Musician Tax Time Questions

[ZonGuy]

Wondering if I dare declare a loss for music business income.

I made about $3K last year from music gigs (W2'd).

I bought $2K in equipment, plus $500 on misc supplies and sheet music.

I have $1K carry forward on a double bass I am expensing out over 7 years.

I drove 1000 miles on gig work plus rehearsals (1 job = 1 ensemble rehearsal + 1 performance on different days), plus 500 miles on shopping for supplies, repair shops etc.

Something inside me tells me I ought to report $0 income instead of a loss to play it safe.

Any thoughts?

[Febs]

Have you shown a profit for that music business in any of the past 3 years? If so, it shouldn't be a problem, though you should look carefully at what mileage is and is not deductible.

[KJung]

Originally Posted by Febs

Have you shown a profit for that music business in any of the past 3 years? If so, it shouldn't be a problem, though you should look carefully at what mileage is and is not deductible.

+1 The rule is that any 'second' business must show a profit in at least one of three years, or it is considered a 'hobby' by the IRS, and nothing is deductible. I'm not sure about primary or only income.

Also, there is no reason that you have to depreciate your DB over time, unless it cost more that the maximum 'all at once' deduction limit, which is now very high (can't remember... it's over $50K in a year, I believe).

So, if you are being honest about mileage, etc., and have receipts, and you turned a profit (even a small one) in the last couple of years, there is no reason to not take the deductions that are appropriate IMO.

EDIT: Hold on.... if you received a W-2 (i.e., you are an employee, not a contractor), you can't deduct anything as far as I know. If you received a 1099 (i.e. self employed), then you can file a schedule C. It sounds like you need to talk to an accountant!

[ZonGuy]

My bad, I meant 1099's, not W2's.

[KJung]

Originally Posted by ZonGuy

My bad, I meant 1099's, not W2's.

Cool. Then the above posts are accurate.

[WJGreer]

Originally Posted by KJung

if you received a W-2 (i.e., you are an employee, not a contractor), you can't deduct anything as far as I know.

You can deduct expenses for a W2 job to the extent that:

• The expenses are legally deductible
• Your employer does not reimburse you for the expenses

Some employers' expense reimbursement policies are more conservative than the IRS - mine is.

Originally Posted by KJung

The rule is that any 'second' business must show a profit in at least one of three years, or it is considered a 'hobby' by the IRS, and nothing is deductible. I'm not sure about primary or only income.

This is the rule I have been assuming true as well, and it sounds reasonable. But - I must point out that TurboTax has not said anything about it to me, ever, and that package has become very robust on those sorts of rules in the past few years. Can anyone confirm that this is in fact the tax law? No disrespect, Ken - like I said, I've been aware of this rule too and assume it to be true.

[Ed Fuqua]

There's been a lot of noise about the "profit/hobby" thang, the IRS has lost a number of cases where the business has been a break even sort of entity and the business owner has paid themselves a salary. It's been primarily horticultural businesses (greenhouses, landscaping etc.) that have led the way on this...

[tycobb73]

You can only deduct milage if you are going from one workplace to another. Home to workplace is not deductable unless home is alos a workplace and you were working at home before you left for the second workplace.

[WJGreer]

Originally Posted by tycobb73

You can only deduct milage if you are going from one workplace to another. Home to workplace is not deductable unless home is alos a workplace and you were working at home before you left for the second workplace.

You can't deduct mileage from your home to an office, but you can deduct mileage to a place that is not your office, but where you are situationally required to be as part of your job - gigs, client sites, and the like. And then, the IRS only allows you to take those deductions to the extent that the commute is further than your normal office commute. If you work from home, zero is normal, so you can deduct all of the mileage.

[KJung]

Originally Posted by WJGreer

You can deduct expenses for a W2 job to the extent that:

• The expenses are legally deductible
• Your employer does not reimburse you for the expenses

Some employers' expense reimbursement policies are more conservative than the IRS - mine is.


This is the rule I have been assuming true as well, and it sounds reasonable. But - I must point out that TurboTax has not said anything about it to me, ever, and that package has become very robust on those sorts of rules in the past few years. Can anyone confirm that this is in fact the tax law? No disrespect, Ken - like I said, I've been aware of this rule too and assume it to be true.

Per your point one, I am pretty sure the rule is that, in a W-2 situation, the expenses are 'required for you to do your job, but your employer doesn't provide for them'. That's a pretty high hurdle to reach.

Per you second point, my accountant says the one in three rule is still in existence, but if it is a second income (i.e., if you have a primary job and, in this case, music is a secondary job, i.e., either a second schedule C, or a schedule C combined with W-2 income), that the IRS has pretty much stopped looking at it.

Of course, if your primary job loses money year after year after year, it's pretty hard to justify that as a 'job'. However, getting audited is still a low probability if you have a spouse that earns income. However, if you are the only income provider, and show a loss or even break-even year after year after year, my guess is you need to plan for an audit.

This is all info I have gotten second hand from my VERY expensive accountant (who primarily is the accountant for my primary business, which I own).

Of course, all this should be checked with an accountant.

