First off, to answer that looming question in the headline, maybe (believe it or not). But we’ll get to that later.
For most, playing music is a money-losing endeavor. No one decides to become a musician in order to become rich, and those who do are quickly disabused of the notion once they actually realize how much instruments, gear, a rehearsal studio, gas, merchandise, and recording adds up to.
But when it comes to taxes, should a musician go through the trouble of trying to write off all these expenses? Well, it depends. “If you have income, then the IRS expects you to report that income. And if you’re reporting income, then you have the right to identify offsetting expenses because you’re only required to pay tax on the net income,” said Rex Davis, a certified public accountant (and, full disclosure, my accountant) who practices in Lafayette.
Of course, when musicians do earn an income playing music, it’s usually in the form of cash from venues or merch sales, and thus the inclination might be to not report it (and, by extension, their expenses), although legally they’re required to. But if a venue gives a musician or a band a W9 to fill out, business manager and accountant Ryan Mattos urges them to not give a fake social security number in order to avoid the IRS. Giving a fake social is “the worst thing you can do,” said Mattos, who works for a company in the Bay Area (which he didn’t want to name) that specializes in business management and tax preparation for high-profile athletes and bands. “The IRS doesn’t care what you’re doing as long as you tell them about it.” (The income will only be reported to the IRS if it’s more than $600, for which a person will receive a 1099 at the end of the year, but technically speaking, the IRS wants people to report any amount they make.)
Some musicians may decide to report all income — even cash — despite the amount, in order to write off expenses, and to be totally legit. That’s what San Jose-based DJ/songwriter Peter Christianson did when he released his first record and began to play bigger shows. Even though Christianson owed money at the end of the year, he figured he still owed less than he would have if he hadn’t claimed his expenses. “That was a big benefit for me,” he said. “The larger benefit might have been to not report it. But this is my job now. I want to do this legitimately.”
For the IRS, the big question is whether the activity is a business or a hobby. A commonly held belief is that if expenses outweigh income for more than three years in a row, then the activity is considered a hobby. Not so, said Davis. In fact, he said he wasn’t aware of any set number of years that someone can claim losses before triggering the suspicion of the IRS. “I’ve seen people lose a lot more money than [three years in a row] and never be audited,” he said.
Generally speaking, said Davis, a musician needs to show that he or she is trying to make money and is approaching the endeavor in a business-like way — i.e., by having a business plan and consultants, and by showing efforts to make the business profitable. “If you can make that case then you’re entitled to the losses and it’s not a hobby,” he said. Granted, having a full-time job might put the person at a higher risk for getting audited, Davis continued, and in recent years, the IRS has been cracking down on people with full-time jobs that have a side business that loses money every year. Davis has had two such audited cases, but in both, the client prevailed.
But say you’re starting to make significant money at music (it’s looking more like a business), and you’ve got a fair number of expenses you’d like to write off. If you’re in a band, Mattos suggests setting up a partnership. “Getting a tax ID number as a partnership is easy and cheap and can help them more than anything else,” he said. However, he cautioned against doing so if the members aren’t set in stone. “Because if a band starts and its four guys and a year later one gets kicked out, that guy legally owns a quarter of the band. Sometimes a band will offer the guy a lump sum — he’ll get a quarter of the royalties down the line. But that’s lawyer shit, and way more expensive than accountants.”
If the makeup of your band is a little more tenuous, Davis recommends filing as a sole proprietor and keeping track of all income and expenses in QuickBooks or a similar accounting software program. Paying expenses with a credit card or check is the best way to keep a paper trail, but one should also take note of mileage for travel expenses, specifically the beginning and ending odometer readings, the date, the destination, and the business purpose.
So what about tattoos? The IRS allows expenses that are considered “necessary and ordinary” — a nebulous phrase, said Davis. “If you can demonstrate that the essence of the persona of the performer, in order to fulfill that persona that makes them interesting and successful as a performer, is tied to a certain presentation, then the taxpayer and the accountant can argue that it’s a legitimate business deduction.” He said similar cases come up in regards to cosmetic surgery for actors and actresses, and the IRS has ruled both in their favor and against. “Whether a particular person could do that with a tattoo I think is a stretch,” Davis continued, “but I’m not saying there’s not cases where you might try to defend it.”