in order to calculate the capital gains owed on the sale of 'non fully depreciated' equipment. However, the WRITE-OFF can be taken completely in the first year.

K

[tycobb73]

Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179), allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes, as an expense (rather than requiring the property to be capitalized and depreciated). This property is generally limited to tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business.[1] Buildings are not eligible for section 179 deductions.[2] Depreciable property that is not eligible for a section 179 deduction is still deductible over a number of years through MACRS depreciation according to sections 167 and 168. The 179 election is NOT mandatory, and the equipment may be depreciated according to sections 167 and 168 if preferable for tax reasons.[3] Further, the 179 election may only be taken in the year the equipment is placed in use and is waived if not taken in that year.[4] However, if the election is taken, it is irrevocable unless special permission is given.[5]

The accountant before me in another business did this with about 5 vehicles. This law is newer than 10 years. Under this method you show 179 depreciation on your tax forms in its own catagory. However, I forgot that this too is only usable up to income. So either way he is depreciating only what he made. Therefore, if I was him I'd start an LLC and depreciate using the double declining balance method unless he's going to make more than the cost of hte PA in the first year.

[KJung]

Originally Posted by tycobb73

Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179), allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes, as an expense (rather than requiring the property to be capitalized and depreciated). This property is generally limited to tangible, depreciable, personal property which is acquired for use in the active conduct of a trade or business.[1] Buildings are not eligible for section 179 deductions.[2] Depreciable property that is not eligible for a section 179 deduction is still deductible over a number of years through MACRS depreciation according to sections 167 and 168. The 179 election is NOT mandatory, and the equipment may be depreciated according to sections 167 and 168 if preferable for tax reasons.[3] Further, the 179 election may only be taken in the year the equipment is placed in use and is waived if not taken in that year.[4] However, if the election is taken, it is irrevocable unless special permission is given.[5]

The accountant before me in another business did this with about 5 vehicles. This law is newer than 10 years. Under this method you show 179 depreciation on your tax forms in its own catagory. However, I forgot that this too is only usable up to income. So either way he is depreciating only what he made. Therefore, if I was him I'd start an LLC and depreciate using the double declining balance method unless he's going to make more than the cost of hte PA in the first year.

I forgot the exact year, but it was fairly recent. It's a HUGE change for small business, and a very welcome one!

The key is, I believe he can deduct the entire $5000 the first year (EDIT:... maybe the 'first year' thing is what I'm wrong about),and you are right... assuming he makes a profit within at least a couple of years, which makes him a 'legitimate business' in the eyes of the IRS, allowing him to take some losses in some years). Again, starting an 'LLC' has NOTHING to do with anything regarding the government considering you a 'business or hobby'. I can see no reason why an independent contractor in the music business would need an LLC (which again only impacts liability regarding non business owned assets, which is kind of a moot point for a gigging side man), but it surely wouldn't 'hurt'. However, it is not needed for filing Schedule C deductions, as far as I know.

Of course, he needs to work with an accountant (as I do) to make sure his specific situation is handled correctly. The fact that it will be his 'first year' in business might be what is resulting in the different ways we are looking at this. I've been filing schedule C's since the 70's, so am not up to speed on the 'first year', which might be a bit different involving 'taking a loss' as you state above. I surely remember the days of having to calculate depreciation on amps and basses, etc., but that stopped a while back with that change in the law.

[()smoke()]

so, to further clarify this idea (since it seems the OP has the answer to the question now)

if one considers and files as a 'hobby', one can deduct only up to the amount one actually makes from the hobby--ie, if one makes $1000 in a year, buys $2000 worth of gear, he/she can deduct $1000 of the gear expense to effectively negate any income tax owed on the $1000 he/she earned, correct?

...but if one starts and files as a 'business', one can deduct the full amount of business-related expenses--ie, if one's business earns $1000 in a year, and buys $2000 worth of gear, the person can claim a deduction of $2000? but what is this deducted from? does it apply as a deduction to one's combined income from this business and a 'day job' or other businesses?

thanks for any input, you guys seem to have this stuff down pat, and i this was something i didn't quite understand from the posts so far

[tycobb73]

He can only deduct up to what he meakes unless he uses straight line, 1.5 declining, or double declining balance depreciation and he is an LLC. If he is going to classify it as hobby income, he can lony expense up to his income. Therefore, whether or not he calls it a hobby has tax implications. What you did 10 years ago and the laws of today are different. I don't know what the laws were 10 years ago buecause I was just starting my masters in accounting. But people just don't blindly write off $30,000 worth of stuff. They classify things into Section 179 depreciation and you can do this up to $250,000.

