How to Reduce Your Taxes as a Working Musician

All US taxpayers, including musicians, will soon begin the arduous task of gathering pertinent documents to file their tax returns. While they’ll undoubtedly look to find ways to reduce their April 15 tax liability, many may realize it’s too late. That’s because most tax-reduction strategies need to be implemented by December 31, which is the reason for this timely article.

As a CPA serving the music industry for the past 40-plus years, coupled with being a performing, songwriting, and recording guitar player for about 50 years, I’ve had the pleasure and responsibility of assisting our music-making clients in filing accurate tax returns and helping minimize their tax liabilities along the way. But it always pains me when I learn they could have reduced their tax liability if they had called us earlier and acted prior to December 31. What’s worse is if they relied on some friendly, but ultimately faulty, tax advice overheard at some social gathering. This cocktail-party advice goes something like this: “My accountant is awesome because he told me to empty my checking account on business stuff and got me a big refund” or “My accountant saved me from paying any payroll tax by becoming a S corp” or “My accountant told me to go buy a new expensive car because it’s fully deductible.” Whenever I hear that kind of rhetoric, I typically want to facetiously retort, “Well, you know, everything is deductible . . . as long as you don’t get audited.”

I never get upset at any of my beloved musician friends for asking a half-baked tax question. After all, their proverbial wheelhouse is in making music, not in studying the US tax code. But these tax myths and the people who spew them as gospel haven’t a clue of how much trouble they are potentially causing by not fully understanding the applicability and effect of these misapplied tax laws. That’s why shedding some light on some of the tax myths and common issues facing the working musician is the primary purpose of this article. So, here we go.

• Music Making: Business or Hobby?
• Business Entity Type: Which One Is Right for You?
  • Sole Proprietorship
  • Partnership
  • Corporation
  • Limited Liability Company (LLC)
• Musician Income: Why Correctly Tracking & Classifying It Is Important
• Business Expenses: Why Documentation Ultimately Reduces Tax
• Business Expenses: Ordinary & Necessary
  • Music Instruments & Recording Gear
  • Media & Research Costs
  • Office/Home Studio Costs
  • Travel & Meal Costs
  • Auto Expense
  • Costs Incurred in Producing Sound Recordings
  • Other Musician Costs
  • Things You Can’t Deduct
• State & Foreign Tax Reporting: A Taxpayer’s Nightmare

Music Making: Business or Hobby?

While I’ve made some money from songwriting royalties, selling my CDs, and playing gigs with my all-CPA classic rock band, the Accounting Crows, all of these income-producing activities are truly hobbies for me. My primary source of income comes from delivering accounting, tax, and consulting services to our music industry clients. On the other hand, my clients generate the predominance of their annual income as songwriters, recording and touring musicians, recording engineers, producers, music educators, and music gear technicians. For them, their musical endeavors are their primary sources of income — making it their business, not their hobby.

This distinction becomes important when reporting this musical income-producing activity on your tax return and there happens to be a loss (as many musicians experienced during the pandemic). Because a real business operates with the intent of making a profit (even if it occasionally incurs a loss), it can use a tax loss to offset other income. A hobbyist, on the other hand, cannot create a tax loss from excessive deductions.

Note: a full-time W-2 employee wanting to take a huge loss from their really small side-gigging activity can’t create a loss to offset their W-2 income.

Business Entity Type: Which One Is Right for You?

Picking the right business entity type can be an overwhelming task for a self-employed musician. This section will explain the different types of business entities that musicians can choose from, along with their pros and cons. But this recap is not a substitute for quality legal advice.

Note: I highly recommend you consult a business lawyer, as certain legal and tax aspects of each business entity will sometimes vary by state.

But with that said, a music business can generally choose to be either a sole proprietorship, partnership, corporation, or limited liability company.

Sole Proprietorship

A sole proprietorship is the simplest and most popular business entity for many musicians. It’s the default option when a single person starts a business, as it doesn’t involve any paperwork to set it up. Sole proprietorships:

• Report their revenues and expenses on their Form 1040, Schedule C
• Have the option of registering under a DBA (Doing Business As) name
• Typically open a bank account under the owner’s social security number

Note: if you plan on having employees, then you’ll need to obtain a federal EIN (Employer Identification Number) from the IRS by filing an SS-4 form at www.irs.gov.

