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Tax question

Discussion in 'Band Management [BG]' started by PinkFloydDan, Feb 9, 2006.

  1. PinkFloydDan


    Jul 4, 2005
    I just joined a band that is incorporated so to speak--meaning the two main band members tax their income and write off expenses. We also operate two music festivals.

    I joined in January 2006. I am wondering, can I write off all my 2005 expenses this year considering I use my spare bedroom as a "practice space" and have been practicing regularly to get into a band that gigs regularly. In was in a prior band that I would not consider a business and we made $100 bucks each for a few gigs. I would report it if I do this, but my expenses were $3,000 (new amp, cabs, bass).

    This is not a hobby anymore as I want to make a strong go at this. I also plan to take pro lessons, etc to boost my knowledge.

    I should be able to report a profit in 2006, because I don't need to buy anything.

    Would it be an error to write off this stuff for this year's taxes? Any advice? I don't want to go to a tax professional, because I beleive I can do this pretty easily through a tax computer program online I have used the last three years--TurboTax.

    But, I don't want to get myself in trouble. Do I just save the receipts and can I write all of this 2005 stuff in 2006?

    2. DO I need to bring in a certain amount of money before the IRS calls this a hobby still? Just wondering if I report an income of $1000 for the year, after all deductions, is that not going to fly? It won't be $10000 profit, but it might be $5000. Who knows. We charge about $350 per gig and we have gigs set almost every weekend starting in March, plus more. Some gigs we are getting more.

    Thanks for any help.
  2. jive1

    jive1 Moderator Staff Member Supporting Member Commercial User

    Jan 16, 2003
    Owner/Retailer: Jive Sound
    Here's a simple rule of thumb to go by:
    If you can substantiate it with written documents, and the savings in tax is worth a potential audit if you get a red flag, then write it off. If everything is on the up-and-up, then there's little to worry about. But if you're fudging around, then really think about what you're risking compared to what you're getting.

    Writing off the spare bedroom?
    Home offices are no longer automatic red flags for the IRS. But, if you use it for purposes other than business, it's a no-no. If you use it as a spare bedroom to house guests, then it's off limits for writing off. You need to have a dedicated part of the house in order for it to be written off. If it's a dedicated section, then you can calculate the square footage of the section, divide it by the total square footage of your entire home to get a percentage. You can then apply that percentage to your rent and utilities to get your write off. For example, if a room takes up 20% of your home, then 20% of your rent and utilities are eligible for write off.

    The general rule for what can be written off is - if it's money spent in the EFFORT to make income then you can write it off. Succeeding in making money isn't the criteria, it's the desire to do so. So lessons, CDs of material you learn, stage costumes, etc. can be written off.

    You don't need to make a certain amount of money in order for it to be considered a hobby. The thing that defines a hobby is how many consecutive years you lose money at it. The laws change, but a good rule is that if you aren't making money in 3-5 years, then you should claim it as a hobby expense. A hobby isn't bad, but it limits your write off to the amount of money you earned. For example, if you spent $5000 to make $3000, $3000 is all you can write off.

    Since it's your first year in business, the IRS will be more lenient towards you.

    I would check with a qualified pro to get better details since tax laws change every year. Especially because I'm a bass player not an accountant.;)
  3. PinkFloydDan


    Jul 4, 2005
    Thank you. The room is dedicated to music--my PC, Ipod, Cds, bass, and practice amp are all that is in there.

    One question I do have: So I can write off my 2005 expenses now, on my own, and not through this current band?

    I doubt I will write off the "room" but I would like to write off the $3,000 in equipment and other expenses that might bring it to $5000. Plus for 2006, I travel 51 miles to jam with this band one way. I want to write off the gas.

    It's not a hobby anymore. I have been practicing 1-3 hours a day and sometimes more. I jam with these guys 3 x a week and we have gigs set up for a lot of the year starting in March.

    I will check into this more, but it appears I am safe doing this. But, can you answer the above question?

  4. xonebass


    Feb 17, 2005
    Orange, CA
    If you feel you can substantiate last years expenses as being legit then you should consider deducting them. If you're unsure or feel you can't meet the requirements then you shouldn't. Also be prepared for the time and hassle of being audited. As a former accountant I can tell you that the number of audits raise exponentially for those who are sole-proprietors or small businesses. That's just the way it is. So have all your documents ready and organized - just in case.

    When it comes to the IRS there aren't any hard and fast answers but the following guidelines should keep you out of hot water.

    Hobby vs. business

    The Internal Revenue Service defines a hobby as an activity you pursue without expecting to make a taxable profit. Basically, you do it because you like it, regardless of the cost.

    But if you demonstrate that you are involved in an activity with the expectation of making money on it, the IRS will consider it a business. As such, you'll be able to deduct expenses directly from your income. You even can deduct overall business losses in the years you don't turn a profit.

    You must, however, make the right moves to convince the IRS that your sideline is a legitimate business.

    What constitutes a business

    The IRS uses two tests in determining whether your activity is a business rather than a hobby.

    First, the profit test demands that you show you earned money on the activity in three out of five years.

    If you can't meet the profits test, you get another chance to convince the IRS that you are running a business by passing the factors-and-circumstance test. Here, the tax agency takes a subjective, individualized look at your pursuit. Basically, the IRS examines:

    Whether you carry on the activity in a business-like manner. This includes, for example, keeping good books and records, promoting your business and holding down costs where possible.

    How much time and effort you devote to the enterprise.
    Whether you depend on income from the activity for your livelihood.

    If your losses are due to circumstances beyond your control or are normal for a business in its start-up phase.

    Whether you change your methods of operation in an attempt to improve profitability.

    The knowledge and background you (or your advisers) have in running such a business.

    If you were successful in making a profit in similar activities in the past.

