Allegro

ALL TAX TIPS FOR MUSICIANS

Volume 113, No. 3March, 2013

The following tax tips for musicians were published in the February 2012, February 2013 and March 2013 issues of Allegro, the magazine of the NYC musicians’ union (AFM Local 802). We post an updated article with current tax tips for musicians each year in the March Allegro, which can be found at www.Local802afm.org. There are multiple articles below; be sure to read all the way through in order to maximize your tax tips!

On the Road: Touring, Taxes and You
by Michael Chapin

Tax time is around the corner, and if you go on tour or work out of town, there are things you need to know. As someone who has been preparing taxes for musicians for over 20 years, I would like to cover some basics about touring and taxes.

This can get very technical quickly, but you need the details in order to handle this complicated area.

Musicians on tour often get a daily reimbursement, also called a “per diem.” If you’re on tour and had to pay some travel and meal expenses that were more than your per diems, you can deduct the amount you spent that was over the per diems you received.

Generally you can deduct the amount of money that you weren’t reimbursed for. So if you were given $25 as a per diem and you spent $35, the additional $10 you spent can be deducted.

Sometimes an employer will include your per diems or reimbursements as wages in box 1 of your Form W-2, or as nonemployee compensation on Form 1099-MISC. In either of these cases you will be able to deduct all of your travel and meal expenses on your tax return.

Deducting travel

For business travel to be deductible, the trip must be away from home and the general area where you work or conduct business. You must be away substantially longer than an ordinary day’s work, and long enough to require sleep or rest to complete your work. The amount of sleep required must be long enough to need lodging; a short nap or minimal rest isn’t enough to satisfy the IRS rest requirement or overnight rule.

The travel must be primarily for business and your trip must be entirely business or job related. Also, the job must be a temporary assignment lasting one year or less.

Most tours will fit into these guidelines.

If you don’t fit these parameters or are unsure, speak with your tax advisor or preparer to find out what you might be able to deduct.

How to report reimbursements

You need to report on your tax return all reimbursements you received for travel expenses you are deducting.

If you were an employee, per diems and reimbursements may be listed in box 12 of your W-2 with code letter L. However, most tour producers and theatrical employers don’t do this. Nonetheless, reimbursements for travel expenses for which you are taking a deduction must still be listed on your tax return.

So keep a record or pay stubs that show the amount of salary, and a separate amount for per diem or reimbursements paid.

You will also need to know how much of the per diem was for meals and how much for lodging.

Employees (those with a Form W-2) should use Form 2106, “Employee Business Expenses,” to deduct travel, meals and business entertainment, and also report any reimbursements for these.

The reimbursement amount is then subtracted from travel and meal expenses being deducted. If your travel expenses are more than the reimbursement, you have a further tax deduction.

For independent contractors or self-employed individuals who have travel deductions, reimbursements are counted as income on Schedule C. You can then deduct travel and meal expenses in Part II of Schedule C.

Meals and business entertainment

Always list and deduct meals and business entertainment separately from all other expenses. Never combine your meals with other travel expenses. In addition, only 50 percent of meals and business entertainment not reimbursed are allowed as a deductible business expense.

Employees should use Form 2106 to figure the 50 percent limit. Independent contractors should see instructions for Schedule C (line 24b), and the 24b worksheet.

To deduct meals while out of town for business, you can use the actual receipts you kept or use a federal “Meals and Incidental Expenses” rate, also called the standard meal allowance. This rate is listed in IRS Publication 1542. See irs.gov or gsa.gov.

Caution: there is also a federal per diem allowance for lodging which is only for employers to use. You can’t deduct a lodging per diem amount instead of receipts. For lodging expenses, use actual receipts you’ve kept.

Nonunion tours may provide lodging and give you a small meal per diem of perhaps only $20 to $30 a day. In this case, it may be worth it to report on your tax return the total amount of meal per diem received and then list the federal meal allowance allowed. You will end up able to deduct 50 percent of the amount the federal meal allowance is over the $20 to $30 a day you were paid. On a long tour, this could add up.

The federal meal allowance is based on what city you were in. The lowest amount is currently $46 a day and can be as much as $71 a day in larger cities.

Employees should use Form 2106 lines 6 to 10 and independent contractors should see Schedule C, Part I along with Part II line 24b and the 24b worksheet.

Other travel expenses

Here are some other deductibles to consider:

Transportation between home and business destination by airplane, train, bus or car. If you travel by ship there are additional rules and limits; see IRS Publication 463 or speak to your tax advisor.
Local transportation, including taxis, auto rental, car mileage or public transit. You may include travel to and from the airport or station and hotel and between the hotel and theatre, work location or meeting place.
Lodging. Remember, you need receipts to deduct lodging. Lodging must be for business purposes, and you must fit into the IRS rest requirement or overnight rule as discussed above.
Shipping and baggage fees.
Business calls on your phone and other business communication such as faxes, e-mail, texts, etc.
Laundry and dry cleaning.
Other expenses which are ordinary and necessary for business, such as computer rental fees or remote Internet access.