Partnership

A partnershipis similar to a sole proprietorship, but there is more than one owner in a partnership. Partnerships:

• Report their revenues and expenses on federal Form 1065 but allocate and report net taxable income among partners on a Schedule K-1 with tax paid at the partner/owner level, not the partnership level
• Operate under the terms of an operating agreement
• Must obtain a federal EIN in the partnership name

Corporation

A corporation is a legal entity organized by filing articles of incorporation with the Secretary of State’s office in the state you choose to incorporate. Corporations can be owned by one or more shareholders. Corporations are annually taxed on their net profits (a.k.a. “C” corporations) or can elect to be taxed as “S” corporations whereby, like partnerships, net taxable income is allocated among its shareholders on a Schedule K-1 with tax paid at the shareholder level. Corporations:

• Report their revenues and expenses on federal Form 1120 (C corp) or 1120-S (S corp)
• Operate under the terms of their corporate bylaws

Note: While S corporations seem like the logical choice over C corporations, they have their limitations (e.g., only one class of stock allowed, all shareholders generally must be individuals, there’s a limit to the number of shareholders, etc.). Furthermore, many accountants know payroll taxes can be avoided by S corp shareholders taking dividend distributions instead of salaries. While true, active shareholders are required to take a reasonable salary commensurate with their corporate duties and pay all applicable payroll taxes — a tax rule often violated with troubling consequences in the event of a corporate audit.

Limited Liability Company (LLC)

A limited liability company (LLC)is a legal entity organized by filing articles of organization with the Secretary of State’s office in the state you choose to organize. LLCs are owned by single or multiple owners/members and are a popular substitute for sole proprietorships and partnerships because they offer limited liability to members. LLCs:

• Report their revenues and expenses on federal Form 1040, Schedule C for a single-member (a.k.a. disregarded) LLC and a federal Form 1065 for multimember LLCs
• Are deemed “pass-through” entities with tax paid at the member/owner level

Note: LLCs are arguably the most popular business entity structure these days but are not always a perfect fit, so consult an attorney!

Musician Income: Why Correctly Tracking & Classifying It Is Important

Income for most working musicians comes from a variety of sources, including live performance and tours, recording sessions, songwriting royalties, licensing fees, music lessons, crowdfunding, and selling CDs, T-shirts, and other merchandise. For a few reasons, it’s important to track and correctly classify this income. (You can do this inexpensively using accounting software, like Quicken or QuickBooks.)

Firstly, it’s a common misconception that if you get paid money but don’t receive a 1099, then it’s not reportable income — this is completely untrue. A federal tax Form 1099-NEC is supposed to be filed for payments made to an individual for services amounting to $600 or more in any calendar year. So, if you’re paid $500 for 100 gigs during the year (totaling $50,000) and didn’t receive any 1099s, then do you really think the IRS doesn’t consider the $50,000 taxable income? Uh, no . . . it most certainly is, along with any cash-paying gigs.

Secondly, in the case of payments to a band, venues typically don’t issue multiple 1099s to each band member. Instead, they pay the bandleader and issue a 1099 to him or her. While this requires the bandleader to report the entire 1099 income on his/her tax return, he/she is eligible to take a deduction for the payments made to the other band members . . . as long as 1099s are issued to each of them. Beware: failure to issue 1099s will not only result in stiff Failure to File penalties for each unfiled form but also disallow the tax deduction in the event of an audit.

Lastly, while all musicianship income is subject to self-employment (a.k.a. Social Security and Medicare) tax, many accountants believe royalty income should be reported on Schedule E and is not subject to self-employment tax. Not true. If the royalty income was earned for songwriting or producing (which is an integral part of the musician’s business trade), then it should be reported on Schedule C along with all other musicianship income, all of which is subject to self-employment tax.

Business Expenses: Why Documentation Ultimately Reduces Tax

When you understand your net taxable business income (which is total income reduced by legitimate business expenses) is subject to federal, state, Social Security, and Medicare tax, you’ll start to see why identifying legitimate business expenses is important. These expenses ultimately reduce the tax you owe if you can substantiate their payments and business purposes. Keeping expense receipts and other documentation for at least three years is vitally important because it helps verify the accuracy of your tax return in the event of a tax audit.

With every musician wanting to minimize tax by claiming every deduction known to man, there is certainly a risk of being audited. The IRS knows most self-employed taxpayers, such as working musicians, typically are scrambling to find business deductions to lower their tax liability. Frankly, we only see about three to five tax returns of the 1,800-plus we prepare each year get audited. But statistics also show that 90% of the time, the taxpayer getting audited is a self-employed individual. Therefore, it’s critically important musicians carefully track their expenses as well as have an understanding of what expenses are, in fact, deductible. With that said, let’s review the business deductions typically available to most musicians.