For $50 I tell everyone to become some form of corporation, if only an LLC. Lets say he was jumping around stage and fell into someone in the crownd. This person hit the floor and broke thier leg. Longshot I know, but it could happen. He could get sued for a few thousand dollars. If its a business and the business doesn't have a few thousand dolars of assets, then the person won't get it.

I work for a guy who used to work for a big automotive repair franchise. Unfortunately his wife needed a kidney trasplant. Accrued 10's of thousands in medical bills. Sued the employer for being dropped from the insurance when it wasn't right. It was clear they were goniig to win the case. So before the case was over, the emplyer disolved the LLC and to this day the medical bills go unpaid. If this employer was just using a DBA the employee would own the employer's house along with everytihng else. Pint is, you never know what can happen and $50 is a small price to pay to insure your personal asets.

[tycobb73]

Smoke:

Hobby expenses are capped aagains hobby income

Section 179 expense is capped by business income

The business can report a loss if a normal depreciaion is used. If thie business is an LLC taxed as an S corp or an S corp itself, this loss will move over to the person's 1040 and can be taken against personal income. If he is a schedule C corp or an LLC taxed as a schedule C the loss stays with the business and is carried back or forward a certain number of years that hey just changed and I can't recall right now.

[KJung]

Originally Posted by tycobb73

He can only deduct up to what he meakes unless he uses straight line, 1.5 declining, or double declining balance depreciation and he is an LLC. If he is going to classify it as hobby income, he can lony expense up to his income. Therefore, whether or not he calls it a hobby has tax implications. What you did 10 years ago and the laos of today are different. I don't know what the laws were 10 years ago buecause I was just starting my masters in accounting. But people just don't blindly write off $30,000 worth of stuff. They classify things into Section 179 depreciation and you can do this up to $250,000.

For $50 I tell everyone to become some form of corporation, if only an LLC. Lets say he was jumping around stage and fell into someone in the crownd. This person hit the floor and broke thier leg. Longshot I know, but it could happen. He could get sued for a few thousand dollars. If its a business and the business doesn't have a few thousand dolars of assets, then the person won't get it.

I work for a guy who used to work for a big automotive repair franchise. Unfortunately his wife needed a kidney trasplant. Accrued 10's of thousands in medical bills. It was clear they were goniig to win the case. So before the case was over, the emplyer disolved the LLC and to this day the medical bills go unpaid. If this employer was just using a DBA the employee would own the employer's house along with everytihng else. Pint is, you never know what can happen and $50 is a small price to pay to insure your personal asets.

+1 Again, an LLC is a good idea. You DO NOT need an LLC or corporation to file a schedule C as a business. I'm not sure how else to say it. An LLC has NO tax implications whatsoever. (your comment on your last post about 'being taxed as an s-corp makes sense, but again, has nothing to do with being an LLC or not, from what I understand).

Your point about LIABILITY protection is a good one though (and your medical bill example is reason enough to pony up the $50), and I agree, although the risk is very small in the music business.

Of course, if you classify your income as a hobby, things change. All you have to do is classify as a business, file a separate schedule C, and then again (I am 100% postive on this, since this is what my VERY expensive accounting firm does) is write off moderate equipment expenses up to around $30,000 a year (which of course, most of us never even get close to). If that results in a loss for any given year, no problem, as long as you don't have loss after loss after loss, for years in a row. That would indicated that even though you SAY you are a business (LLC or not) the IRS will determine FOR YOU that you are NOT a business (since no business can stay in business year after year and never show a profit).

