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Thread: Tax implications?

  1. #1
    mjr's Avatar
    mjr
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    Tax implications?

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    This isn't really a newbie question, but I couldn't really find an appropriate place to post it.

    I know copyrighting my songs is legally important, but I have a question regarding taxes.

    What am I able to, and what am I not able to, write off from a tax standpoint? If I put out an independent CD, I know that legally I have to pay taxes on every CD I sell (because they're a form of income at that point), but can I write off any particular expenses (credit card processing, CD manufacturing, artwork, software, etc), and to what extent?

    What are the tax implications if I go through a site like CDBaby?

    Any information on this is appreciated.

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    I recently asked an accountant friend of mine the same question. He said that, basically, you can write anything off as an expense if its related to a venture of yours with the intent of turning a profit (selling your CDs being such a venture). But, MAKE SURE you have reciepts to prove your expense in case you get audited.

    You do have to keep track of any income from sales, and report it as additional income. Make sure, also, that you keep track of sales tax if you sell any yourself (if its through CD Baby, you don't have to worry about it, because they're the retailers). I'm not sure who you have to pay that to, but it sounds like you really need to find out.

    That's the gist of what he told me.
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    mikeh is offline 2.5K Gold Member
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    The key thing the IRS looks for is something that indicates a business vs. a hobby.

    You can write off anything to do with the costs related to recording, duplicating and marketing a CD. If you generate income and have proper "business records" (as an example a seperate checking/savings account for music business activities) you should be able to prove business vs. hobby.

    As a general rule, you should make a profit 2 out of every 5 years, however various types of artistic works (such as song writing) can take longer to generate profit.

    How aggressive you want to be as a tax payer is up to you (I am very aggressive and take every deduction I feel I can justify). However, the more agreesive you choose to be the more important that you have good tax advice.

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    You can write off anything to do with the costs related to recording, duplicating and marketing a CD.

    -- Anything? Could I write off my monthly web hosting fee if I use my website to promote my CD (which I plan on doing)? Classified Ads? CD duplication services (like Diskfaktory)? All that stuff?

    If you generate income and have proper "business records" (as an example a seperate checking/savings account for music business activities) you should be able to prove business vs. hobby.

    -- Do I have to set up a separate account? Can I use the one I already have?

    As a general rule, you should make a profit 2 out of every 5 years, however various types of artistic works (such as song writing) can take longer to generate profit.

    -- Since this is my first independent release, I'm not sure how many I'm going to sell, and therefore I don't know how much money I'm going to make.

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    jonnyc is offline 2.5K Gold Member
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    The best advice to get is from an certified professional financial advisor/cpa. I have one and I call him all the time and you'd be surprised how little you can really write off. You can write off anything you want, but when uncle sam comes knockin asking why you took these deductions they better all be valid. First off if you turn a profit ever in your studio then you're considered self employed which has an extra 15.8% increase to you're normal income tax, so if you do turn a profit you'll want to set yourself up as a personal corporation and save a butt load. Just spend 400 to 500 bucks and hire an accountant and find out what exactly you can write off. I'm also in real estate and figured I could write off my pc, my car, my rent since I sometimes work out of my house, couldn't write off any of those. So before you go and get yourself into some serious doodoo with the IRS check on what you can write off and pay someone to do your taxes, a few hundred bucks a year can save you thousands and possibly jail time.

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    i would say if this isn't your full time income, then you can't take any deductions. I think you have to make a certain amount for it to be considered taxable income...and hence being able to take deductions (and yes, you also have to itemize your deductions as well). I think the minimum amount you have to make is somewhere around $4,000 total for the entire year for it to be a requirement that you file. But if you work somewhere else, say a grocery store, they're going to say that THAT is your source of income and none of your "music" deductions are valid because it doesn't have to do with the grocery store.

    like everyone said, ask an accountant. It's been recommended that you also find an entertainment business account, who knows more about the ins and outs of how our business works and how it relates to taxes

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    mshilarious's Avatar
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    Quote Originally Posted by bennychico11
    like everyone said, ask an accountant.
    Hey! I'm one of those! Here's some answers:

    http://www.irs.gov/businesses/small/...100767,00.html

    http://www.irs.gov/pub/irs-pdf/p535.pdf


    First, let's leave the hobby loss rules until the end.

    I know that legally I have to pay taxes on every CD I sell (because they're a form of income at that point), but can I write off any particular expenses (credit card processing, CD manufacturing, artwork, software, etc), and to what extent?
    You need to separate expenses into four categories:

    - Selling & marketing expenses, general & administrative--credit card processing, web hosting, advertising, etc. No issues here--write 'em off!

    - Master recording & CD duplication expenses, artwork--these need to be allocated among the CDs produced and deducted when the CDs are sold.

    - Capital expenditures - gear which includes software. These assets have to be depreciated (spread over a given number of years), although you might be able to writeoff all of the cost the first year, depending on the amount you spend, how much you earn, and a few other provisos . . . depreciation on your home studio would then be considered a production cost of the CD treated as above.

    - Personal expenses. No can do, but I don't see anything personal listed in this thread yet. The home office deduction might be worth a thought if you're making money (net profit, that is).


    What are the tax implications if I go through a site like CDBaby?
    No different really, they are just a sales channel.