Business Expenses: Ordinary & Necessary

Pretty much any non-lavish or non-extravagant expense incurred in the production of income is deductible as long as it’s an ordinary and necessary expense incurred in conducting a trade or business. An ordinary expense is an expense commonly found and accepted in the taxpayer’s trade or business. A necessary expense is one that’s appropriate for the business. When you look at any business tax return, you’ll see descriptions of the most common business expenses, like advertising, rent, office expenses, telephone, insurance, utilities, supplies, contract labor, taxes, professional fees, dues and subscriptions, travel, business meals, and a catch-all line called “Other” for those expenses not specifically delineated on the tax form. But then there are other legitimate business expenses unique to most musicians that some taxpayers and their tax return preparers may not be aware of, leaving tax deductions on the table to the detriment of the musician’s wallet. The following are just a few.

Music Instruments & Recording Gear

While musical equipment may bring you sonic pleasure, it can also bring financial pleasure to your bank account through lower tax. If you’re purchasing musical gear used in earning income from live performance, recording sessions, teaching music lessons, audio engineering, producing another artist, or even making demos to promote your music-making business, then that gear is a legitimate business expense deductible on your tax return on Form 4562. The purchase of gear is considered a capital expenditure and is written off (via depreciation) over its useful life (typically five to seven years). But you can make a tax election (Section 179) on your tax return to expense it all in the current tax year, with a couple of limitations (e.g., you can’t let a Sec. 179 expense create a loss). Check with a tax professional to make sure this deduction is properly claimed on your return.

Media & Research Costs

Media costs can include CDs, albums, and subscriptions to music streaming services, such as Apple Music or Spotify, and research costs can include concert tickets, music conventions, and trade shows. As long as there’s a true business purpose to incurring these costs (especially events with networking and/or professional education, like NAMM or AES), these deductions should hold up in any tax audit.

Office/Home Studio Costs

If you’ve dedicated an exclusive workspace in your home, then the costs associated with that workspace are deductible on federal Form 8829. Just like the deduction you’d be entitled to for renting a studio or rehearsal space, the in-home workspace used for recording, practicing, teaching lessons, storing gear, or even bookkeeping is deductible, as well. The deduction is a formula based on the square footage of your workspace compared to the total square footage of your home. For example, if you have a 200-square-foot recording studio in a rented 1,000-square-foot apartment, and you pay $20,000 a year in rent, then the deduction for your studio workspace would be 20%: (200 square feet ÷ 1,000 square feet) x $20,000, so that’s $4,000.

This same formula applies to all other home-related expenses (e.g., utilities, insurance, repairs, condo fees, etc.), no matter if you rent or pay a mortgage, as long as the space is used exclusively for business and is not a mixed-use space, like a living room. Make sure to check with a tax professional, as there’s a simplified office-in-home method (with limitations) that can be used instead.

Travel & Meal Costs

When you tour or travel for business, a deduction for travel costs is allowed if you travel away from your tax home. You also have to be traveling overnight for significantly longer than an ordinary day’s work. Overnight travel is travel that’s far enough away from home to make it inconvenient to return home at night. Travel costs can include expenses related to live performance, recording sessions, auditions, and rehearsal. If you meet these criteria, then you can deduct the cost of all transportation, lodging, and meals.

Since maintaining receipts on the road is often difficult, the IRS allows both a lodging and meal allowance deduction when traveling. These allowances, called “per diem,” are adjusted annually by the IRS and range in amount depending on the location (see www.gsa.gov for current rates). This means receipts for lodging, meals, and incidentals are not required as long as the travel itself can be substantiated.

Meals, whether business- or travel-related, are partially deductible (50%) if they meet the criteria of “ordinary and necessary” (in IRS terminology) and business-related. This means the cost of breakfast, lunch, or dinner meetings with fellow musicians, venue owners, promoters, producers, lawyers, accountants, managers, agents, and others is deductible if there’s a documented business purpose.

Auto Expense

I could write a book on the proper deduction of vehicle-related expenses, which include gas, repairs, insurance, lease payments, property taxes, and the depreciation of the vehicle itself. There are two methods of deducting auto expenses: actual costs or the mileage method. Using the mileage rate method ($0.655/mile for 2023) is way easier, but both methods require you to track both your business and total miles as well as the business purpose of any trip. Suffice it to say, consult with a tax professional because showing up to any audit without a well-documented auto log is the best way to get your auto deduction thrown out.

