Income Tax Planning for Musicians
As a musician, you have expenses that are unique to your industry. Utilizing the tax deductions available for musicians is essential to reducing your tax liability. This is especially true since some of the deductions musicians may have used in past tax years were eliminated with the passage of the Tax Cuts and Jobs Act.
In this article, we discuss several of the unique income tax planning issues for musicians and how musicians can take advantage of tax laws to reduce income tax liability. We’ll talk about:
· First Year Depreciation Allowance for Equipment
· Deducting Expenses for Travel, Vehicles, Meals, and Equipment
· Changes from the Tax Cuts and Jobs Act
First Year Depreciation Allowance for Equipment
The expected useful life of most musical equipment is five to seven years, according to the IRS code. Therefore, a musician “writes off” the cost of equipment over five to seven years for tax purposes. Other equipment not expected to last more than one year is typically written off or deducted in full the year it is purchased. For example, the cost of supplies such as cords, music sheets, books, and strings is typically deducted the year they are purchased.
However, a change in the tax law allows musicians to write off up to $1 million for purchases of equipment during 2018. Section 179 allows for the immediate expensing of musical equipment and assets. Instead of spreading out the deduction over five to seven years, you can deduct the full purchase price of equipment to reduce your taxable income. Therefore, if you purchased musical instruments, recording equipment, computers, audio gear, or other expensive equipment for your business in 2018, you may take advantage of a large tax deduction.
Determining whether to accelerate the deduction for equipment can be complicated. While it may reduce your taxable income for 2018, you cannot use the deduction again in future years for the same equipment.
A change in the tax law allows musicians to write off up to $1 million for purchases of equipment during 2018.
If you are a musician just starting out, it may be more beneficial to spread out the deduction over five to seven years because you may expect an increase in income as you grow your business over the next few years. It may be a greater tax benefit to utilize the tax deductions in the coming years when you have more income and greater tax liability. A Maryland tax attorney can help you with advanced tax planning to take full advantage of equipment deductions.
Deducting Expenses for Travel, Vehicles, and Meals
A musician’s expenses related to travel, vehicle, and meals can be a large portion of the deductions taken each year to reduce tax liability. Detailed expense records are required to take full advantage of the deductions for travel and meals. You can deduct 100 percent of the cost of overnight travel for business purposes.
Therefore, if you travel far enough away from home for an audition, performance, or recording session, you can deduct the full value of your hotel room and other expenses related to the reason you needed to travel.
For instance, if you traveled for an audition to another city, you should be able to deduct the cost of your hotel room, parking fees, reasonable tips, and other expenses related to the audition. You need to keep copies of all receipts that prove the exact cost you are deducting for travel expenses.
Meals are different. You can only deduct up to 50 percent of the expenses for meals when you travel. Because it's difficult to keep up with receipts for meals and calculate the correct deduction, many musicians take advantage of the meal allowance for deducting the cost of meals while traveling. The IRS allows a set amount for meals when you travel, provided that the travel can be documented as a valid business trip. When you choose the meal allowance, you need not keep receipts for meals and incidentals.
You can deduct 100 percent of the cost of overnight travel for business purposes.
Business meals are a separate deduction. You may only deduct up to 50 percent of the meal, and you must keep careful records to prove that the meal was business-related. For instance, if you cater a meeting with the band, you can deduct up to 50 percent of the cost of the meal. If you meet with a potential client or a business manager, you can deduct up to one-half of the meal. To help document that the meal was business related, it is helpful to keep notes about who was present and what was discussed. If the person has a business card, keeping the business card with the notes can be useful.
Vehicle expenses are another allowable deduction, but it must also be carefully documented if you choose to deduct direct expenses. The easiest way to claim a vehicle expense deduction is to use the IRS standard mileage allowance. Receipts are unnecessary to claim the standard mileage allowance, but you need to maintain records of your mileage to and from business-related meetings, performances, rehearsals, errands, etc.
The easiest way to claim a vehicle expense deduction is to use the IRS standard mileage allowance.
Mileage apps or an old-fashioned calendar can be used to track mileage and trips. If you intend to write off direct expenses, you must have receipts for all repairs, fuel, insurance, oil changes, or other expenses related to your vehicle.
Changes from the Tax Cuts and Jobs Act
While some changes to the tax code were beneficial to musicians, some changes may actually increase your tax liability. Working with a Maryland tax attorney can help you determine how to take advantage of the positive changes to offset the non-beneficial changes.
Many musicians accustomed to itemizing deductions may have a difficult time accumulating enough expenses to exceed the standard deduction.
Some changes from the Tax Cuts and Jobs Act (TCJA) that may affect your tax liability for 2018 and beyond include:
The standard deduction almost doubled for 2018, but the personal exemption was eliminated. Therefore, many musicians accustomed to itemizing deductions may have a difficult time accumulating enough expenses to exceed the standard deduction. When combined with the cap on some allowable deductions for musicians, you may be required to take the standard deduction in 2018 and beyond.
The TCJA has eliminated all "Miscellaneous Itemized Deductions" for musicians who receive a W-2. The deductions for “Unreimbursed Employee Expenses” have also been eliminated by the TCJA. Unfortunately, W-2 musicians are penalized by the new tax code because they cannot deduct many expenses they have deducted in the past, including purchasing instruments, concert attire, mileage, union dues, membership fees, and sheet music. If you earn income on the side, filing a Schedule C may help you deduct some expenses that are no longer allowed for W-2 musicians.
Self-employed musicians may receive a significant tax benefit as a “pass-through” business entity. A 20 percent deduction on Qualified Business Income may significantly reduce your tax liability as a self-employed musician. There are income caps for this tax benefit, and you need to make sure you qualify to claim the expense, so you may want to consult a Maryland tax attorney if you have questions.
A Maryland Tax Attorney Can Help Musicians with Income Tax Planning
The information above is a brief summary of just some of the tax issues faced by musicians. With the changes in the tax law, it is important that musicians take advantage of all tax exemptions and deductions to reduce tax liability. Contact Thienel Law today to discuss the above issues and other tax matters that directly impact musicians. Maryland tax attorney Steve Thienel is dedicated to assisting clients in Maryland, Virginia, and throughout the DC Metro area.