Artists, musicians and taxes may not mix very well. Taxes and the administrative tasks required for their business are often last on the list of concerns for the artists and musicians. However, it is helpful for the artist or musician to develop an understanding of some key mechanisms of the tax code as it relates to their special skills and endeavors.
Hobby or Business?
Like many of us, you’ve probably dreamed of turning your love of music, photography, or making art into a regular business. You won’t have any unusual tax headaches if your new business is profitable. However, if the new enterprise consistently generates losses (deductions exceed income), IRS may step in and say it’s not a business but a hobby.
What are the practical consequences of the hobby loss rules? Your deductions for business-type expenses (such as rent or advertising) are essentially limited to the excess of your gross income from the hobby.
One key way to avoid the hobby loss rules is to run your venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby. For example, maintaining a separate business bank account and books and records for your business.
Lower tax rates.
A special tax break provides capital gain treatment for self-created musical works when the artist sells these works. Here, a taxpayer may elect to treat the sale or exchange of a musical composition or copyright as the sale or exchange of a capital asset.
This election generally applies to musical works created by the taxpayer’s personal efforts. For example, a composer who sells his composition or copyright and makes this election will pay tax at the lower rates that apply to long-term capital gain.
Gain that would otherwise be taxed at 10% or 15% is taxed at a zero rate. Gain that would otherwise be taxed at 25%, 28%, 33%, or 35% is taxed at 15%, while gain that would otherwise be taxed at a 39.6% rate is taxed at 20%.
The courts have ruled on the deductibility of the following expenses incurred by actors and artists. Amounts paid for costumes, wigs, make-up which are suitable only for professional use are deductible. Payments to studio employees, tips and rewards to studio employees for helping a motion picture star with clothes, speech, etc., are deductible.
The cost of wages for a chauffeur-bodyguard is deductible, but not the cost of commuting to and from the studio. Expenses of physical training paid by a stunt actor to keep in good physical condition are deductible.
If you’re self-employed and work out of an office in your home, and if you satisfy the rules that govern those deductions, you will be entitled to favorable “home office” deductions-that is, above-the-line business expense deductions for the following:
In addition, if your home office is your “principal place of business,” the costs of travelling between your home office and other work locations in that business are deductible transportation expenses, rather than nondeductible commuting costs.
And you may also deduct the cost of computers and related equipment that you use in the home office, without being subject to the “listed property” restrictions that would otherwise apply.