[KJung]

Originally Posted by Ed Fuqua

There's been a lot of noise about the "profit/hobby" thang, the IRS has lost a number of cases where the business has been a break even sort of entity and the business owner has paid themselves a salary. It's been primarily horticultural businesses (greenhouses, landscaping etc.) that have led the way on this...

That makes sense if you are a corporation. For an LLC (or just a guy/gal gigging with no 'company status' other than 'self employed'), I don't think that would fly, since 'salary' and 'income' are the same thing.

[ChrisB2]

You can't use a hobby loss to reduce other taxable income. But I'd like to clarify that you can deduct expenses from your hobby to offset income from it, resulting in zero taxes on the hobby income. Another post made it sound like you could not deduct them at all.

Like others have said, the only way to use the hobby loss to reduce taxes on other income is to show a profit some time or another. My understanding was that you have to have a profit 3 out of 5 years, but I could be wrong. Also, I think showing a small profit one year then a loss the next would be a red flag. Probably can't have losses exceed profits in any case, besides the whole concept just screams "AUDIT!", just like huge mileage and home office deductions. Just zero out your music income and be invisible and happy!

[KJung]

Originally Posted by ChrisB2

You can't use a hobby loss to reduce other taxable income. But I'd like to clarify that you can deduct expenses from your hobby to offset income from it, resulting in zero taxes on the hobby income. Another post made it sound like you could not deduct them at all.

Like others have said, the only way to use the hobby loss to reduce taxes on other income is to show a profit some time or another. My understanding was that you have to have a profit 3 out of 5 years, but I could be wrong. Also, I think showing a small profit one year then a loss the next would be a red flag. Probably can't have losses exceed profits in any case, besides the whole concept just screams "AUDIT!", just like huge mileage and home office deductions. Just zero out your music income and be invisible and happy!

Correct. If you manage your deductions so that you at least 'break even', then it's not considered a 'hobby' by the IRS, but rather a poorly performing business. If you show a loss year after year after year, then there is a chance they will negate the write-offs that resulted in a net loss.

However, depending on your situation, just zero-ing out your income every year, even if you made small profits some years and huge losses others, is just giving money away IMO.

I guess if it really is a 'hobby', this is all a moot point. However, if you are a professional player who every once in a while takes a hit when he/she buys new gear, you should take advantage of it within the limits of the law IMO!

[Febs]

Here is an IRS publication that provides guidance: http://www.irs.gov/irs/article/0,,id=186056,00.html

Originally Posted by IRS

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.

...

If an activity is not for profit, losses from that activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. It does not apply to corporations other than S corporations.

The publication gives a list of factors considered in determining whether an endeavor is a business or a hobby. However, it also provides:

An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).

So, if you have made a profit in at least three of the last five tax years, your endeavor is presumed to be for profit. If you have not made a profit in at least three of the last five tax years, it may still be a business for profit if you can establish the other factors listed in the publication.

[VroomVroom]

Originally Posted by KJung

Per you second point, my accountant says the one in three rule is still in existence, but if it is a second income (i.e., if you have a primary job and, in this case, music is a secondary job, i.e., either a second schedule C, or a schedule C combined with W-2 income), that the IRS has pretty much stopped looking at it.

FWIW, this is echoed by my accountant. And watch me jinx myself here, but I've shown a loss on music for six years running now, with no repercussions from the IRS. Since my day job pays the bills, so to speak, I've actually been advised to show a reasonable loss each year on music.

[ChrisB2]

Originally Posted by IRS

An activity is presumed for profit if it makes a profit in at least three of the last five tax years.

Yes! I was right!

[victorydance]



[/victorydance]


Thanks Febs!

[WJGreer]

Originally Posted by KJung

Per your point one, I am pretty sure the rule is that, in a W-2 situation, the expenses are 'required for you to do your job, but your employer doesn't provide for them'. That's a pretty high hurdle to reach.

Perhaps not so high, depending on the policy of your employer. As an example, mine has a somewhat arbitrary limitation on reimbursement for cellular phone expense - a ludicrous $25 monthly, even for outside sales guys like me. I am completely confident that the portion of my cell phone bill that is beyond that $25, and that represents business use, is deductible.

[jnewmark]

My situation has been for the last 15 years that, the manager ( and guitar player ) of the band pays the IRS upfront every year for all the $$ the band makes, and then, sends me ( us )1099's at the end of the tax year, for the amount that I individually made. I deduct everything I can think of that relates to me playing music, including mileage. I also have a primary job. I then turn everything over to an accountant. So far, so good - no audits!

[KJung]

Originally Posted by WJGreer

Perhaps not so high, depending on the policy of your employer. As an example, mine has a somewhat arbitrary limitation on reimbursement for cellular phone expense - a ludicrous $25 monthly, even for outside sales guys like me. I am completely confident that the portion of my cell phone bill that is beyond that $25, and that represents business use, is deductible.

+1, and with companies REALLY cutting back on stuff like cell phone reimbursement, I think you are right that there will be more 'legitimate' deductions for those who have W-2 income.