Tax Tips for the working Drummer

Making your living as a working musician is a strange life to begin with. You spend half of your time on the road, you have to beat off groupies with a stick at the end of the night and you rarely see daylight before 3:00 in the afternoon. It only makes sense that doing taxes would be different for a musician than for the other 98% of the population.

Why can KISS deduct the costs of confetti that they shoot all over the crowd at their show, but if you have confetti at a birthday party, you do not get to claim the same deduction? Joey Jordison gets a deduction for the cost of his face paint, but Morgan Rose does not get a deduction for the cost of his blue hair dye. Likewise, professional working drummers can offset their incomes for money spent on sticks and heads, but a guy who just has a drum kit that he jams on in his basement does not get the same tax treatment. Hopefully, by the time you are done reading this, you'll have a better idea of your tax rights.

The Basics

Before we get to step one, we'll define perhaps the two most important words related to taxes: income and deduction. Section 61 of the IRS Federal Tax code defines income as:

all income from whatever source derived, including (but not limited to) the following items;

1. Compensation for services, including fees, commissions, fringe benefits and similar items.
2. Gross income derived from business.
6. Royalties.
13. Distributive share of partnershipgross interest...

Anything you received in exchange for your services (musical and/or related to your musical endeavors) is income, hence the word, similar items. There are other types of income besides money. If you are given hotel accomodations, endorsements or studio time, they are considered forms of income. The IRS expects that any income that is not in the form of mosey be reported according to its fair market value. They are in essence, compensation for your work as a musician.

Next is deduction. For every dollar of deductable expense you have, you get to deduct it off of a dollar of income received during that year. A deduction is not applied against the amount of taxes owed. Example, Chad makes $100,000 as a musician in 2004 and pays 27% in taxes. He had $50,000 in deductable business expenses. Before Chad could take a deduction, he would owe $27,000 in taxes for the year. However, he would deduct the $50,000 of expenses against the $100,000 in income and would pay 27% of the remaining amount of income totaling $13,500. Note that Chad did not deduct the $50,000 from the $27,000 in taxes, as the deduction goes against the amount of income, not the amount of taxes.

Where To Begin

You have to decide whether making music is a business or a hobby. The IRS encourages businesses to deduct the costs of doing business but a hobby is something someone does for personal enjoyment. The IRS does not cut breaks for hobbyists. The following are some of the factors the IRS will use in making such a determination:

1. You carry on the activity in a businesslike manner.
2. The time and money invested indicate a clear intention to make a profit.
3. Your losses/expenses are normal for the operation of such a business.
4. You depend upon the income derived for your livelihood.
5. You make a profit within a few years.

This is only a partial list and is presented simply to give you an idea of considerations that the IRS looks for in making a determination. It's important to know that you do not need to make a profit immediately to be considered a business but you have to have been engaged in a good faith attempt to become a profitable venture. However, you have to make a profit at least 3 out of 5 years, otherwise, the IRS will clasify you as a hobbyist.

What Can You Deduct?

Regarding business expensedeductions, the IRS states:
"To be deductable, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business." So what are ordinary and necessary expenses?

1. Instruments
2. Equipment and accessories (cases, pedals, stands etc)
3. Replacable/consumable items (sticks, heads etc)
4. Studio costs
5. CD production and duplication costs
6. Web site creation, maintenance and hosting costs
7. Promotional material costs (posters, photos, press kits etc)
8. Copyright and trademark registration fees
9. Travel expenses that are music related
10. Sheet music, manuals, record company directories, performance venue directories
11. Membership fees paid to professional organizations
12. Professional fees (managers, agents, attorney fees, accountant fees etc)

Just because you might use something in your musical career, doesn't necessarily mean it is deductable. A good example is stage clothes. The IRS does allow a deduction for the costs of uniforms related to employment but what do they consider a uniform?

1. Clothing that is a condition of employment
2. It is not suitable for everyday wear.

That means if you take the stage in jeans and t-shirts, you cannot take a deduction for the cost of the clothing. It doesn't matter if you bouth those jeans and t-shirt to wear specifically for the shows because they are suitable for everyday wear. GWAR is a good example of a situation in which stage uniforms would be deductable. That is why Joey Jordison can deduct his makeup and Morgan Rose cannot. Joey's makeup is not suitable for everyday wear whereas Morgan's hair is always dyed blue, everyday.

The IRS recognizes that you have to eat while touring. They also know that you have to eat when you're not touring. So to be fair, they will permit 50% deduction for meals purchased while traveling. The same goes if the band pays for a meal to entertain a client.

The IRS also allows small busines owners a deduction for the costs associated with their personal homes that are dedicated to their business (capped at 85% of the costs). So if the IRS recognizes your band as a business and the band practices at your home, then you can deduct for the portion of the house used by the band? NO. The place of employment is where the performance actually takes place, on stage and unfortunately, not in the home where you practice. If you operate a home studio, then a deduction for that portion of your home should apply. If you are a musician that does not perform publicly then the deduction should apply as well.

A recapture provision exists in the event that you sell your home for a profit and it applies the same percentage rate as your deduction. This means that if you deduct 25% of your home costs for a home office and you later sell your house for a profit, 25% of that profit will be attributed to the business and will be considered business income. There is a loophole by not taking the home deduction for 2 years prior to the sale of your home.

The deductions are there because the IRS wants us to use them. If you don't take advantage of them, then you're just giving your money away!