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Taking
the Sting Out of Taxes
by Mike Grebb.
This article first appeared
in The
Musician's Atlas' April 2006 Atlas Plugged Newsletter
and is used by permission. The
Musician's Atlas is a fantastic
resource for musicians, containing
over 30,000 music
business contacts.
Back to The
Academy
With April 17 now behind us, many of you
just looked back upon the last 12 months and exclaimed, "I owe
what??!!" Settle down. You should be so lucky to owe taxes. It means you're
making money (always a good thing). But for artists, indie labels and other cash
strapped music biz entrepreneurs, tax time is never easy-especially when you had
to spend most of what you made just paying for living expenses. So here are a
few things to consider as you're filing for extensions or making resolutions for
next year....
Keep Your Receipts & Write It
Off
Many musicians can be especially lax about writing off
music-related expenses throughout the year. That's really no different than
digging into your wallet and throwing money on the ground as you skip giddily
down the sidewalk. Christopher
Knab, a Seattle-based music business consultant, says artists must
think of themselves as businesses and take the same write-offs that any business
would take. But make sure it's really a business expense! The IRS defines
such expenses as "ordinary and necessary" to the business. Here are a few
standard write-offs, according to Knab:
- Instruments, equipment, accessories
- Consumables (guitar strings, etc.)
- Subscriptions to trade magazines
- Sheet music and "How-To" books and manuals
- Promotional: CD/tape duplication (for demos), photos, bios
- Office supplies: paper, envelopes, photocopies, stamps
- Fees related to maintaining your website and e-mail access for your
music-related activities
- Rent for storing your gear and for your practice space
- Music association and union memberships
- Professional fees (attorney, manager, agent, accountant)
- Copyright and registration fees
- Lessons and instruction
- Travel expenses
- Losses by theft
Find A Pro In The Know
Music
business books and directories are also fair game as write-offs. Keep in
mind that some expenses can be deducted in full, while others can require a
depreciation schedule (basically, this forces you to spread the write-off over
several tax years rather than taking it all at once). Consult a qualified
expert like a tax accountant, to walk you through all the particulars. Never
rely on your own intuition or what you've read here or anywhere else. Each
situation is different!
Experts are also good at finding write-offs you wouldn't have
even known about otherwise. Peter Irvine, a Northampton, Mass.-based musician
and attorney, likes to spread the word about some of those little known tax
benefits. Did you know, for example, that you can choose to use a "per
diem" system that allows a flat per-day meal deduction in each city? The
IRS allows different per diems for different cities, and the system can work in
your favor if you frequent high-cost towns and eat cheaply. "If you play a show
in New York City, you can deduct more food costs than you might actually use,"
Irvine says. Per diem rates are available at the General Services Administration Web site.
Another one of Irvine's favorite deductions? The home office.
He says that even if you're on the road constantly and only use your home
office for "administration," you can still write it off. "People are
leery of the home-office deduction because it's a red flag to get audited," he
says. "But there's a legal way to do it." Of course, a touring band also needs
to have an official residence to get these travel write-offs. So while you might
be saving some rent by living out of a van, you also might be giving up even
bigger tax write-offs.
Beware: Auditors are on alert for anyone
associated with the music biz. Irvine says the IRS actually provides agents with
an entire pamphlet explaining the "funky accounting" of the entertainment
industry. The federal government probably isn't out to get you. In fact, there
are countless legal ways to reduce your tax bill-especially for touring artists.
But you have to be smart. "Keep track of stuff," says Irvine. "Unless you're on
a major label, you shouldn't be having to pay much in taxes."
Invest In Your Future
Experts
advise artists of all levels and incomes to spend less time complaining about
their financial situation and more time strategizing. That includes not only tax
planning, but also ensuring that money is available when times get
tough.
In a way, the music business is a crap shoot for most
people trying to make a living with their art. No pension. No job
security. No steady paycheck. Managers and booking agents, who depend on getting
a cut of artist income, have similar cash flow problems. And while labels may
get first dibs on that income stream, they often face expenses and delayed
payments from distributors-creating many of the same problems.
The bottom line is that everyone-from the incorporated entity
to the sole proprietor-must have a plan. "Organization is really the
key," says Michael Hamrick, divisional V.P. for the Southern Division in
AXA Advisors' Nashville office. He says everyone has to resist the urge to spend
everything they make-no matter how small the amount. Always take a little bit
off the table before you pay yourself. "It's about getting the fundamentals set
up," he says. "You have to make sure there's an emergency fund. The money
doesn't always come in when you need it." Savings mitigate risk. "If
income is low one month, you've got some resources you can tap," he says.
