How You Can Prepare Now For Next Year’s Taxes As A Musician

Unveilmusic - Taxes & Receipts
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Every year we have to worry about filing our taxes for all of our income. You get forms from employers and banks and figure out your deductible expenses. What about your music-based finances though? Well depending on how much you earn and how you classify your efforts you may be able to minimize your taxable income. Now that this year’s tax date has passed, what can you do to prepare for next year?

Getting Organized

Before we can start reporting our income and deductions, it is probably best to track and organize it all. There are numerous ways to do this, from old school filing your receipts to digitally recording everything. While you can still file all your receipts in a file cabinet (and you should do this), I find it better to use something to digitize the receipts so the information is easier to find. While there are devices out there you can buy to handle this process such as the NeatReceipts scanner, my personal recommendation is to use Evernote. As long as you have a camera, smartphone, or tablet with which to take a picture of your receipts, you can easily file them in Evernote. The advantage to this is Evernote will use OCR to make the text in the image searchable, thereby making it easier to find that receipt you need.

Of course, this arrangement is good for tracking the receipts themselves but can make calculating your expenses a bit tedious. This is where I like using spreadsheets to help track everything. An obvious option is of course Microsoft Office’s Excel, but Office is a bit pricey if you ask me. That is why I just use Google Docs for tracking my information. First advantage is that the information is saved in the cloud, and this let’s me access if from numerous devices. The second advantage of spreadsheets is obviously the use of formulas. Rather than having to tally up various expenses and income records, you can set up formulas in your spreadsheets to calculate it all as you add the information. Getting into the various formulas that can be useful in this case is a series of posts in itself. Fortunately, Google is a wealth of information to help you figure out how to set up the formulas you need.

What Do I Report?

Now that you are tracking your income and expenses, you need to make a decision about how to treat these finances. The only two options are as a business or as a hobby. While there will be variances from state to state, the main aspect is that a hobby only allows you to deduct up to the amount you make doing it. Reporting your income as a business means you can report a loss but not every year. Either way, obviously you need to track certain things for when you have to report your finances at tax time. You should be tracking all income and organizing it in any way to suits your needs. I tend to prefer organizing mine based around performance income, lessons, and merchandise or Other. At the same time you need to keep track of a multitude of expenses ranging from your mileage on your vehicle, food and other travel expenses, equipment expenses, etc….

What Can You Deduct?

Now here’s the fun part: deductions! Now once again, this is affected by your choice of hobby or business. Even with business however, you have to keep in mind that the IRS considers personal use to be separate from actual business use.

  • Instruments – obviously if you use the instrument for your business you can deduct but in you use it for personal use as well you should only deduct a percentage based on how much it is used for business
  • Additional music gear – the same goes for your amps, pedals, cases, etc…
  • Instrument and equipment repair costs
  • Consumables – items that are replaced on a regular basis such as strings, guitar picks, woodwind reeds, drum sticks, etc…
  • Books related to your craft – buying books about music and music business related aspects can be deducted as business expenses
  • Sheet music, transcriptions, manuscript paper, tablature books, etc…
  • Percentage of your rent/mortgage and utilities if you have areas of your home designated strictly for music purposes based on percentage of square footage the area takes up in your homes total square footage
  • Rented storage space for music equipment
  • Mileage and repairs on your vehicle based on percentage of business use versus personal use
  • Business meals and meals during travel for business purposes
  • Insurance on your musical equipment

The list goes on and on and depending on how much you earn and spend you may find some deductions aren’t worth the trouble. Also, once again some of these won’t even be an option if you are reporting your income as a hobby. A hobby after all doesn’t involve business meals or travel expenses like mileage. Depending on how much you want to try and deduct in the end is also how thoroughly you need to structure your tracking and organizing efforts for your income and expenses.

Check out these Income and Expense checklists for musicians to help you get started tracking your finances.

James Higgins (295 Posts)

Professional guitarist and instructor based in Alabama; performance, songwriting, and recording. Atlanta Institute of Music graduate. Part-time blogger.

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