Why You Need to Treat Your Music Like a Business
Let me paint you two pictures, the difference between which may be more important now than ever before.
Johnny Guitarman is a busy beaver. He plays out with his band at least once a week, maintains the group’s social media presence, handles the merch, writes the songs, books some shows, and materially participates in almost every other ancillary task necessary for the band to grow and succeed. At the end of a long day, Johnny kicks back with a cold one and reflects on a job well done. On to the next show!
Alice Fourstring is just as busy as Johnny. In addition to being the most important member of her band, she puts in the same amount of work as he does. The only difference? At the end of the night, while Johnny’s sipping down a Genny Cream, she breaks out her mileage log and a calculator. Unlike her six-stringed counterpart, she keeps scrupulous notes of her band expenses and income, and even goes so far as to report that activity on her tax return.
Here’s the important difference between Alice and Johnny: Right now, as he’s sucking down the last Genny his savings can afford, she’s riding high with that sweet, sweet PUA (pandemic unemployment assistance) money.
The PUA program, as part of the CARES Act, extended unemployment benefits to the self-employed (musicians included) as long as they genuinely treat their enterprises as businesses. As we’ve seen above, Johnny and Alice put in nearly the same work, but the devil is in the details. Because Alice keeps accounting records of her activity, reports her income, and is savvy enough to offset it by also reporting her expenses, her business is seen as legitimate in the eyes of the powers that be, and she qualifies for PUA. Johnny, on the other hand, has no proof he’s ever actually had a business, and he’s left with only his $1,200 stimulus check that he’s supposed to stretch until Doomsday.
This example is not meant to rub salt into the wounds of those who may be in Johnny’s situation. Rather, it’s meant to highlight just one of the benefits of treating your music career as a career.
Sure, the pandemic is a one-off situation most of us didn’t see coming. But the advantages of treating your music like a career don’t end with the current enhanced unemployment benefits. I’ve enjoyed some pretty decent tax savings three years in a row now, and you can too with a little work and some guidance. So without further ado, let’s look into some of the biggest takeaways you’ll need to get started on the path toward savings.
Business vs. Hobby
The deductibility of your music-related expenses hinges upon whether or not the activity is what the IRS would call a business or a hobby. Hobby expenses are not tax-advantageous at all, but your hobby income is taxable. Business expenses, on the other hand, are almost all fully deductible from your business income.
Made $3,000 last year playing cover gigs with gear that cost you $2,000? If you treat this as a hobby, you’re on the hook to pay taxes on the full $3,000. If you substantiate this as a business, however, you pay taxes only on $1,000 (your net profit).
Now, you might be saying, “Who cares if I made $3,000 last year with my band? The IRS will never know.” I respond to this with two points:
- The IRS does care, and while the odds of them ever “catching you” on this are tiny, you do have a legal responsibility to pay tax on those earnings. Not trying to scare you — just pointing out that in the eyes of the tax code, you owe Uncle Sam his cut.
- While it might hurt to add a couple hundred bucks to your tax bill, you’re actually missing out on many potential deductions by leaving it out. More likely than not, you’ll end up reducing your overall tax bill rather than adding to it.
The cost of the gear you purchased can all be deducted from your income. So can the gas money spent getting to the show. So can the Chipotle carnitas and rice bowl you bought on the way. So can the printing costs for the flyers you made, the Facebook ads you ran, the studio time you purchased, the CDs you produced, and almost any other expense related to the band (your business).
Below are the nine factors the IRS recommends when considering whether you have a true business or a pricy hobby. While no one factor by itself is necessarily enough to indicate a business exists, a combination of them can. They all help to prove that you spend a substantial amount of time, energy, and effort in making your musical endeavor profitable, successful, and sustainable, while keeping adequate records of your activity.
https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses
How This Can Save You Money on Your Taxes
Take me for example. My band, The Scarecrow Show, plays out on average once a week (cover gigs and originals), has two studio releases we actively push through physical and digital platforms, maintains a decent social media presence, and (perhaps most importantly) does this all with the end goal of making a sustainable living for its members. Being an active participant in each of these activities, I claim that The Scarecrow Show is a business, which allows me to claim the income and expenses on my tax return. Almost every year for as many as I’ve been able to do so, I have enjoyed net tax savings by declaring this work as a business.
Because my expenses have, by and large, exceeded the income I’ve made from the band, I’ve effectively reduced my taxable income from other sources. In other words, the net loss from the band can be used to offset the income I had from my day job!
Say you make $20,000 serving burrito bowls like the one you bought on the way to the show, and you have a net loss of $1,500 from your band. These leftover expenses can now reduce that $20,000 to $18,500, saving you about $200 in tax. I’ve saved about $1,000 by including my business activity, and you might be able to as well.
Things to Keep in Mind
Whether or not you have a business is determined at the individual level, meaning not everyone gets to enjoy this benefit. If you can’t substantiate your claim of having significantly contributed to the success of the band, then it isn’t truly a business for you, and you can’t treat it as such. But if you do put in the work, you grind and you struggle and you stress, you might just be in store for some long-anticipated and well-deserved financial respite.
The key to it all is in your records. Keep a mileage journal, store your receipts, and take note of how many crumpled-up $5 bills the promoter gave you at the end of the show. Not only will you need these things to calculate your total income (or total loss), but you should hold onto these records for the same reason any business should: to substantiate your claims as true and complete.
How You Can Start Treating Your Music Like a Business (Right Now)
In the next few blogs, we’ll look more closely at exactly how to rack up the expenses and make the juice worth the squeeze. Fortunately, many of you are probably already running in the red (see, you’re a natural!). Now it’s just a matter of analyzing, accounting, and realizing a tragically under-utilized benefit of our tax code.
Until then, stay safe and stay productive! COVID-19 has radically changed life for all of us, but here’s your chance to start something new. Most of you probably haven’t incurred many music-related expenses so far this year (or generated much income), but when this all lifts. I know we’ll all be right back to it. That gives you at least a couple months before the stage lights go up again to institute a system that will help you track your spending, keep the necessary records, and save a little dough next time the taxman comes a-knockin’.
Photo Source: Clyde Robinson on Flickr