Again, not sure about 'blindly' writing stuff off, but if you purchase two Sadowsky basses this year, for a combined total of $8,000, and you have $5,000 in 1099 income from music performance and/or teaching, you have a $3,000 deduction for 2009 (how that $3,000 is handled depends on if you have other businesses or W-2 income). Do that four years in a row, and the IRS will come calling. You DO NOT have to write off 20% the first year, 18% the next, etc., like the 'old days' of depreciation schedules even for small equipment purchases, prior to the rule/law being changed.

Just making sure the general correct info gets out there. Again, for the typical music gear purchases, a $5,000 bass is handled very similarly to a $30 set of strings in that you can write off the entire amount, and as long as you hold it 7 years or more, there isn't any residual capital gains when selling it as a 'used' piece of equipment.

There are some exceptions. For some reason, a large software purchase is handled different, and still needs to be depreciated (i.e., deducted over a period of years). However, I think they might have even changed that rule.


EDIT: TO THE OP... you should use the info in this thread as a STARTING POINT to discuss these issues with YOUR accountant. It's amazing how complicated this stuff is. I am not an accountant, but spend a lot of time discussing these issues with the accounting firm that handles my primary business, so I've developed an interest in it. The issues for each individual are so different, and the rules so complex, that you really need to have a professional who knows your entire situation take a look at the whole picture.
K

[crijan]

I use Turbo Tax to manage my Schedule C business info and it keeps track of what equipment I've bought and when I've retired it, etc for depreciation reasons. It apparently defaults to the Section 179 since it's been including the total amount in the year of purchase on my returns (for the equipment I've bought in the past three or four years).

[KJung]

Originally Posted by crijan

I use Turbo Tax to manage my Schedule C business info and it keeps track of what equipment I've bought and when I've retired it, etc for depreciation reasons. It apparently defaults to the Section 179 since it's been including the total amount in the year of purchase on my returns (for the equipment I've bought in the past three or four years).

+1!

[cabrego]

The best thing I have learned over the years is for one person to be responsible for all income the band makes. Have all your band members fill out tax forms and issue them 1099s at the end of the year. In my past bands we used to take turns signing at different bars, but the only way to split it fairly is the way I described. It makes you look like an employer on paper, but at least you don't have to pay taxes on money you didn't make. When dealing with the IRS one time, the service rep said if the money wasn't reported she wouldn't claim it. To me there is no sense in claiming income if it is from a wedding or party that you will never play for again. Especially if they have no intention of reporting what they paid you.

[stflbn]

Just FYI... everyone i've talked to this morning is saying basically the same thing as KJung. At least here in Tennessee.

Sounds like it can be written off the first year with no realistic limit for a part time player as long as I have some other kind of ongoing employment that's the typical W2, etc. Which I do.


.

[()smoke()]

thanks, that clears it up perfectly!

Originally Posted by tycobb73

Smoke:

Hobby expenses are capped aagains hobby income

Section 179 expense is capped by business income

The business can report a loss if a normal depreciaion is used. If thie business is an LLC taxed as an S corp or an S corp itself, this loss will move over to the person's 1040 and can be taken against personal income. If he is a schedule C corp or an LLC taxed as a schedule C the loss stays with the business and is carried back or forward a certain number of years that hey just changed and I can't recall right now.

[tycobb73]

I'd be willing to bet that if Kjung looked at the tax returns he'd see what he think is being expensed classified at Section 179 income. It is depreciated in the year you bought it, which is the same thing as saying it is expensed for tax purposes. But you report it as depreciation, not expense. You must keep but not file all the assets you have and how you depreciated them. If you electronicly file you give the IRS everything, which is why I never electronicly file business returns.

[KJung]

Originally Posted by tycobb73

I'd be willing to bet that if Kjung looked at the tax returns he'd see what he think is being expensed classified at Section 179 income. It is depreciated in the year you bought it, which is the same thing as saying it is expensed for tax purposes. But you report it as depreciation, not expense. You must keep but not file all the assets you have and how you depreciated them. If you electronicly file you give the IRS everything, which is why I never electronicly file business returns.

+1 That's why I posted above that we were probably saying the same thing in a different way (with you being more technically correct, of course).

The key point is that, call it what you want (write-off or a 'one year depreciation' or whatever), you can take the entire cost of your gear as a 'deduction' in the year you bought it, which is quite different from the way it used to be, when you had to take a little part of the total value each year over a number of years.