    Make sure, also, that you keep track of sales tax if you sell any yourself (if its through CD Baby, you don't have to worry about it, because they're the retailers). I'm not sure who you have to pay that to, but it sounds like you really need to find out.
    Sales tax is a different animal. You are probably required to collect & remit sales tax for sales within your state only (or at sales in other states if your band does an out-of-state show, but I'm guessing those are notoriously unreported ) If you sell to out-of-state buyers off your website or CD Baby, you don't have to do anything

    -- Do I have to set up a separate account? Can I use the one I already have?

    -- Since this is my first independent release, I'm not sure how many I'm going to sell, and therefore I don't know how much money I'm going to make.
    OK, the hobby loss rules. After you write off everything you can think of, if you have a net loss, the IRS may challenge the business nature of your activity. If it is deemed to just be a hobby, you can't offset other income (like your day job) with that loss. Worse, many of the deductions will be considered miscellaneous itemized deductions, which in effect takes away a good chunk of them, depending on the rest of your tax situation.

    So it's a bad thing to be considered a hobby. There is no objective test, you have to look at a bunch of factors:

    http://www.irs.gov/businesses/small/...=99239,00.html

    The profit in 3 (not 2) of five years test is actually a safe harbor--if you can show that, you are presumed to be a business & you aren't subject to the hobby limitations. If you can't, then you have to be able to argue the 9 points in that link. Hence the advice for a separate bank account--you want to make it look businesslike. Have a business plan--a projection of profits from the CD. Have a marketing plan--sales channels, advertising, etc. Register for sales tax and get a local business license, if applicable.

    This might all seem like a big hassle, and it is. So if this is a one-time small pressing deal, you might as well either 1) pay tax on the gross, because you won't get much out of the hobby loss rules or 2) don't worry about it unless CD Baby sends you a 1099.

    By the way, I never said to do #2

    First off if you turn a profit ever in your studio then you're considered self employed which has an extra 15.8% increase to you're normal income tax, so if you do turn a profit you'll want to set yourself up as a personal corporation and save a butt load.
    Finally--sorry dude, but this is really terrible advice. The rate is 15.3%, and effectively it's a bit lower because there is a deduction for a portion of the tax. But the advice about the 'personal corporation' only works if the IRS doesn't audit you (which wouldn't be a big surprise, the audit rate is really low) or if you have an extremely stupid auditor. Read this, maybe:

    http://www.finance.cch.com/text/c60s15d715.asp

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    x147902 is offline Newbie
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    Quote Originally Posted by mikeh
    The key thing the IRS looks for is something that indicates a business vs. a hobby.
    And we have a winner!
    Member: Fathers Against Rude Television

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    I've got to second the motion for a business license and a state tax number, both will help to establish your serious intention of opperating a business. Plus the state tax number will allow you to buy a lot of materal at wholesale prices without paying sales tax, the tax responsibility is passed along to the distributer/retailer. The taxman will get his cut of the profits but there is no reason you shouldn't let someone else pay him whenever you can. Keeping records gets to be a real pain, you have to keep reciepts for everything going out and anything comming in, make notes on reciepts as to why you needed whatever it was. Most deductions are valid if you can show that they are "exclusively used for the purpose of conducting business." Bank account, telephone listing, insurance, internet charges, opperating expenses, power bills etc. need to ALL be listed under the business name and address. I learned this much as co-owner of a furniture refinishing business but the same principles apply to opperating a "for profit" studio or any other business.
    The more I learn, the more I realize how much I don't know. [url]http://www.soundclick.com/sixfeetover[/url]

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    mikeh is offline 2.5K Gold Member
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    You can write off computers, automobiles and even a portion of a house, if you can prove they are used exclusively for the business (you may not be able to expense them, but you can amortize them over x years). Writing off part of a house can be a problem when you sell the house and the business has to then realize a % of the gain. I'm not saying you should do this, but you can do it - again depending on how aggressive you want to be as a tax payer. johnnyc - if your tax ccountant told you you "can't" he is either wrong, or he presented the "can't" with certain caveats.

    Becoming a corporation can help avoid or defer some taxes, however there are many rules you must follow (corporate board meetings, minutes, etc, etc). Even an S Corporation can be a pain - so choose that path carefully. The suggestion re: business license is a good idea, if you plan to pursue this "business" long enough to justify the time and effort to get licensed (the process may be different from State to State).

    I would never suggest this (or admit to it) - but unless there is a 1099 involved or unless you start selling enough CDs to risk the evil eye of the IRS, it may simply be better to eat the costs and "neglect" to report the income from the CDs.

    Writing off "part time business expenses" can be a good tax strategy - but you really need to dot all the I's and cross all the T's - which candidly, most musicians are not really good at (the whole left brain/right brain thing).

    I am very agreesive as a tax payer because I pay large amounts of income, and property taxes - thus I'm more than willing to "risk" the scrutiny of an audit. However, unless you have a lot of money invested in your cD, the tax savings may not be worth you time and effort. If you do go that route, make sure you are either qualified to interpret the tax laws or hire professional assistance.

    mshilarious - thank you for correcting my error re: 2 year vs. 3 year - it has been a while since I reviewed the tax laws and I should have confirmed my facts before posting.

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