Costs Incurred in Producing Sound Recordings

This is one of the more complex and often misunderstood taxation topics affecting musicians. So much so that I wrote an article for Dollars & Sense magazine a few years ago on the taxation and deductibility of recording costs. While this article remains an important read, the following is a brief recap.

If you are a musician who has incurred sound recording costs, then you’re subject to Internal Revenue Code Section 263A Uniform Capitalization rules (a.k.a. “UNICAP” rules) enacted in 1986. These rules require you to expense recording costs over an extended period of time using the income forecast method instead of being able to deduct them all in one year. However, under IRS Notice 88-62, you can make a “safe harbor” election on your tax return to expense these costs over a three-year period, as follows: 50% in year one, 25% in year two, and 25% in year three. Yet another reason to consult a tax professional.

Other Musician Costs

Here are just a few of the other legitimate deductions available to the working musician: merch costs, audio equipment rental, instrument repairs and insurance, union dues, sheet music, method books, copyright and registration fees, equipment loan interest, and consumables (e.g., drumheads, sticks, guitar strings, picks, capos, valve oil, mutes, music stands, polishing cloths, mouthpieces, tuners, cases, straps, etc.).

Things You Can’t Deduct

While there are myriad other potential business deductions, it’s important not to get carried away trying to classify an expenditure as business when it’s clearly personal in nature. And every now and then, you will occasionally face one that falls in a gray area, such as this one.

Generally speaking, stage clothing that can be worn on the street is deemed personal and not deductible. However, a few years ago, I had prepared the tax return for a prominent touring guitar player and took a deduction for about $1,500 on his tax return for what I called “theatrical clothing.” He was unfortunately audited, and at the audit meeting, the auditor found our stage clothing deduction and immediately disallowed it. As I would normally do, I had brought our client’s tax client file with me and remembered that in the very back of it, I had a copy of the tour program related to the year being audited. And as luck would have it, the tour program included pictures of the band members performing onstage. And there it was . . . a picture of my client onstage wearing purple satin pants, a leopard-skin jacket, a bright green scarf, and pink sneakers. I showed the picture to the auditor, who agreed this clothing wasn’t something you’d generally wear out on the street and allowed the clothing deduction. The point of this story is that it’s all in the documentation, and if you can’t prove it, then don’t deduct it. Remember: the burden of proof is on the taxpayer, not the IRS, to support a business deduction you claim on your tax return.

State & Foreign Tax Reporting: A Taxpayer’s Nightmare

While most taxpayers know they’re required to file a resident state tax return, tax returns are also required to be filed in states and foreign countries where the musician traveled to earn income. For example, if a Connecticut-based band tours in New York, New Jersey, Pennsylvania, Rhode Island, Massachusetts, New Hampshire, Vermont, and Maine (which is easy to do, living in the northeast US), then the band is also required to allocate net income to each state they worked in and file a business tax return in each of those nine states . . . with each band member also having to file the same multistate individual tax returns. This is a real pain. And failure to do so can cause bigger tax pain from tax, interest, and penalties levied if the band gets audited down the road. Once again, consult a tax adviser to discuss the costs/benefits of complying with this tax law requirement.

Some Final Thoughts

Since you probably wouldn’t do your own hip replacement or root canal surgery, then why would you do your own tax return? You can see from this article that our tax code is very complicated and that tax circumstances vary greatly among all taxpayers. Accordingly, it makes sense to seek professional tax services from someone familiar with the unique tax issues facing music professionals. Do your part to help maximize deductions, minimize tax, and keep your tax prep fees at a reasonable level by doing the following:

• Planning ahead;
• Reconciling your business checking account each month;
• Tracking your revenues and expenses;
• Organizing your tax documents during tax filing season; and
• Filing on time

Spending a few hundred dollars on quality tax prep can literally save you thousands or more dollars and, at the same time, minimize your chance of getting a tax notice from Uncle Sam or, even worse, getting audited. It’s tough enough to make a buck as a musician, so I hope this article helps you find ways to keep most of that buck. After all, you could use the savings to buy these favorites of mine: a Telefunken ELA M 251E tube microphone or that new Ernie Ball Music Man Steve Lukather L4. And they’re deductible!

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