I know that tax season is a few months away still, but there’s still no excuse that you shouldn’t be keeping track of your finances all year round. I’m going to go over a few things that will help not only make tax time easier, they’ll save your band money while you’re on the road or buying things related to the band.
Almost all of your business expenses can be deducted from your taxes, but you need some kind of documentation to prove to the men in charge that you actually did spend the money you say you did. This can be done in a fancy accounting software like Quicken every day when you check into the hotel, or you can just keep a pen and paper log (a simple one) to keep track of everything as you go and fill it in later on.
Although it’s not necessary, I insist on keeping receipts for everything that a band purchases. Be it a new set of strings or a guitar, if it costs the band money, a receipt will be kept for it. In addition to the receipts, just keep a simple log in a notebook on a page by page basis of what was spent and on what. Like this:
[Pete]
Breakfast: $7.33 (McDonalds)
Lunch: $1.82 (Protein Bar)
Dinner/Snack: $2 (Homemade Spaghetti/sauce – this is an estimate of the cost of the food because the ingredients were canned and bought in the store and it would be impossible to know how much each band member actually spent)
Picks: $4.36
Show: Tonight we played a show at Lucie’s in Atlanta, GA.
This one is going to be the hardest to do because musicians are such space cadets and it’s damn near impossible to remember socks in the morning, let alone tracking mileage on their van. To combat this problem, I suggest buying an adhesive Post-It note pad that you can stick to the dash. Every time you get into the car to drive somewhere for band related business, write down what the odometer reading is before you leave and as soon as you get back. Do the quick math with the calculator you also have taped to the dash (joke) and figure out how many miles you’ve driven.
**Alternatively, if you’ve got more money than a post-it note book costs, you can head over to Office Depot or Amazon and pick up a mileage log book (also called an “Auto Log Book” where you record the mileage driven, gas used, and where you came from and are going to.
While on tour, every time you get into your van, your driving counts for business. So, if you’d like to simply record the odometer reading before you leave for tour and when you get back, that might make things a hell of a lot easier, right? WRONG. You need to have an itemized list of each “business trip” you take, meaning you have to record your driving from city to city every night. Trying to track the entire trip in one mileage count is a red flag come tax time and will end up causing more headaches than it’s worth. Track each trip you make to avoid any sort of confusion that might arise.
There are two ways that you can deduct your driving expenditure.
1) Standard Rate: The standard rate is a flat rate of reimbursement per mile that the IRS announces each year. For 2013, it’s 56.5 cents per mile. This changes somewhat infrequently, but it’s a good idea to check on the IRS website (irs.gov) to see what the current mileage rates are for the year. I simply searched for “mileage” in the search box on the site to get 2013′s rates.
2) Actual Expense: If you’re so inclined, you can calculate the actual driving costs for your vehicle for the year. Track your total miles traveled in the year, total repair costs, and total fuel costs, and after keeping track of all of the miles driven for band related business, you can take a percentage of the total costs for your vehicle to charge to the IRS. Because this is a lot more complicated than the other method (and usually only applies to expensive cars), I recommend just using the standard rate to keep things simple.
So, this is a pretty cool tax tip I learned years ago and I wish I’d known it sooner. Any space that you use in your home to conduct band business can be used towards a tax deduction on your mortgage and utility bills.
Let’s say that you use the garage as a practice space, make phone calls and reply to business emails at the kitchen table, and use one of the bedrooms in the house as a storage room for all of your band’s merchandise, all of that space is deductible.
But how do you calculate all of that? Square footage of course. So, if out of your 1,500 square foot home that you’re sharing with the band, you use one bedroom to store merchandise (120 square feet), you practice in the garage/basement (300 square feet), and you use half of the dining room to file paperwork, answer emails, and make phone calls (100 square feet), you divide the total square footage used for your business by the total square footage of your house and get a percentage (In this case, 300+120+100=520/1500=34.67%). Then, however much you pay for utilities and rent, or mortgage, multiply by this business percentage and get the number you’re allowed to deduct for taxes. You should keep a copy of your rent statement and utility bills every month to cover your ass on this one.
