Reprinted from the March 2013 issue of Allegro, the magazine of the New York City musicians’ union (AFM Local 802). For more information, see www.Local802afm.org. The original article can be seen at this link: http://www.local802afm.org/2013/02/all-tax-tips-for-musicians/

Text by by Michael Chapin

Tax time is around the corner. There are many business and job expenses musicians must pay to keep current in the profession and continue their career. Deducting these expenses can lower your tax bill or increase a refund.

Usually there are two places in the Form 1040 tax return where expenses are deducted:

1. Job expenses for which you receive a Form W-2 (wages) are deducted on Schedule A (Itemized Deductions).

2. Business expenses for self-employed work such as those which you receive Form 1099-Misc are generally deducted on Schedule C (Profit or Loss From Business).

This article mainly concerns Form 1040, which is the individual income tax return. However, these expenses also pertain to other business entities such as an S Corporation, an LLC, or a partnership return.

Business expenses must be ordinary, necessary and related to your current career. In addition, there are many job expenses for which an employer, if needed for the IRS, should be able to provide a letter stating the necessary requirement of these expenses. This request for a letter from an employer has come up more frequently in the last couple years. Many employers are reluctant to provide a complete letter and may have to be prodded to do so.

(A side note to Local 802: I think the union needs to help educate employers regarding the necessity of writing a letter, when needed, which authenticates job expenses. This has become a thorny issue with the IRS and the union could help its members a great deal. Otherwise many legitimate job expenses could be disallowed.)

Below is a list of some business and professional expenses for musicians.

• Union dues and initiation fees, including work dues. This expense is usually only for W-2 jobs.

• Professional memberships directly related to your job. No social, entertainment or health clubs.

• Resume expenses such as printing, mailing, photography fees and resume-listing fees.

• Demo recordings to seek work or enhance your professional standing.

• Web hosting fees for a business or promotional site.

• Agent or manager fees and commissions.

• Trade publications and subscriptions, including web-based subscriptions. Only publications related to your profession (like, for example, Billboard magazine) may be deducted. Your subscription to the New York Times, for instance, may not be deducted.

• Promotional tickets for directors, producers, agents and others when they are bought so they can hear and see you perform as you are considered for a job.

• Professional education that maintains or improves your skills as a musician, including seminars and workshops.

• Subs who you have to pay for yourself. Also accompanists, side musicians and assistants.

• Rehearsal and studio rentals. Also instrument and equipment rentals.

• Professional research, such as recordings, sheet music, books and concert tickets. Be sure to have a substantial reason for each one of these and be able to list them if required.

• Tuxedo and concertwear, if required for work and not used for anything else except work.

• Local transportation to auditions, non-paid performances, professional education or to a second job on the same day. Commuting to your first or main job any day isn’t deductible. (Deducting transportation can be tricky, so do some research starting with the IRS publications I’ve listed at the end of this article or hire a tax preparer.)

• Instruments purchased. These are considered business equipment and have to be depreciated on Form 4562. See the instructions for this form.

For all business and job expenses, you are required to keep records and receipts that substantiate your expenses and the reasons for them. You should have a receipt or a cancelled check for each expense. For every expense you need to provide who, what, where, when and why in a business-like format.

One way to help do this is to have either a business diary or a ledger. With a diary you can have every job, audition and related expense listed under the date. If your diary or ledger is in electronic format, save it for each year and be able to print it on 8.5 x 11 paper when needed. If your diary is a physical one, the minimum size should be 5 inches by 8 inches.

If you use a car for business local transportation, you must have a car log with a daily record. Write down the odometer mileage on Jan. 1 of each year, then when the year ends on Dec. 31. Business mileage along with the destination must be written under the date. You will need the following:

• Business miles driven during the year.

• Commuting miles (which are nondeductible) and the average daily round trip of your commute.

• The total of all miles driven during the year, including business miles, personal miles, commuting and any other.

• Business parking and tolls. With just your mileage figures, most of the time you can use the standard mileage rate. You may also use actual car expenses. But see the IRS publications listed at the end or use a tax preparer.

Keeping track of business receipts can be a chore, but it’s worth money to you – so do it. The old fashion way is to use an accordion file: keep your receipts by category rather than by date. It’s easier to total each category at the end of the year this way and the dates are already in your diary or ledger. In your file, have separate pockets for most of your expenses and a miscellaneous pocket for your lesser-used categories.

If instead you use bookkeeping software, be sure to stay on top of it and be current. Keep the software simple and have a category for each type of expense that can be totaled at the end of the year.

If you keep your business receipts current and categorized during the year, it will be much easier at tax time to pull out the receipts by category and just add them up.

