Writing Off Gear for Tax Purposes

[SteveR]

My band reports our income and doesn't take taxes out, so I have to pay taxes on it.  This year, I saved all my receipts (unlike last year  >:( )  in hopes of writing it off.  I even bought a new kit this summer, so that should help.  I think I bought enough gear to almost equal my playing income.

So does anyone have any experience with this?  Do I have to fill out a different form for this?  Is the IRS pretty liberal when it comes to working musicians writing off their gear and gas receipts?

[Bermuda Schwartz]

As long as you're reporting and liable for taxes on your income, you're also entitled to take applicable business write-offs.

Keep in mind that social security payments are still due, so making 20g and writing-off 20g still means you owe something.

If you're primary income is from music, and you're officially self-employed, you can expense all of your gear up to a certain amount. I recommend talking to a CPA about the specifics, they don't even have to be familiar with entertainment taxes... business is business in their (and the IRS's) eyes.

As such, things like CDs or music videos are considered 'research'. MD & Drum! magazine... 'subscriptions'. Do you use your home or cel phone to conduct business and seek work? Take a percentage of that as well. If your gear is stored somewhere, that's a deductable expense, too.

Did you buy a shirt, or pants or shoes to wear while playing? That's 'stage clothing'. Do you pay for a domain and web space to host your music site? 'Advertising & Promotion'. Did you take someone to lunch in an effort to seek work? 'Meals & Entertainment'.

And of course union dues & fees are deductable.

Vehicle expenses releated to work are certainly deductable. Keep track of the total miles driven in the year in addition to your business miles. The percentage (at the prevailing mileage allowance) is then weighed against actual repairs and expenses, and I think the greater of the two is deductable.

Again, please consult a qualified tax person, it's definitely worth your while to do it correctly, and they will undoubtedly uncover a number of deductions that you might not otherwise keep track of.

Business gifts up to $25 per recipient are deductable, but cannot be averaged. In other words, a gift of $15 to one person and $35 to another does not equal $50... it equals $40.

Also - and this should be used sparingly - deductable expenses up to $75 are allowed without a receipt.

There's lots more fun stuff! Taxes are a trip, but there's no need to get taken for a ride.

Good luck,

Bermuda

[kohei]

I don't remember the name of the form, but it's the one for self employed sub contractors. If you have a day job, you can fill this one out in addition to your regular income/W2 thang. Equipment expenses, repair, musical education (lessons etc.) that kind of thing is no problem deducting. Travel expenses you either have to keep VERY good records (a logbook detailing the gig and mileage to and from) or have a dedicated vehicle (band bus used ONLy for transportation to gigs). Likewise Travel and Expense deductions - it used to be that you could write off cover charges, drinks, CDs, your stereo, dry cleaning or clothing expenses etc. Now it's a LOT tighter. Even if you wear your tux ONLy to do those stupid clubdates, the only way you can deduct it is if everybody in the band has exactly the same tux and it can be described as a "uniform". Unless of course you guys do all have matching outfits.
Ewww!
It also used to be that the IRS got a little sticky if you broke even or showed a loss for more than a few years (cause then they said you had a "hobby" that kind of paid for itself), but in the last few years (and with a lot of litigation of audit results) they have finally acknowledged that there are 'businesses" out there that people love enough to continue to do even if they show no profit, but just pay for themselves (ie break even). I think it was actually horticulture that set the precedent, a number of folks that ran greenhouses/nurseries that paid their own salary and everything else but didn't show a profit...

It's worth going to an accountant who specialises in entertainment or arts clients, they are the most familair with what's gonna be deductible or not (andyou don't want guess work). Their fee is going to be deductible as a business expense the following year.

[Bermuda Schwartz]

It's worth going to an accountant who specialises in entertainment or arts clients, they are the most familair with what's gonna be deductible or not

Yes... and no. That's what I used to think, but once I switched from my Entertainment Tax preparers (recommended by Local 47 here in L.A.) to the CPA my in-laws use, my eyes were opened BIG time. He caught a LOT of things that the other folks had been missing for years, and was able to interpret my seemingly 'generic' purchases into applicable, deductable expenses.

I also tripled my $100 prep fee, but the new guy's absolutely worth it, and has also warned me where to NOT push my luck. But, never a question from the IRS about my more aggressive returns of the last 7 or 8 years.

Bermuda

[Jon E]

I have filed a "SCHEDULE C" in the past in order to decut business expenses.