Taxes in two states

What if you paid taxes to another state besides your resident state?

Many tours withhold state and local income taxes for states where you worked but don’t live. Income earned in another state and the taxes withheld on it should be reported on a Form W-2.

Sometimes there is a separate “state only” W-2 for other state’s income and taxes withheld or the information is reported on your main W-2. There is a state tax credit available on your resident state tax return so you won’t be double-taxed for income earned out of state.

First you need to prepare a nonresident tax return for the other state to figure out how much the other state’s tax is. Then you can figure your credit for taxes paid to another state.

New York residents use Form IT-112-R, “New York State Resident Credit.” New Jersey residents use state Schedule A. Connecticut residents use Schedule 2.

With these forms you can subtract part or all of the taxes you paid to another state from your resident state taxes. This way you won’t have to pay two state taxes on the same income.

Conclusion

I have tried to discuss the main highlights, concerns and pitfalls of working out of town. I haven’t addressed all the variables, which can get complex and cumbersome.

If you do this on your own, be sure to get the IRS publications as well as the tax forms with instructions I’ve referred to.

Also get IRS Publication 17, “Your Federal Income Tax,” which is a general guide to taxes for individuals. Finally, make sure you check out www.irs.gov.

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.

Tax Tips for Musicians
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:

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

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!

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 at www.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:

Performed services in the performing arts as an employee for at least two employers during the tax year
Received wages of $200 or more from at least two of those employers
Had allowable business expenses attributable to the performing arts of more than 10 percent of gross performing arts income
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.

Here are some last-minute checklists. Did you remember to:

depreciate your equipment
keep a mileage log if a personal vehicle was used
adjust your W-4 allowances to reflect increased or decreased tax withholdings needed to cover your liability
if self-employed, did you make estimated tax payments so that your cash flow will be less strained
most importantly, did you save your receipts in an organized manner?

Good luck with your taxes! I hope that they will be less stressful and maybe even financially rewarding.

Walter Gowens is an Enrolled Agent. He formerly worked for the IRS and currently represents clients in various disciplines before the IRS and state tax authorities. Gowens earned an MBA in finance from Indiana University and a B.S. in business administration from Arizona State University. He is president of Prudential Vanguard Financial Services, Inc. Its Actors, Artists, Athletes & Authors division prepares income tax returns and provides other services for those in the performing arts. You can reach him at AAAA@PrudentialVanguard.net.

Tax tips for musicians by
Gould, Kobrick and Schlapp

Each year, as the tax season approaches, Allegro publishes these updated tax tips for musicians provided by Local 802’s accounting firm, Gould, Kobrick & Schlapp P.C.

OVERVIEW AND HIGHLIGHTS

The following outline focuses on aspects of the tax law that specifically affect musicians. For additional information on deductions, exemptions or filing status, see a tax advisor or www.irs.gov.

Here is a quick overview of some highlights for this tax year:

The top four basic tax rates above 15 percent remain the same for tax year 2012. (The rates are 25 percent, 28 percent, 33 percent and 35 percent). However, in the beginning of 2013, a fifth basic tax rate of 39.6 percent was introduced.
The personal exemption amount for 2012 is $3,800.
The basic standard deduction is $5,950 for singles, $8,700 for heads of household, $11,900 for married filing jointly and $5,950 for married filing separately.
All unemployment compensation is taxable in 2012.
The standard mileage rate for business use of your car is 55.5 cents per mile for 2012. The rate for medical expense and moving expense deductions is 23 cents a mile. For charitable volunteers, the mileage rate is 14 cents a mile.
Wages and self-employment earnings of up to $110,100 are subject to the Social Security tax for 2012
The temporary 2 percent reduction in the tax rate on the employee portion of Social Security expired on Dec. 31, 2012. The rate is 4.2 percent for 2012 and 6.2 percent for 2013.
Required Minimum Distribution (RMD) must be received by April 1 of the year following the year in which you reach age 70½ from your traditional IRA account(s). If a RMD is not received within the required period, the IRS can impose a penalty of up to 50 percent on the amount not received.
A six-month automatic extension may be obtained by filing Form 4868 by April 15, 2013.
Taxpayers can deduct either state and local income taxes or state and local general sales taxes. The sales tax deduction is based on an IRS table or actual sales taxes. You should get the advice of your tax preparer when filing your return.
For 2012, the contribution limit for traditional IRAs and Roth IRAs remains $5,000 or $6,000 for those ages 50 or older.
Taxpayers with interests in foreign bank accounts or other foreign financial accounts or assets may have to file Form TD F90-22.1 (FBAR) or Form 8938, or possibly even both forms. Substantial penalties may apply if a required form is not filed.
Eligible individuals in 2012 covered by a qualified high-deductible health plan can make deductible contributions to a Health Savings Account (HSA) up to $3,050 for self-only coverage or $6,150 for family coverage. Other rules may apply so consult your tax preparer.
The Residential Energy Credit is a 30 percent credit allowed for the cost of certain qualified residential energy saving items.
The first-time homebuyer credit has expired in 2012.
In 2012, if the claimed value of a donated car exceeds $500, a qualifying written acknowledgment must be obtained and must be on form 1098-C and attached to Form 1040 or no deduction is allowed. If the charitable organization sells the vehicle without having put it to significant use or improving it, the deduction may be limited.
If a new car is placed in service in 2012 and used over 50 percent for business, bonus depreciation allows an $11,600 first-year depreciation limit. The limit is $3,160 if bonus depreciation is not allowed. For a light truck or van, the limit is $11,360 if bonus depreciation applies and $3,360 without the bonus. The limits are reduced for personal use.

