The United States of America is built on capitalism. Every American can hang a shingle in front of their house and accept dollars in exchange for products or services with little or no actual business formation. The most basic level of business ownership in the USA is the sole proprietorship. A sole proprietorship is formed automatically upon the exchange of any dollar amount in exchange for a product or service. Playing guitar at a recording session, in a live club, or on the street for tips all qualify as providing a service. This income and the associated expenses are reported on Schedule C on the guitarists (taxpayers) personal tax return. Often expenses exceed income in the early years of a musician’s career. This generates a loss for tax purposes and reduces taxable income from other sources such as a day job. This is perfectly fine for a few years, but these additional deductions can be deemed “Hobby Losses” at audit at the state or federal level and be overturned, causing a surprise tax bill at some future point. If your music activities are deemed a hobby, then expenses may not exceed income on your tax return. A taxpayer must prove profit motive when these additional deductions come into question. So how do you prove profit motive?

1 – Conduct your music activities in a business-like manor. The IRS recognizes a well thought out and WRITTEN business plan. This does not have to be a formally written plan, but should at the least be a set of marketing objectives, performance goals, and plans for the future. As with most things, a simple plan can be the difference between sitting in the garage jamming with friends or playing the hottest club in town. Having a plan strengthens your chances of success along with providing evidence that your music activities are not just a hobby.

2 – Document your work. Most musicians have a datebook. Let me say that differently. ALL working musicians have a datebook. This simple calendar based notebook is much more than a place to write down your gigs. Jot down your rehearsal times both with the band and on your own in it. Use it to track your mileage to and from gigs. Did you go to a seminar or other networking event? Write it in your datebook! Many also come with contact list section, which is very handy. I see many musicians carrying a small pocket sized datebook to the gigs so they can instantly check their schedule if someone needs them on another gig. These little tools are nearly as important as your guitar. Do not go to an audit without one with plenty of information in it.

3 – Don’t buy gear you don’t need until you have a good profit. Yes a new Gibson 335 every year for ten years with no profit on your Schedule C will most likely overturn your deductions. Buy gear that gets the job done in the early years and develop your own unique sound, but overbuying gear simply to generate a tax loss is bad medicine. Wait for the year that you have plenty of profit to buy that collectors edition.
4 – Work with professionals. Become associated with an agency, manager, attorney or qualified tax professional. Having these professionals at your disposal can help in many aspects of your career and lend credibility to your arguments in a tax case.

5 – Work on your music career on a regular basis. This gets back to the datebook but shows the auditor that you work each day or week on your music activities and expect a profit. Having regular activity looks much more legitimate than having two gigs per year and no documented rehearsals.

These are only guidelines, of course, but if you get to know the real professional musicians you will see that they are all doing these things (or someone on their team). Get used to keeping track of things along with developing your chops and your musical business life will bear fruit for many years to come.

For more information visit http://bradheck.com.

Brad Heck is a tax professional in St Paul, Minnesota who specializes in the entertainment industry. He is also a professional guitarist/songwriter. Check out his music at http://myspace.com/bradhecksection179.

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