[BigBillInBoston]

If you're primary income is from music, and you're officially self-employed, you can expense all of your gear up to a certain amount. I recommend talking to a CPA about the specifics, they don't even have to be familiar with entertainment taxes... business is business in their (and the IRS's) eyes.

Interesting topic and good input from Bermuda and others. The original post asked about expensing equipment and in Berumda's comment above he confirms that (in certain circumstances) it can be expensed. My question is...wouldn't a new drum set have to be expensed for tax purposes over it useful life (i.e. depreciated over a certain number of years) instead of written-off completely in the year it was purchased? This kind of depreciation for tax purposes is certainly true for other kinds of assets one might use in a small business like a computer or furniture that provide useful service for more than one year. Obviously some equipment (heads, sticks etc) could be fully expensed in the year they were purchased due to their short useful life.

Anyone have knowledge or thoughts on this?

BigBill

[kohei]

I think that's an "on down the line" question. If you write the entire value off in a single year and you hang on to it til it depreciates to zero, you don't have to worry. If you write off the full value and then sell it, you have to report the money (less depreciation) as income.

[SteveR]

Lots of good info.  Thanks!

One more thing.  Does the IRS accept copies of receipts as well as receipts.  For some reason, Interstate Music sometimes forgets to send my receipts with my orders.  I can go to their website and print one up though.  Do you think that's acceptable?

[Bart Elliott]

Interesting topic and good input from Bermuda and others. The original post asked about expensing equipment and in Berumda's comment above he confirms that (in certain circumstances) it can be expensed. My question is...wouldn't a new drum set have to be expensed for tax purposes over it useful life (i.e. depreciated over a certain number of years) instead of written-off completely in the year it was purchased? This kind of depreciation for tax purposes is certainly true for other kinds of assets one might use in a small business like a computer or furniture that provide useful service for more than one year. Obviously some equipment (heads, sticks etc) could be fully expensed in the year they were purchased due to their short useful life.

Anyone have knowledge or thoughts on this?

BigBill

You can depreciate or write off the full amount in one year.  It all comes down to what works best ... and the total amount we are talking about.

I've researched tax 'law' far more than I care to; seems like I should have a degree by now. Things change yearly, so the statements I have made may not be current for 2003.

Just a little FYI ... many CPAs are extremely conservative ... and are not always up on all the laws. I've worked with an EA who is actually trained (yearly) by the IRS, but is not an employee of the IRS. They are up on all the new laws, and if you are auditted, they guarantee to resolve the matter at no cost to you. An EA (Enrolled Agent) knows how to take every possible write-off without raising any red flags with the IRS. Sorry if we have any CPAs here, but an EA makes a veteran CPA look like a newbie. IMO

[Bermuda Schwartz]

Lots of good info.  Thanks!

One more thing.  Does the IRS accept copies of receipts as well as receipts.

I would think that if your name is referenced on it, yes, it should be acceptable. If it's a generic receipt, it could be suspect, since everyone in a band could be sharing and deducting the same receipt!

Also, too many copies of receipts could be a problem if you were to be audited. It's a genuine concern that you could have copied receipts for your puproses, and submitted the opriginals for reimbursement as a tour expense, whereby the receipt gets written off a second time. If the IRS really wanted to pursue an unusually large amount of copies, they'd also have to involve some of the people/organizations you're involved with.

Also, mail order stuff can be verified on charge card statements. Don't kill yourself getting receipts for purchases already accounted for on your bill.

Bermuda

[Bermuda Schwartz]

...wouldn't a new drum set have to be expensed for tax purposes over it useful life (i.e. depreciated over a certain number of years) instead of written-off completely in the year it was purchased?

As mentioned, it can go either way. Perhaps if you have a lot of equipment expenses for the current tax year, you will want to take a high-ticket item and spread it out to take advantage over the next few years.

There are a few things I learned recently about equipment, and this has to do with being 'officially self-employed' as I mentioned above.

First, since I have taxes deducted from my Al paychecks, I am considered an employee, and in the eyes of the IRS, am not self-employed. As such, equipment purchases up to 2% of my gross income - and since we file jointly, my wife's income is included - are not deductable! After all, equipment necessary to do a job is supposed to be provided by the employer!! So, let's assume that if we gross $100,000, the first $2,000 of expenses is useless. If I bought $5,000 worth of stuff, I can only deduct $3,000.