INCOME & RELATED EXPENSES

Professional musicians may have income from which tax has been withheld (W-2) or income from self-employment where neither tax nor Social Security has been deducted.

If the musician is self-employed, all allowable travel and other expenses should be deducted on Schedule C before the adjusted gross income is entered on page 1 of the tax return.

If the musician has only W-2 wages, these expenses must be deducted on Schedule A.

Reimbursements for expenses (e.g., travel and entertainment) received under an accountable plan do not show up on the musician’s Form W-2, are not reported as income, and do not give rise to deductions.

However, if the employee’s expenses exceed reimbursements, the excess may be claimed on Form 2106 as an employee business expense.

Generally, reimbursements are considered received under an accountable plan if:

They are made for deductible business expenses;
The employee accounts for the expenses to the employer; and
The employee returns any excess reimbursement.

Reimbursements received under a non-accountable plan (any plan other than an accountable plan) are subject to withholding and employment taxes and are shown as wages on Form W-2 and must be reported as income on Form 1040.

The employee may be able to offset the extra income by claiming employee business expenses on Form 2106, but such expenses, along with other miscellaneous itemized deductions, may be claimed only to the extent they exceed 2 percent of adjusted gross income.

OTHER EXPENSES

Also deductible are employees’ expenses incurred in the practice of your profession. In addition to the travel expenses discussed above, they include:

Union dues, assessments and initiation fees;
Commissions paid to agents and booking offices;
Dues to other professional societies;
Rehearsal hall, studio or office rental;
Sheet music, transcriptions, arrangements, records, manuscript paper, etc.;
Stationery, printing and postage used in business;
Telephone used for business (a portion of your home phone may be deducted);
The costs associated with your cell phone, as long as the calls are made for business purposes;
Books and subscriptions to professional journals;
Advertising and photographs for promotion;
Other promotional expenses such as entertaining potential purchasers of music and gifts (not exceeding $25 per recipient);
Repairs and upkeep of instruments;
Insurance on instruments;
Substitutes’ pay;
Legal expenses for drawing up contracts of employment;
Rental of instruments;
Depreciation of instruments or recording equipment.

If you’re a self-employed freelance musician, you may be able to deduct the cost of your internet service provider, web site designer, web site expenses, domain hosting bill or anything related to the internet that is related to your business. (If you are not self-employed, check with your tax adviser.)

If you’re a self-employed freelance musician, you may be able to deduct the cost of buying a computer if it is used for business purposes, and you may also be able to deduct a portion of the depreciation on your computer each year. (If you are not self-employed, check with your tax adviser.)

Self-employed musicians (those who use Schedule C) may take tax deductions for contributions made to formal pension or profit-sharing plans for themselves and their employees. The procedures for this are quite complicated, and we advise that professional assistance be employed.

Note that two items – home office expenses and expenses for uniforms – were omitted from the above list. A word of caution is needed as to their deductibility.

HOME OFFICE EXPENSES

You may claim a deduction if you use your home office exclusively and regularly for the administration or management activities of your business and you have no other fixed location where you conduct such activities.

Exclusive use means that the office space must not be used for personal purposes. And you may not deduct home office expenses in excess of your net business income as a musician. The rules for the Home Office expense deduction go beyond this general description and should be discussed with your tax preparer.

EXPENSES FOR UNIFORMS

The cost of uniforms and other apparel, including their cleaning, laundering and repair, is deductible only if the garments are specially required in order for you to keep your job and are not adaptable to general or continued wear, to the extent that they could replace your regular clothing.