    Whether the activity makes a profit in some years and, if so, how much.

    Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

    The element of personal pleasure involved in the activity. That doesn't mean you can't enjoy your new business, but you better be getting more out of it than just a good time.

    The IRS looks at everything

    In determining whether you are carrying on an activity for profit, the IRS says all the facts are taken into account. No one factor alone is decisive. So be prepared to come through in several areas to convince the IRS that you're making a good-faith attempt to run a business and not just looking to illegally claim the more-expansive business tax breaks.

    By successfully transforming your hobby into a business, you'll be able to deduct your associated expenses on Schedule C or C-EZ without worrying about a percentage limitation. You might even find a few more you can take, such as one for the home office you set up to take care of your new endeavor's administrative chores.

    And if you have an occasional year where you lose money, the loss can help reduce your other income and lower your tax bill.
  5. jive1

    jive1 Moderator Staff Member Supporting Member Commercial User

    Jan 16, 2003
    Owner/Retailer: Jive Sound
    Yes you can. You can write off anything, it's a matter of selling it to the IRS. ;)

    Seriously, as long as things are documented and done in good faith, I don't see why they can't be a write off. For example, if you bought the equipment in the fall with the anticipation of earning an income in the following year, then it works regardless of the business you are in. Expenses and revenue do not have to be in the same year.

    On the other hand, if you bought the stuff in Jan 05, and didn't earn until the following year, it would look suspicious. If there is a lag time, then have documentation that you are acting in good faith. For example, a business or financial plan with milestones for expenditures or phases of development might help.

    The key thing is that you are earnestly engaged in a money making adventure and have the documentation to prove that you are pursuing it in good faith.
  6. Steve


    Aug 10, 2001
    Google up Donnie Castleman and ask him.

    He's a tax accountant and monster bass player from Vegas. He saved me and my whole band a TON of dough.
  7. I've got a lecturer at uni who does all this rebate stuff...he even gets his mobile phone bills back (well...of COURSE the mobiles ONLY for business!
  8. Dkerwood


    Aug 5, 2005
    Don't you have to be registered as a business to write this stuff off? And don't you have to claim and substantiate SOME profits from your "business"?

    I'd think that the IRS would question me writing off $5000 worth of PA and $3000 worth of travel expenses... and not reporting a single penny of income...

    Too bad the IRS doesn't understand the idea of a business simply sustaining itself, rather than making a lot of money.
  9. Sippy


    Aug 1, 2005
    you do report the income to the IRS,I don't think you have to register yourself as a professional bass player.
  10. jive1

    jive1 Moderator Staff Member Supporting Member Commercial User

    Jan 16, 2003
    Owner/Retailer: Jive Sound
    Registering your business is mainly for state tax purposes. The main reason why you need to register your business for the federal level is if you have employees. In short, if you made money, you need to report it's regardless of whether or not you're a business.

    And as far a needing to have a profit, the main thing they are looking for is the desire to make a profit. It's not just the successful business that take deductions. Fledgling and collapsing businesses take deductions too.
  11. AlembicBob


    Dec 28, 2004
    MA, US
    If you try to write off equipment as a business expense, then you may need to amortize those capital purchases over at least a few years. You may also need to pay taxes on the proceeds if/when you ever sell any of it. Check into the whole works before you act.
  12. Dkerwood


    Aug 5, 2005
    I'm just saying that they might get a little suspicious if they saw this:


    QSC RMX1450 $400
    Aguilar GS 410 $900
    Line 6 Bass PODxt Pro $700
    Spector NS-5XL $4500


    Aunt Louise's birthday $20
    Sitting in with "Shark Attack" metal band $50

  13. PinkFloydDan


    Jul 4, 2005
    Well, that's what they will see from me this year. But in 2006, they will see about 20-30 gigs or more. I cannot guarantee money, but I certainly don't need to buy a whole lot more. I am writing off about 5 grand and we'll just see what happens. I just have to figure out how I do it now with Turbo Tax online.

  14. Dkerwood


    Aug 5, 2005
    I guess it does make sense, now that I think about it. Who's to say that it wouldn't be wise, as a business, to do all your start up stuff in December and then open the doors (so to speak) in January?

    I do believe, however, that you can't simply write off the total amount of the equipment. I think you have to depreciate it over a number of years.
  15. PinkFloydDan


    Jul 4, 2005
    I am just going to type in Turbo Tax and see what happens. I hope I can figure it out.
  16. You generally write the equipment off over multiple years as depreciation. There are different types, different # of years to depreciate it over, and different schemes to depreciate it. You're $3000 of equipment in 2005 won't result in $3000 in deductions that year. A fraction will be deductible each year for the next few years. So the equipment in 2005 will offset some income (or wipe it out if income is too low) in 2006 and beyond.

    You also may have the option of a 139 deduction, taking the whole thing in one year. You probably need some advice to do it even if you use turbo tax. That's what I use, but in case I'm doing it wrong, I'm not going to give you any specific advice other than to check with someone who really knows... And if you take it all in 2005, don't buy a lot of stuff in 2006, you have nothing to reduce the income you make in 2006, but guarantees a profit in 2006 to help you meet the "its a business not a hobby" requirements. You'll then pay a full tax load on the 2006 earnings.

    I try to make sure I hold off on buying stuff some years to make a profit, and once the business/hobby stuff is taken care of, the years I can lose money I buy lots of stuff. You can lose big some years for better tax breaks, and barely make a profit other years to meet the business requirements.

    Financially it all comes out in the wash, doesn't matter. You eventually write off all the depreciation in 1 year, 3, 5 or whatever. And you pay taxes on the money you make. Just be a little careful so you structure it to make a profit enough of the time to keep it classified as a business. Time your purchases when possible, be careful how you depreciate it with an eye on income for that year.