Keeping a current business diary also makes tax time easier. For example, a diary will have all your job locations, your local transportation expenses and will help substantiate your receipts.

Here are some IRS publications and forms that you might find helpful:

• Pub. 17 (“Your Federal Income Tax”). See part five.

• Pub. 535 (“Business Expenses”)

• Pub. 463 (” Travel, Entertainment, Gift and Car Expenses”)

• Pub. 946 (“How to Depreciate Property”)

• Form 2106 (“Employee Business Expenses”)

• Form 4562 (“Depreciation and Amortization”)

These are all available at www.irs.gov call             (800) 829-3676      . Some are available in person at the IRS building in New York City, which is located at 110 West 44th Street.

Michael Chapin has been preparing taxes and consulting for musicians and performing artists for over 20 years. He is active in the arts and also an amateur musician who sings in a choir. For more information, see www.TaxesForPerformers.com.

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Buying an expensive instrument? Don’t try to avoid sales tax

One of my clients bought a very expensive instrument from a store. The store, acting as agent for a private owner, wanted her to provide an out-of-state address where they could say the instrument was shipped to when she actually took it home herself. This way the store wouldn’t collect New York sales tax.

Why? The original owner didn’t want any potential sale to include sales tax but instead wanted all the money a buyer could come up with for themselves – or they wouldn’t sell it.

My client came to me at tax time with this problem. We decided she should pay something called “use tax” in lieu of the sales tax the store wouldn’t collect. Use tax can be paid on your state tax return for purchases you didn’t pay sales tax on. Ordinarily, this is for out-of-state or online purchases.

Though the sales or use tax may be several thousand dollars for expensive instruments, it is much better to pay it than risk a very large bill from New York in the future.

Here’s some history for you: many years ago, fur stores in New York used to let out-of-state customers not pay sales tax and walk out of the store wearing their fur purchases. The stores thought they could let these customers get out of sales tax by mailing an empty box to the customer’s out-of-state address, thus completing the sale. Though this initially saved people thousands of dollars and helped the fur stores make the sale, the state finally audited the fur stores and sent large tax bills with interest and penalties to all out- of-state buyers!

Michael Chapin has been preparing taxes and consulting for musicians and performing artists for over 20 years. He is active in the arts and also an amateur musician who sings in a choir. For more information, see www.TaxesForPerformers.com.

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Tax tips for musicians by Walter Gowens

Tax time is coming, but don’t be afraid. If you think that organizing your financial life is distasteful, just remind yourself that paying more in taxes than required by law is even more distasteful. The better you understand the process and benefits of filing your taxes (yes, there are benefits!), the smoother the process will seem to you. Here, I will answer some frequently asked questions, which may also reinforce some of the things you already know.

First, there is a distinct difference between music being a business or a hobby. For our purposes, I will deal with music being your business. Keep in mind that it does not have to be a full-time business. Many Local 802 members have full-time jobs that are not music related.

Q: What is the difference between music being a business or a hobby?

A: To be in business, you must have what the IRS calls a profit motive, i.e. you must be in it to earn a living or to supplement earning a living. That does not mean that you cannot enjoy doing what you do. To demonstrate a profit motive, some of your activities must include keeping adequate records that clearly show your income and related expenses, maintaining your skills, advertising or seeking paying work as a musician and having some degree of expertise in your craft. You may also want to obtain a separate tax identification number.

Q: What business expenses can I claim as a musician?

A: Business expenses must be both “ordinary and necessary” to be tax deductible. An ordinary expense is one that is common and accepted in your trade or business (for example, union dues, music publications or lessons). A necessary expense is one that helps you to perform your trade or business ( for example, the purchase of an instrument or recording equipment). Keep in mind that even if an expense meets the “ordinary and necessary” criteria, it may still be challenged if it appears to be too lavish. The moral of the story? Document everything! Retain original receipts (you can also scan them). Keep copies of bank and credit card statements that clearly show who, what, when, where and how much was paid for items you want to write off.

Q: What should I do if I am audited?

A: First, take a deep breath. Second, don’t panic. Third, read the audit letter thoroughly to understand exactly what is the IRS or state’s area of concern. Fourth, you must respond. Do not ignore it! Once you know what year and what expenses are under review, provide a response to address only what was requested. Do not volunteer anything additional. If the deductions on your return were legitimately incurred for business and you have the proof showing that they are ordinary and necessary – but not lavish under the circumstances – then there is no reason you wont be able to stare down the IRS. If you need more time to prepare than specified in the letter, you can request it. Also, the IRS and the state make mistakes more often than you think, so it is very important to know what they want from you.