You may not deduct the cost of ordinary clothes used as work clothes on the grounds that they get harder use than customary garments; that they are soiled after a day’s work and cannot be worn socially; or that they were purchased for your convenience to save wear and tear on your better clothes.

That your job requires you to wear expensive clothing is not, according to the IRS, a basis for deducting the cost of the clothes, if the clothing is suitable for wear off the job.

Deductions have been allowed to musicians for formal wear and the costs of theatrical clothing and accessories, if these items are not suitable for ordinary use.

TRAVEL EXPENSES

The deductibility of long-distance travel involving railroad or plane fares is fairly clear. The fares, plus related costs – such as taxis to or from the depot, baggage-handling charges and passports – are all deductible as travel expenses.

If you were away from home overnight, you may also deduct all of the following expenses: 50 percent of meals and entertainment; 100 percent of travel and lodging; laundry and cleaning; tips to bellhops and chambermaids; and transportation at destination.

Musicians may also use their own cars for business travel. The deductible items involved include: depreciation of the cost of the auto; gas, oil and tires; insurance, license and registration fees; parking expenses (e.g., garage rental or parking meters); parkway or bridge tolls. The point to remember in deducting auto expenses is that after you have totaled all of these costs, you must subtract that portion used for personal purposes.

The regulations call for an allocation based upon both time and mileage used, and this is often the most difficult part of the calculation.

An alternate method involves computing the amount of business mileage and then multiplying those miles driven by 55.5 cents per mile effective Jan. 1, 2012. You may still deduct direct costs such as parking and tolls (but not depreciation, gas or oil).

The real problem in travel expenses is determining what portion of local travel (that is, not away from home overnight) is deductible.

In no case are personal meals deductible if the musician does not sleep away from home.

The regulations say that commuting costs are not deductible. This means that if the musician travels only from home to the hall and back again, the costs of travel are not deductible – even if the instruments are so bulky and heavy that it is impossible to use public transportation.

The costs of transporting instruments to and from work are deductible only if extra costs were incurred.

If you are playing more than one job during the day, you may use the business mileage formula described above for travel between jobs.

Again, except for any additional expenses, there is no auto deduction for travel to the first job or home from the last.

JOB EXPENSES & EDUCATION

Bills are required as proof for all job expense items exceeding $75.

There are many items of a lesser amount – such as tips and taxi fares – where no proof may be obtained.

Detailed records must be kept of these expenses (and of business mileage if a car is involved) through a careful diary or log. Keeping such records takes time and effort. If your return is ever examined, however, you could lose your entire deduction in the absence of a good log or diary.

Numerous other items are deductible by the professional musician. Among these are education expenses, accounting fees and fees for investment advice.

With regard to education, you may take a deduction for any training or coaching that sharpens your present job or professional skills, or meets the expressed requirements of your employer for you to retain your job. You may also be able to deduct the cost of a course if you are entering a new specialty within the music field.

PROCEED WITH CAUTION!

A great deal of specific information appears in the booklet every taxpayer is sent with pre-addressed income tax forms.

If you have a complicated return or a particular tax problem, consult your own tax advisor or, if you prefer, contact one of the IRS taxpayer assistance sections at any of its offices.

If you make less than $16K as a musician, check out this tax tip!

If you earn less than $16,000 per year as a musician, you may be eligible to deduct business expenses as an “above the line” deduction, meaning that it can reduce your adjusted gross income. This could be an advantage for musicians. The following information is from IRS publication 463 (see www.irs.gov):

If you are a performing artist, you may qualify to deduct your employee business expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. To qualify, you must meet all of the following requirements.

During the tax year, you perform services in the performing arts as an employee for at least two employers.
You receive at least $200 each from any two of these employers.
Your related performing-arts business expenses are more than 10 percent of your gross income from the performance of those services.
Your adjusted gross income is not more than $16,000 before deducting these business expenses.

Special rules for married persons. If you are married, you must file a joint return unless you lived apart from your spouse at all times during the tax year. If you file a joint return, you must figure requirements (1), (2), and (3) separately for both you and your spouse. However, requirement (4) applies to your and your spouse’s combined adjusted gross income.

Where to report. If you meet all of the above requirements, you should first complete Form 2106 or 2106-EZ. Then you include your performing-arts-related expenses from Form 2106, line 10, or Form 2106-EZ, line 6, in the total on Form 1040, line 24.

If you do not meet all of the above requirements, you do not qualify to deduct your expenses as an adjustment to gross income. Instead, you must complete Form 2106 or 2106-EZ and deduct your employee business expenses as an itemized deduction on Schedule A (Form 1040), line 21.

On the Road: Touring, Taxes and You by Michael Chapin

Tax Tips for Musicians by Michael Chapin