TAX DEDUCTIONS & BAND BUSINESS

    In the last two issues of The Midwest BEAT, I have been telling you about the different options for conducting your band business from both income tax and liability perspectives.  However, whatever legal entity you choose, it is important for your own financial benefit to know the many ways you can reduce your income taxes by taking deductions for expenses incurred while participating in your band's small business, company, or corporation.  How the expenses are reported may vary, but the type of deductions the IRS will allow apply to all the entities.

     Let me state from the outset that there are some "gray" areas of band or business related expenses that the IRS may - or may not - allow, depending on your particular circumstances.  (Case law on some types of expenses/allowable deductions can be very fact specific.)  Therefore, when you have any doubt whatsoever, it is important that you consult with your income tax professional.  That said, however, there are some general types of expenses that you can deduct, especially if you are aware of them in advance and are thus able to keep or collect the necessary records and receipts.

     Remember, your band is a type of small business (unless you or the IRS considers it a "hobby" - which it may if the business is not profitable for more than three years of a five year period).  Consequently, any "ordinary and necessary" business expense may be deducted with adequate documentation.  Such expenses may be reported as small business deductions on your individual
income tax return if you are a "sole proprietor" or if you and your bantams are operating as independent contractors.  In such cases, if your expenses exceed your band-related profit for a tax year, the resultant "business losses" you report may reduce your income tax if you also have taxable income from other sources. Otherwise, your allowable band expenses/deductions should be reported on the partnership, company, or corporation tax returns - but they will still reduce any potential taxable income.  Some of these expenses are completely deductible in that tax year, while others - especially certain types of instruments and equipment with a life span beyond one year - must be deducted over a set number of years, as determined by the IRS.

     However, the following are examples of some types of expenses that can be deducted for your band's business:

. Musical or Performance-related Equipment (batteries, guitar strings, cords, drum sticks, amplifiers, guitars, keyboards, drums, PAs, recording equipment, microphones, outboard gear, etc.).

. Business Service Expenses (legal fees, accounting/tax preparation, business banking and credit card fees, etc.).

. Telephone Calls (If you have a separate, exclusive business line, the entire bill can be deducted, otherwise you will have to itemize calls.)

. Website maintenance and computers (if used exclusively for band business).

. Hired Musicians, Roadies, Drivers, or Techs.  (If they qualify as independent contractors VS regular employees, and you pay them more than $600 per year, you must issue them a 1099 Form to report the income.)

. Practice Rental Space (Keep rent receipts and a copy of the lease.)

. Certain Auto Expenses, including gas and mileage, and depreciation. (The deduction will depend on whether the vehicle is used exclusively for band business, otherwise you can deduct a proportionate ratio of the applicable expenses.  There are also different ways of filing such expenses which must remain uniform-please consult your tax preparer.)

. Hotels, Airfare, and Food (These expenses must not be for personal business and pleasure, but directly related to band business and gigs, etc.; the IRS allows a per diem deduction for food purchased during those periods.)

. Home Studios or Office Space (The delineated space must be used exclusively for band practice or business, and if it is an office, it must be where "substantial administrative duties occur."  Such expenses, including utilities, rent or mortgage can be deducted in a direct ratio to the portion of you residence the space takes up.  For example, if your home is 1000 sq. ft. and your office is 10' x 10', you should be able to deduct 1/10th of your utilities and rent/mortagage.)

. Professional Dues, Research, Publication, or Education Fees (directly related to your work as a musician).

     There are also other miscellaneous expenses that you might deduct as well, but, for now (until you consult your tax professional) make a hang file for each of these expenses (receipts, statements and records) applicable to your situation and keep them together in one drawer or box.  It will save you
a garangutan headache - not to mention mucho dinero - when tax time comes!