Okay. I can already hear the chorus of skepticism. Artists get
especially offended when people tell them to save more, primarily because many
live on a shoestring budget already. But think about it. Are you really making
those little sacrifices here and there that will ensure your financial future?
Everyone needs a backup plan. Even more important, everyone needs a
"retirement" plan as well.
Hamrick can recount stories about songwriters and artists who
made it relatively big (at least for a while) and simply wasted that
once-in-a-lifetime income rather than devising a smart strategy to make it last.
"They had half a million dollars fall in their laps," he says. "They buy the big
house, buy the nice car, pay their taxes, and it's gone. Then they're working at
Guitar Center. It happens. It really happens." Hamrick is among financial
advisors who specialize in working with music-industry types, especially
artists. He says too many people don't even know the savings options
available to them. Many of these options are great ways to avoid taxes
that can eat away at your hard-earned cash faster than you might imagine.
Find A Plan That Can
There's
always the Self Employment Pension Individual Retirement Account, or SEP-IRA,
which allows self-employed folks (i.e., most artists, managers, etc.) to
shelter up to 25 percent of their income from taxes (up to a $44,000 maximum in
2006). That's pretty powerful. Better yet, the plan is a cinch to set up.
Any bank or brokerage can help you out. You can either hire a tax advisor to
figure out your maximum (the 25 percent thing isn't as simple as it sounds. The
actual percentage is usually lower and depends on several factors). And if you
can't spare the maximum contribution, SEP-IRA and other plans allow you put in
as little as you like. Every little bit helps when you're planning for the
future.
And there are other plans that are winning converts because of
their flexibility and their ability, in some cases, to shelter more income.
Hamrick, is a fan of the recently enacted "owner's" 401-K, which works
much like the SEP-IRA or 401-K plans that many people have through an
employer. It's specially designed for small business owners and sole
proprietors.
The owner's 401-K allows a self-employed person to
set aside up to $15,000 of 2006 income as a "salary deferral"-no matter how much
money he or she earned during the year. You could theoretically defer every cent
of that if you so desire. Better yet, Hamrick says you can devote some of those
$$$$s to a Roth 401-K, which gives you no tax benefit now because you can only
use money you have already paid taxes on. But when you withdraw it years
later, you don't pay any tax on the gains. That adds some flexibility that's not
available with a SEP-IRA.
The owner's 401-K also allows you to shelter
up to 25 percent of your remaining income as a profit-sharing contribution (20
percent of the net for unincorporated businesses, which covers most musicians
and artists). The only catch is that the total deferral (salary and
profit-sharing) can't exceed $44,000 in 2006. Not a problem for most of us,
right?
Now, for those who find sacrificing $15,000 of income difficult
enough, setting aside even more money might not be a realistic goal. But if
you're having a good year (or string of good years) and don't really need to
treat yourself to a new car or that gold-emblazoned custom guitar, why not
defer gratification and put some of that money into a profit-sharing
fund? Instead of spending that extra money, you're taking it off your
balance sheet, sheltering it from taxes and making sure it's there for your
future when money might be quite a bit tighter. If you're over 50, there
are catch-up provisions allowing even bigger contributions. And for older
artists who are making nice, stable coin, other options-such as defined benefit
plans-can shelter even more income from taxes.
Each person needs to carefully consider what retirement plan
will work best for them. The owner's 401-K, for example, can involved higher
fees and greater restrictions on investment (being limited to certain mutual
funds, etc.) than a SEP-IRA. Make sure to ask your financial advisor about all
of these things before deciding.
The Bottom line: Get some
advice.
No matter how much it pains you, hire a lawyer, accountant or
financial advisor to help you figure this stuff out. It's not as expensive as
you might think and you'll lower your chances of screwing something up, which
can lead to interest and penalty charges with the IRS. "Before you start writing
checks," advises Hamrick, "you have to make sure you work with your tax advisor
professional" (a good tax accountant might cost you only a few hundred
bucks).
Yes, Hamrick and other financial planners have an interest in
saying that, but that doesn't make it untrue. This stuff is complex. If you have
trouble just keeping track of mileage on the road, attempting to set up your own
a retirement plan probably isn't the wisest move.
- (Mike Grebb is a writer, journalist and singer/songwriter based in
Washington, D.C. He has written for numerous publications, including Wired and
Billboard. His debut solo record, Resolution, is available at www.mikegrebb.com, as well
as digitally on iTunes, MSN Music, Musicmatch, Yahoo! Music Unlimited and other
sites. And you can also be his friend on MySpace! www.myspace.com/mikegrebb). |
