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How NOT to Become Another Rapper in Trouble With the IRSPosted by Andrew Lewis on 07/16/12 | Filed under Features, Opinion, Your Favorite Rapper Is Poor
"You can't run and you can't hide, if you work for the man, Uncle Sam will find you". This saying holds weight for every working man/woman worldwide, but it somewhat feels directly intended for those who believe they can get away without giving Uncle Sam his "fair" share. Now if whether you believe that Uncle Sam deserves any piece of your income that topic is up for discussion, but as for the rest of us filing our earnings and loses is something we have to do once a year.
When we hear about tax issues we usually think of high end celebrities and the wealthy, right? Over the past couple months a few names have became media headliners for tax evasion such as Lionel Richie, Lindsay Lohan, Lil Wayne, Bubba Sparxxx and Wesley Snipes. So what is going on here? Lionel Richie is one of the top-selling recording artists of all time with more than 25 gold and platinum records, he is unlikely to have trouble paying a $1.1 million tax bill. The ugly truth is that many entertainers have had issues with the IRS when it comes to tax liens; some are fortunate to make it out, while some not so much; many have lost their mansions, cars and expensive lifestyle because of it.
Actors and actresses are not the only ones subject to tax issues, musicians appear to be prone to tax problems, Lil Wayne was the latest rap star to face money troubles when the IRS filed a $5.6 million tax lien, after paying it off I am sure Wayne had some words for his accountants. This raises a few questions though, why are these high end names having "money-problems"? Don't they have the best accountants handling their investments? The answer is, I couldn't tell you. My speculation is that many entertainers have no clue of how much they are making on a daily or monthly basis. There is a story about Eminem calling his manager before purchasing a Rolex watches that he wanted AFTER selling millions of records, to see if he could afford it. This goes to show you how easily one can lose track of how much money they could be making.
So aspiring musicians, how does this apply to you? Hopefully you are not going through tax problems or have the IRS breathing down your neck, but let's discuss some "Tax Tips" you can use on your journey as a up & comer.
First, you need to figure out if making music is your hobby or if it's your business. Are you making music because you like hearing yourself or do you want to earn a living from it? Simple. If it is a business you can probably deduct the cost of your equipment and other expenses on your tax return. if making music is a hobby, you can only deduct the amount of money earned from it. This is the first step, once you figure this out a business license should be filed for.
If creating music is done for the purpose for possibly making a living you need to inform the IRS that this is so. Be careful though! While you are definitely entitled to deduct expenses from your business, you need to know what you can and cannot claim, please report all of your earnings and document everything. Like my college professor once told me "Leave a paper-trail!"
Here are a few things you can do to turn your hobby into a business!
• Make sure you are operating like a business.
• Keep good books and accurate records.
• Get business cards.
• Get a business license or separate taxpayer ID number (TIN).
• Incorporate your band. Open a P.O. Box.
• Join Musicians' organizations and/or unions.
• Copyright your work. Register your songs with a performing rights organization (such as ASCAP, BMI or SECAC).
So how do you file? To deduct business expenses you need to fill out a Schedule C and file it with your Federal 1040 form. Now, if you are self-employed, you will probably have to also file a Schedule SE. Now, on the Schedule C, Line A, you'll need to know your principal business code, for the IRS to recognize you as a musician the code is "9811, Amusement & Recreational Services"
If this is sounds difficult a good CPA will know how to handle your tax forms properly.
Now what can you deduct? If you spent money to operate your music business you should be able to deduct it from your income taxes. Here are some categories to think about:
• Equipment/gear & accessories (amps, pedals, effects, straps, carrying cases)
• Consumable supplies (such as drum skins & sticks, guitar strings & picks)
• Music business books, record company directories, venue directories
• Subscriptions to trade magazines (such as Billboard and CMJ))
• Sheet music and "How-To" books and manuals
• Promotional: CD/tape duplication (for demos), photos, bios
• Office supplies: paper, envelopes, photocopies, stamps
• Fees related to maintaining your website and e-mail access for your music-related activities
• Rent for storing your gear and for your practice space
• Membership in professional organizations, associations & unions
• Professional fees (attorney, manager, agent, accountant)
• Copyright and registration fees
• Lessons & instruction
• Travel expenses
Please remember when the IRS hears "self-employed" they are more inclined to perform an audit, add into account that you're an artist I'd suggest that your expenses may well exceed your profits. Document everything! The IRS are absolute sticklers for detail, so please do so. It is recommended that you review all your options with a tax professional for extra tips and knowledge regarding the matter.
As always remember that the music industry is 50% game, 30% business and 20% talent, and any artist who is serious about their craft must seek consultation.Feel free to schedule yours with MyMusicExec.com today! Become a smarter artist!
See Also: G.O.O.D. Music, Consequence & Why Your Favorite Artist Can’t Release an Album