Automobile and Vehicle Expenses
The use of your automobile is probably one of the most common and largest deductions for musicians. The automobile use expense can be taken in two ways. The first method is by using the IRS “standard mileage allowance.” In 2007, this annually defined allowance is 48.5 cents a mile (50.5 a mile in 2008). To take this deduction you do not need receipts, only records that show the distances driven and the business purpose of the trips. These would include travel to gigs, trips to the music store picking up equipment and supplies, rehearsals, etc. The best tool for tracking and calculating this expense is your appointment book or calendar. If your calendar has a record of rehearsals and gigs it can be used as a tool to estimate your mileage deduction (odometer readings are appreciated by IRS but NOT required). The second method is to write off direct expenses. In this method you actually depreciate the cost of the vehicle (over 5 years) and then tally up gas slips, repairs, insurance, etc and use that amount as a basis for your expense. This method requires more work and organization. If you were writing off a tour bus, cube van or other larger vehicle, the second method would be preferred. In my practice I often find the mileage allowance method generally yields the highest deduction for straight automobile use. In any case, the IRS allows the taxpayer to calculate the best method year by year and take the one that yields the highest deduction (within limits).
Equipment purchased is generally “depreciated” and written off over five or seven years on Form 4562. Depreciation is a technique for expensing or writing off purchases that have a useful life of greater than one year. In other words, a set of drums is intrinsically different in nature than a set of drumsticks because the drum set will (hopefully) last longer than one year (Keith Moon types excepted!). Supplies such as drumsticks, guitar strings, cords, music books, CDs and tapes, reeds, etc. will be written off (or deducted) in the year of purchase. Most musical equipment is written off in five to seven years. These “depreciable lives” are defined in the IRS code. The main tax strategy when it comes to depreciation is the use of what is often called “the section 179 election.” In 2007 the IRS allows taxpayers to “expense” up to $125K ($128K in 2008) of equipment in any one year. In this case the drummer is allowed to write-off his or her $8,000 drum kit in one year rather than wait seven years to do it. Remember, this “section 179 expensing election” only accelerates the deduction into one year; in either method the artist is able to write-off (depreciate) the full cost of the purchase.
The Home Office or Studio
The home office has been a contentious subject in my profession for a number of years. With recent legislation the home office has finally returned to its rightful place as an allowable deduction for many musicians & performers. In fact, a recent tax court case helped seal this fact. If you use a room (or rooms) in your home exclusively for your music business you will probably qualify for the home office. The use of the room can be as a rehearsal space, storage area for equipment, teaching space, home recording studio, record keeping for the business, marketing, etc. The home office is a fairly straightforward deduction to calculate on form 8829. It simply utilizes a formula based on the square footage of the business portion (the home office) of your home vs. the total square footage of the house or apartment and applies that percentage to all associated costs. The costs could include rent, mortgage interest, real estate taxes, condo fees, utilities, insurance, repairs, etc. Other rules that come into play here include the “exclusive use” requirement. This rule states that the home office must be used only for the business – no “mixed use” allowed. In other words the home office cannot be part of a larger room such as the living room unless the business part is partitioned off in some way. The home office can be a powerful write-off as it allows the musician to deduct a part of what were non-deductible personal expenses.
Other Unique Deductions
Performers and musicians have other unique deductions that are considered personal for most other taxpayers. These include concert tickets, CDs, stage makeup and clothing, music lessons, etc. Remember not to get greedy on items like concert tickets, shows and CDs. The IRS loves to attack deductions such as these. But they are allowed since performers must keep up with trends in their profession. Most tax preparers call it “research,” but be prepared to justify it. In any case do not deduct every concert or show you attend in the year; they can’t all be “research.” This also holds true for CDs, some purchased must be for personal pleasure alone.
Remember that this outline is not intended to be the whole story. The Federal Tax Code is very complicated and your specific applications should be reviewed with a tax professional before filing your taxes. The musician and performer are unique in the world of taxes. When you are shopping for a tax preparer please make sure they have some experience in taxation for performers. Also, organize your numbers using our attached worksheets (and bring along this article), it will make the process easier, cheaper and will help you maximize your deductions. Ask your preparer about other tax saving strategies for self-employed individuals such as retirement plans, health insurance and deduction timing.