Second, there is also an UPPER limit as to the amount of gear I can deduct! Jeez, I can't win!! I have yet to determine whether it's a fixed amount or a percentage, but it basically keeps me from going too wild buying stuff. Also, crossing that limit may invite amortizing some of the larger expenses, simply because the amount over the limit is wasted, and gone forever otherwise.

Anyway, there's some tricky stuff, and it pays to get experienced advice, whether it's from a CPA, EA, or entertainment tax person. But make sure they know what they're doing! Ask associates who handles their taxes, and if they're happy with that person.

Bermuda

[smoggrocks]

if i recall correctly, even as an employee you can take certain deductions if you incurred certain expenses to "stay on top of" your industry. in my case, things like movies, magazines and books were all allowed; "Professional viewing" was the category. i was actually even allowed to write off my drum studio [though i am not a drummer by trade] under some weird "research" category., but only for one year.


i suppose it does get trickier if you're married and filing jointly, but i was surprised at the things i was able to write off.



definitely get a really good accountant, preferably one with knowledge of the entertainment field, and someone who's basically conservative.



if i don't get a refund this year, i will eat my hat. i'm talking 2003 was my 'concerts for the people of kampuchea' year -- complete poverty!

[Tony]

Well, I've read through this post and saw no reason to add or detract.  I can only reitierate what most peoplle here have said and add my 2cents, which is:  You need someone, either a CPA or and an EA to do your taxes if you plan on any itemized deductions related to business expenses or 1099 information, as is the topic here.  I'm an advocate of using one of these professionals even for ordinary tax filings.  They are worth their weight in gold, plus most of them can get their fee added into your return, so you get part of it back.  Use reputable folks, not your fly by night tax return places that pop up at tax season.  Good lucjk!

[racindrummer]

I am a volunteer tax preparer in an IRS sponsored program, so I receive a good bit of training directly from the IRS each year to remain certified.

Most of the comments above are true with a few clarifications.

You can use Schedule C-EZ to report your music income if you have a profit and expenses are less than $2500.  Otherwise use Schedule C.  Neither is particularly difficult, just read the instructions.

Kohei is right about writing off equipment.  You can write off capital equipment up to $100,000 (expensive set) in the year of its purchase, but if you sell it before the end of its useful life as defined by the IRS, you must include part of its cost as income in the year it is sold.  Publication 946 explains this.

The definition of uniforms for employed people deducting business expenses as an itemized deduction are very strict as described above, but 'uniforms' as a business expense for a self-employed person gets easier.  If you purchased clothing you only wear for gigs, you should have no problem using it as an expense.

Copies of receipts are fine.

You pay social security and medicare taxes on your profit, not revenues.  So if you received $5000 playing, and had expenses of $5000, your self employment income is $0 and you pay no social security or medicare tax.

Believe it or not, common sense usually rules.  Any money you spend to generate business (music) income, is a valid business expense.   If you start pushing the envelope, e.g. writing off home expenses because you use part of it as a practice studio, you begin waving the red flags in the face of the IRS.  You can do it if you know how, but you may have a fight on your hands.

Having worked for 10 years an a program who does preparation for free, I have much less respect for paid preparers than expressed above.  Each year I get several thousand dollars back for people who had past returns screwed up by paid preparers.

I would suggest that if you have done your own returns in the past, your music income is small compared to your other income, and you feel comfortable trying it yourself after looking at the publications, just do it yourself.  If your music income and expenses are small, the IRS won't waste its time questioning them.  If you claim something as an expense and the IRS disallows it, you simply pay the additional tax.  They usually will waive any penalties and interest on the disputed amount if the expense looked legit.

If, on the other hand, you are getting rich playing music and it is your main source of income, you probably should get some professional help.

I will be happy to answer any specific questions on this forum (and provide the IRS publication reference to back it up).  Just ask away and give me a day or two to respond.  You can also get free tax help online at http://www.aarp.org/taxaide/bulletinbd.html.

[racindrummer]

On car expenses, you can use $.36 per mile as an expense.  You should keep a notebook in the car and record the odometer reading at the beginning and end of each business trip, and the date and purpose of the trip.  With this documentation, the IRS will allow the mileage without much question.

If you did not keep a record last year, estimate the mileage and expense it anyway.  Just be prepared to explain to the IRS how you estimated the mileage and be prepared to pay the additional tax due on any amount they might disallow.

For example, if you play at a club 10 miles away, you would be all right declaring 20 miles for each night you played there.

[SteveR]

Good to know, racindrummer thanks!  I'll come back to this thread if (more like when ) I have any more questions.

Thanks to everybody in this thread.