Starting Your Music Business
Author: Brad Howland
First Posted: October, 2000
Here are some helpful tips to get your music business started, and begin reducing your taxes now!
- The three principle forms of business organization recognized by the Canada Customs and Revenue Agency and the IRS are incorporation, partnership, and sole proprietorship. In almost all cases, sole proprietorship is the way to go for musicians. There is no requirement to incorporate, and you don't have to register your business name, or even open a business bank account. Just report the income and expenses on your personal tax return. Owning a sole proprietorship is basically the same thing as being "self-employed," or being an "independent contractor."
- Get receipts for every business related deduction, no matter how insignificant it may seem. Keep anything even remotely connected to music! At tax time, your preparer will let you know if it is legitimate or not. (See below for more information about possible deductions.)
- Start tracking your expenses early. Music students should keep all receipts for "capital" purchases (purchases of items that will last more than 1 year). They will be deductible as depreciation in the future, when they are converted to business use. Also, it is OK to begin claiming expenses with little or no income. Business losses are normal when starting out, and can be written off against other kinds of income, or carried forward to the future, as long as there is "reasonable expectation of profit."
- You can deduct a portion of your car for business purposes. For example, travel to and from gigs, rehearsals, or schools to practice or teach is deductible. You should keep a log showing the date, destination, and odometer readings for each trip. Keep track of all vehicle expenses, such as gas, oil, repairs, insurance, interest, lease costs, license fees, parking, and even car washes. Depreciation is also allowed, so keep records of the selling price of your old auto, and the cost of the new one. US taxpayers can elect to deduct the standard mileage rate.
- If you have a space in your home that you use only for musical purposes, you can write off a portion of your home expenses, such as utilities, insurance, repairs, rent, mortgage interest, and property taxes (In the US, home mortgage interest is also allowed as an itemized deduction on Schedule A). To calculate the deduction, you take a percentage of the total expenses, based on the percentage of the total floor space your music studio occupies.
- Capital property is anything that is not used up within a year, and includes musical instruments, computer or electronic equipment, and office furniture. Rather than deduct the full purchase price all at once, you claim a portion of it over several years (this is called "depreciation" or "capital cost allowance"). The calculations to determine how much you deduct are complicated–you should use professional help. Also, certain small items (that cost less than say, $500) might be allowed to be deducted fully in the year of purchase. For example, if you purchase a few CD's, you can probably write them all off as a music supply. In addition, the US allows certain tangible personal property to be deducted fully under the section 179 deduction. Again, please check with your tax preparer.
- Keep accurate records for your business. Although the proverbial shoe box is a good place to store receipts during the year, at tax time they need to be carefully sorted. Self-employed taxpayers are more likely to be audited, and you must be able to back up the claims made on your tax return.