Unbeknownst to most touring bands, you’re able to deduct 50% of your food expenses on your tax return. While you’re on the road, all of your meals count as “business meals,” so treat them as such. You can either keep track of the exact cost of every meal that you have (which is recommended if you’re spending a lot on food on the road and high-protein/high-fiber diets are necessary to keep you fit as a fiddle (terrible pun intended)) or you can use the federal day rate per person. This method is not recommended for up and coming bands who are still eating almonds and peanut butter, thinking they can get the federal rate of about $50 deducted from their taxes each day. WRONG. Deducting the maximum rate for food every day is a huge red flag to the IRS and you’re almost guaranteed to get audited. Keep your receipts and deduct the actual cost of food for each person. Trying to swindle the IRS out of money is harder than breaking into Fort Knox.
After you’ve registered your band as an LLC, it’s time to start living together. Well, kind of. Having a home of some kind allows you to leave somewhere to go on the road. In the eyes of the IRS, if you’re not leaving home to go out on the road, you’re not entitled to collect any sort of business travel expenses such as the other tax tips mentioned in this article. This can prove troublesome if you spend most of your working days on the road and don’t crash anywhere besides your parent’s couch while playing shows. Wherever you are registered to vote and receive mail is your home. Use it as your “Home” address on everything and ensure that you’re actually paying rent or property taxes on the place to maintain it as a place that you’re leaving whenever you hit the road.
Not in the traditional sense that it’s becoming less valuable the longer you hold onto it, but rather in IRS tax terms. Depreciating your gear is a clever accounting technique to help keep your taxes down at the end of every year. Let’s say you buy a new guitar for $1500 and you say that the guitar has a “useful life” (fancy term for how long you plan on using it before needing a new one) of 5 years. That $1500 you spent on the guitar can either all be deducted from your taxes the year that you purchased the instrument, giving you a $1500 tax break in one year, or you can use a method called “straight line depreciation” to divide that $1500 up over the course of the 5 years you plan on using it.
That means that for the next 5 years you can deduct $300/year from your taxable income. If you’re not making a lot each year, spreading out this type of purchase may be wise, but if you have a great year one year, buying a new guitar to deduct the entire $1500 from your taxes that year may be the better option.
It’s important to note that if you ever sell the instrument after you’ve depreciated it down to $0 of worth to you, any profit you make will be taxable income. The basic idea is that if you buy a new computer, after 5 years it will be obsolete and you’ll have a hard time even giving the thing away. So, companies depreciate their equipment for 5 years and don’t bother selling it. In the case of a guitar though, it probably still has a lot of value in it after 5 years, leaving you with the burden of having to pay taxes on the money you make from selling it later on.
Anytime you hire another musician to be in your band and pay him/her more than $600, you have to issue them a form called “Form 1099.” This is a form for an independent contractor. The same holds true if a venue pays you more than $600 in a night. You were an independent contractor for them and should receive a 1099 from them as well. Remember, every time one of these forms is issued or received, the IRS knows about it. So if you fail to fulfill your end of the bargain by reporting that income to the IRS after receiving more than $600 in a night as a band, the IRS may be knocking at your door shortly thereafter.
Also, if you pay any independent contractors less than $600, you can deduct these as“commissions and fees” on your own tax statement. That means that if you pay the extra guitar player in your band $50 as well as the venue owner for helping you with your gear, you can deduct these from your taxes as well.
As a business, you’ll be filling out a Schedule C form and submitting it alongside your Federal Form 1040. If you’re self-employed within your band, you’ll probably also need to fill out a Schedule SE form as well (You must fill out one of these SE forms if your net earnings during the year were more than $400).
On the Schedule C form, Line A will require you to know the business code for your musical endeavors. Typically, this is code 9811. It can be found under the branch of Services – Personal, Professional, and Business – Amusement and Recreational Services. This code can also be applied to people who are music agents, producers, and those that perform in musical theater. If you’re struggling to find the forms you need for the tax deadline, you can use the IRS website to help you.
These tax tips aren’t meant to try and help you scam the IRS out of extra green every year. They’re not stupid. Trying to deduct expenses that are more than you actually spent is guaranteed to at the very least get you audited, or worse, get you put in jail for tax fraud. Be honest with all of your receipts, costs, expenses, and spending. With documentation for everything, you’ll be able to defend your case to the big men upstairs should the need ever arise.
Best, -David
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David Roberts is the founder of the Sunshine Promotion company. Based out of Nashville, TN, his blog “Sunshine Promotion” at sunshinepromotion.info helps artists achieve real goals with hard facts, case studies, and templates of music business plans to follow.