Join Richard Stim for an in-depth discussion in this video Deductions, part of Taxes and Accounting for Music.
- [Voiceover] Deductions are the IRS's gift to you, allowing you to subtract all ordinary and necessary expenses from your income. This in turn helps to lower your taxes. To understand deductions, it helps to understand the difference between gross income and adjusted gross income. Gross income is anything you receive that increases your wealth. That includes paper and electronic payments, payments in the form of goods, a club owner pays you with a guitar, or payments in the form of services.
A graphic artist creates cover art, in exchange for your performance at a party. Gross income doesn't include gifts, inheritances, welfare benefits, property that has increased in value but hasn't been sold, or personal injury judgements. Adjusted Gross Income (AGI) is your gross income after adjusting for standard exemptions and deductions. Most taxpayers want to reduce their AGI, because the lower your AGI, the less tax you pay.
And the best way to lower your AGI is to maximize your deductions. If you earn income as a self-employed musician, you can subtract all of your ordinary and necessary business expenses on a dollar-for-dollar basis from your gross income. For example, if you spend $4000 on music business expenses, you can deduct $4000 from your gross income. But this is not exactly the case if you're an employed musician.
If you are an employed musician, usually identified as one who receives a W-2, the amount you can deduct is limited and you must deduct expenses from your AGI, not your gross income. Under IRS rules, you as an employee can take itemized deductions only to the extent that they exceed 2% of your adjusted gross income. Here's how that works. Imagine you are a musician employed by a Las Vegas casino and you have $4000 in personal employee expenses related to your job, your adjusted gross income is $60,000.
2% of that equals $1,200, you must deduct $1,200 from your $4000 in expenses, that leaves you with $2,800 in expenses that you can now deduct from your AGI. If an expense is for both self-employment and for your employer, for example you buy a trumpet that you use for both types of work, do your best to apportion the expense. If two-thirds of your income is from employment, then apportion two-thirds of the trumpet expense to employment.
A group of expenses is known as listed property and includes items such as cars, boats, airplanes, and computers and cellphones. Things that can be used both for personal and business-use. The IRS wants you to document your business-use of this listed property. You can satisfy this requirement by keeping a logbook, showing when and how the property is used.
In this music business course, author Rich Stim covers the most important tax issues for musicians. He starts with the basics: determining if music is a hobby or a business for you and how that affects your deductions. He then discusses money and the sources that determine gross income. From there, he shows the items you can deduct from your gross income—mileage, studio spaces, touring expenses, and other miscellaneous deductions—that can add up to big savings. Next, he covers the different tax rules for individual musicians, bands, general partnerships, LLCs, and corporations, and explains how to get an Employer Identification Number (EIN) when you need one. Finally, Rich navigates through the tax forms, including Form 1040, Schedule A, Schedule C, Schedule SE, Schedule K-1 (Form 1065), Form 4562, Form 8829, and Form 2016, and provides advice on hiring a tax preparer or going the DIY route with tax software.
DISCLAIMER: This course is taught by an attorney (or other instructor) and addresses US law concepts that may not apply in all countries. Neither LinkedIn (including Lynda.com) nor the instructor represents you and they are not giving legal advice. The information conveyed through this course is akin to a college or law school course; it is not intended to give legal advice, but instead to communicate information to help viewers understand the basics of the topic presented. The views (and legal interpretations) presented in this course do not necessarily represent the views of LinkedIn or Lynda.com.
- Managing bookkeeping
- Counting income
- Claiming expenses and other deductions
- Understanding tax entities such as LLCs
- Getting an employer ID number
- Preparing and paying taxes