If you do not have or cannot obtain records required to satisfy the auditor and cannot pay the amount due right away, then consider one of the available payment options. One is a payment plan. This is similar to a loan repayment. Monthly payments, including interest and penalty charges, are made to the IRS until the debt is paid in full. Another option involves making an offer to partially pay the amount owed in exchange for forgiveness of the balance. (The IRS calls this an “offer in compromise.”)

The IRS and the states share information with each other about your filings.

Q: What are some of the issues I should be aware of when touring?

A: Touring is a great way to showcase your talent and earn a living doing it. But be aware that most states and some cities have personal income tax filing requirements and have the right to tax income that is earned within their jurisdiction. What that can mean to you is having to file tax returns in multiple states or cities depending on the amount earned. Fortunately, all states recognize that double taxation of your income would be unfair. Therefore, your “home state” (a complex definition, but for our purpose it is where you intend to return to live after touring) will give credit for the greater of income taxes due to the other jurisdictions or to the extent that income tax is due to it.

Another important issue is meals and incidentals. Just when you have gotten into the habit of saving and being able to find receipts while working locally, now comes the pesky task of doing it on the road. Well, the IRS will help to ease your recordkeeping requirement. You are allowed to take a per diem determined by locale in lieu of producing actual receipts when traveling takes you outside of your home area overnight. The range is between $46 for small towns to $71 for major U.S. metropolitan areas (see www.gsa.gov). This does not include lodging and you still must keep records to validate tour locations and dates.

Q: What if my tour goes outside of the United States?

A: Some countries require that a set percentage be withheld from your pay and be remitted directly to the appropriate taxing agency by the organization bringing you into the country. In those cases, usually your tax liability is fully satisfied by the withholding and you don’t have to file any kind of foreign tax return in the foreign country. But back in the U.S., when doing your tax returns here, you are required to report foreign income converted to dollars on your returns for the year it was received. Be sure to file Form 1116 Foreign Tax Credit with your federal return to take credit for any taxes paid or claim them as an itemized deduction on Schedule A, depending on which method provides the most benefit. (The foreign earned income exclusion is beyond this discussion. For more information visit the IRS website atwww.irs.gov and type “foreign earned income” in the search box).

Per diem allowances may be claimed for foreign cities too. The amounts are actually higher than those allowed for U.S. cities.

Q: You said there were benefits to filing tax returns. O.K., what are they?

A: Other than to say it will keep you out of the crosshairs of the authorities, I won’t bore you with the legal aspects of filing. But, by filing you may find that there are certain credits that can be used to help offset some of your tax liability.

One of those is the earned income credit. As the name implies, you must have earned income to qualify (wages, fees and the like). Based on filing status (single, head of household, married filing jointly but not married filing separately) and the ages of children claimed as dependents, this credit can be worth from a few dollars to over $5,000.

If you have gone back to school to pursue a bachelor’s degree, the American Opportunity credit can be worth up to $2,500 – with up to 40 percent of that refundable even if you do not have any tax liability.

If you are pursuing a post secondary degree or just taking a class here and there, the Lifetime Learning credit can be worth up to $2,000.

If you have children age 16 years or younger at Dec. 31, the Child Tax credit can be worth up to $1,000 per child. This should not be confused with the Child and Dependent Care credit which can be worth up to $2,100 for two children (under 14 years old) or adult dependents.

Each of the above credits is first applied towards any tax liability. They provide an excellent way to pay part or maybe even all of your taxes just by doing the things you would do anyway. Other credits worth looking into include the retirement saver’s, electric vehicle, elderly or disabled, and mortgage interest.

Another good reason to file taxes is that if you are self-employed and have faith that the Social Security and Medicare programs will survive, you need to file tax returns to pay into the system in order to get those benefits out. This is different from those working in an employer-employee relationship where the employer withholds those taxes. Studies have shown that the value of benefits received from those programs far exceed the amount contributed to them.

Q: What is meant by Qualified Performing Artist and how do I qualify for it?

A: Qualified Performing Artist or QPA is a government term applied to individuals who meet certain thresholds:

1. Performed services in the performing arts as an employee for at least two employers during the tax year

2. Received wages of $200 or more from at least two of those employers

3. Had allowable business expenses attributable to the performing arts of more than 10 percent of gross performing arts income

4. Had adjusted gross income of $16,000 or less before deducting expenses as a performing artist.

The elephant in the room here is the gross income of $16,000 or less. That figure includes both performing arts and all other sources of income, whether single or married filing jointly. If you do qualify, the QPA expenses can be claimed as an adjustment to income, thus reducing income without having to itemize deductions – truly a significant benefit.

Reprinted from the March 2013 issue of Allegro, the magazine of the New York City musicians’ union (AFM Local 802). For more information, see www.Local802afm.org. The original article can be seen at this link: http://www.local802afm.org/2013/02/all-tax-tips-for-musicians/