As an aspiring young guitar player growing up in rural Nova Scotia, I could think of nothing better than getting out, landing a record deal and coming back to play a benefit concert for my old high school – a “band-nerd makes good” kind of story. Well, I did go away, and I came back … but as an accountant. Okay so, its not as sexy as my original plan, but I can offer tax advice from a musician’s point of view. Here are some tax tips that every self-employed performer or recording artist should be aware of.
Business Use of Home
You’re recording an album and half the house has been taken over – including the bathroom – you know, for those “church-like” acoustics? Or you’re in song-writing mode or planning a tour on the dining room table. Maybe you have a designated space in your home or maybe the space varies, but either way, designate a reasonable-sized space and compare that to the total liveable space in your home or apartment. Keep it reasonable to avoid attention from the CRA (i.e. 10% – 20%). Use this percentage to calculate the portion of home expenses you can deduct – like mortgage interest, utilities, property taxes, rent, insurance, etc. You may only deduct this from your self-employed income to the extent that you do not go into a loss, but you can also carry forward expenses you can’t use this year against next years’ self-employed income.
The drum kit’s packed, gas card’s in the visor. You’re officially on tour and tracking your travel expenses for tax-time. However, I bet you’re running around a lot more for business purposes than you think. Rehearsals, late-night gigs, trips to the music store, coffee with your agent or band mates – it all adds up. And not just gas: wear-and-tear on your car, tires, oil-changes, repairs. Keep a log book to track total and business kilometers driven. Keep all receipts, all the time. Even when driving personally. Your log book will help you determine the business portion of your total expenses to claim.
You’re claiming the obvious expenses – picks, strings, drum sticks, reeds, paper, pens, and all the stuff we need to practice our craft effectively. Don’t miss out on some of the less obvious expenses – coffees & lunches with agents, reporters, prospective collaborators, etc. Think about your cell phone costs, subscription fees on musical apps, stage costumes (be reasonable here – Levi’s Jeans would not qualify!). Gear your mind to always ask yourself, is the money I’m about to part with in any way reasonably associated with my musical career? If you’re unsure, throw it in the “shoe-box” anyway and your accountant can help you decide later.
We cannot deduct the full cost of gear expenditures (PA systems, lights, guitars, stands, mics, etc.) from income, but we can deduct a portion of the cost on an annual basis. Throw the receipts in the shoe box. If you’re financing some larger purchases, you can deduct finance & interest charges. Make sure you request an annual statement from the finance company.
While I am in no way an expert on the Excise Tax Act, many musical revenue streams may be considered a taxable supply for GST/HST purposes. If you are not considered a small supplier, meaning you have over $30,000 in revenue over a consecutive 12-month period, you may be required to register for GST/HST and charge your clients sales tax. The silver lining is, as a registrant, you would be able to claim any GST/HST paid on your expenditures as a rebate. Consult with your accountant on this issue – GST/HST is a highly complex area of tax.
The Proverbial Shoe Box
Okay, you’ve put it off long enough. Its tax time! You can go it alone if you’re feeling adventurous, or enlist the services of a CPA, but either way you go, grab a glass of wine, beer or coffee – whatever your poison – the shoe box, a stapler and the calculator on your smart phone. Clear a large space on your living room floor and start grabbing those receipts one at a time, putting similar-type receipts in their respective piles.
Now that you have everything categorized in their piles, add up the receipts, staple them together and document the total on top of each stapled packet. (Note for GST/HST registrants: make sure you break out the GST/HST.)
Last step: summarize all the totals on one sheet of loose-leaf or in a spreadsheet along with your total revenue. Make sure you include your mileage information from your log book as well as the percentage of the business-use of your home. Keep your receipts in a safe place for at least 7 years. If you use a professional tax preparer, they will likely only require that one sheet. They will also think, because of how organized you are, that you are a dream client, which may help lower the fee.
The Songwriters Guild of America Nashville Office recently hosted a tax and accounting seminar with Certified Public Accountant Cathy McCormack of Nashville, TN. Cathy McCormack is co-author of the book, “Financial Management for Musicians,” (Hal Leonard) by Pam Gaines and Cathy McCormack. Many of McCormack’s clients are musicians and songwriters. “Financial Management For Musicians” is the title of the book, but she says it is really more about organizing your financial life for what she calls this business of music. Below is a summary of her presentation:
Cathy McCormack Let’s talk about the myths of money management and audits, to start the event. The definition of a hobby has several factors, and includes a test to determine whether there has been a loss in three of the proceeding five years. That is just one of the criteria in determining whether or not you have a hobby. A hobby can exist with respect top raising horses, painting, writing or anything that you can get involved in. They could be considered a business or a hobby. There are a lot more criteria to consider, and one important and significant issue is whether you have intent to make a profit.
Most people who launch into something that takes eighty percent of their time obviously have a profit motive. Your job is to prove that you have a profit motive and to keep good records to show how much time that you spend on the business. The time issue is extremely important. Keep your calendar in outlook or a manual calendar or on post-it notes, whatever that you do to document your schedule. It is one of the leading ways to prove that you have spent substantial time in trying to produce profit.
[Question] Should you keep track of time and expenses after your first two years of losses?
Cathy McCormack This is something that you should have for every year you are in business. When people first start to write, they do not think of it as a business so they don’t track time or expenses very well. Some people knew from the minute that they are born what they wanted to do and immediately launched into it. When people get started in songwriting and have a different career “day job,” they tend not to keep good records. Then they hear they cannot take losses for three years in a row, so they do not even bother with keeping the records.
I encourage you when you first start writing songs to keep track of your expenses, keep a good calendar, and track of everything that would help your accountant to support what you are doing for your songwriting career. You can show losses your entire life. Many people fear of getting audited and will not deduct their expenses. Don’t lose opportunities for fear of the audit myth. Take your losses every single year.
I have had clients get audited because they have taken losses over a period of years. I represented them, proving profit motive and everything was fine. Two years ago a client was audited. He has a studio in his home, has been writing all his life. He has a wife who has made money and she off set her income with his losses. He had a big hit and is going to start showing substantial profit, which solidified the fact that he is a writer with profit motive. In addition, he had a calendar and sufficient data to show that he spent his life trying to launch this business. Professional services are vital for business of any size, visit this accounting services miami site for more information about.
There was a court case about ten years ago with respect to a painter that was audited and the IRS agent ruled the painter had a hobby. The painter had very good records; they went on to tax court and the painter won, as the judge ruled it was a proven fact that many artists did not become famous until after they died. (Laughter in the room.) One time is all it takes to put you on a map after all the years of working toward that goal. That court case has been used several times in the music business and other creative industries.
[Question] So you are saying that you need a calendar to prove a profit motive?
Cathy McCormack You need a calendar to prove the amount of time that you spent on your craft.
[Question] Is there a minimum amount of time to prove you had a profit motive?
Cathy McCormack It is about you being a member of organizations that support your efforts, keeping brochures and pamphlets of seminars that you have attended, keeping records of your co-writing appointments or interviewing people to get ideas. You calendar is a support for the other things that you do with your songwriting career.
[Question] The point of the profit motive is for your taxes?
Cathy McCormack No, the profit motive is to prove your songwriting is not just a hobby. It shows you are very serious about it and you want to make money at the songwriting. Make sure that you do act like a business, keep good records of your time and expenses.
[Question] What happens if you have many years of no income in the songwriting business?
Cathy McCormack That happens and that is OK. You deduct it on a schedule C with your tax return and show your losses against other income that you make during the year.
[Question] Is there any rule about how much money that you can make and still have a loss on your taxes?
Cathy McCormack You can have negative income, but the thing that triggers an audit is to show an income below the standards that the IRS has set that they feel you can live on. To continue to show poverty level income on your return can trigger an audit. They will audit you because they believe that you have an income that you are not showing on your tax forms. I have represented people in those categories. They ask how can you live and eat in the kind of house and survive making this low amount of money? They come in to make sure you are reporting all of your income.
[Question] I have been living on inheritance in the past year. Is this going to trigger an audit?
Cathy McCormack If you have inheritance money, you likely have it invested, and can show investment income. If I were looking at your tax return, I would look to see how you have been able to sustain those losses. If I saw that you had interest and dividend income, then I would say this person has money saved up that has sustained your lifestyle during the process of trying to launch your business. Those kinds of things are taken into consideration when the IRS triggers audits.
You would not get audited because you continue to have losses. If you had no income at all and you showed losses and carried those losses forward, then you would probably get triggered for an audit because it looked like you had unreported income. If they audit you, come in and find you clean, they put a note in your file that says this was a clean audit. That establishes a good track record for you. If you come back with those ratios mentioned previously about audits, then they will probably skip you from an audit. If they audit you and find errors, they can recommend that you be audited in the future.