3

I've been a hobbyist musician my whole life, playing random paying gigs from time to time. The group I am with now all have day-jobs as non-musicians, but we plan to start playing shows and recording an ep in the next few months. I plan to make some small amount of money at latest in 2019. We will also publish our recorded lp to streaming sites which may generate some tiny amount of money. We will not be quitting our day jobs in the foreseeable future. While you can certainly scrutinize whether we'll find paying gigs and get the ep recorded, let's assume for the sake of this question that we will.

I need to make an instrument purchase between $1,000 and $2,000 in the next month in order to be able to effectively practice. The instrument may or may not be used for shows and recording, but it is critical for me to progress. I don't have access to our performance gear on a daily basis.

I'm wondering if I stand any chance of deducting the cost of the instrument from my income, for state or national purposes. I live in VA.

3

Your side business can be organized in several ways, the simplest is self-employment filed on a Schedule C. Regardless of how it's organized, you'll record valid business expenses and business income and come to your business profit or loss. Losses will offset ordinary income (from your full-time job), decreasing tax liability. In the case of assets that you are purchasing, you don't count the full purchase as an expense at time of purchase, but rather depreciate them over their useful life, so maybe you pay $1,000 for your guitar but take $200 in depreciation each year for five years, the idea behind depreciation is that the guitar is an asset that has value even after being used. You can research Section 179 which essentially enables businesses to depreciate the full amount of an asset in the first year.

The IRS differentiates between hobbies and businesses. A hobby can make money, but with a hobby you can't use losses to offset ordinary income (they still want tax on profits of course). Generally, if you are trying to make money at the activity and function like a business, the IRS will accept the business classification. You'll frequently hear that you have to show profit 3 of last 5 years to be considered a business, but that's not true, you can lose money every year and still be a business. However, if you have profit 3 of last 5 years the IRS presumes you are a business, which means they are less likely to audit to see if it should be considered a hobby. Here's a section of considerations the IRS uses in determining hobby vs business:

  • Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
  • Whether the time and effort you put into the activity indicate you intend to make it profitable.
  • Whether you depend on income from the activity for your livelihood.
  • Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
  • Whether you change your methods of operation in an attempt to improve profitability.
  • Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
  • Whether you were successful in making a profit in similar activities in the past.
  • Whether the activity makes a profit in some years and how much profit it makes.
  • Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

Note that this list is not a set of criteria that you must check off to qualify your business, it's just the questions they think through in making the decision, just because it's a side-business and you don't rely on the income doesn't mean it's not a business.

In my opinion, keeping thorough separate business records and engaging in some form of advertising would a great way to prove that your band is a business, setting up an LLC or Partnership and having separate business bank accounts would be wise too.

  • There may also be something that says your business has to turn a profit in 3 of 5 years, or it will be downgraded to a hobby, something along those lines. Quickbooks or Quicken is great for tracking your business income and expenses, and it can be imported into Turbotax as well. – CrossRoads Sep 21 '18 at 16:09
  • @CrossRoads You don't have to ever turn a profit to be a business, that is not a rule, but they are far less likely to question the business v hobby status if you show profits. Basically the IRS presumes that you have a business if you have profit 3 of last 5 years. – Hart CO Sep 21 '18 at 16:12
  • Thanks, I wasn't 100% sure on the 3 of 5 rule. We managed to be profitable in our small side business from the 2nd year on. Musician wouldn't have too much to deduct for expenses - instrument, sheet music maybe, travel expenses. I think you need to keep a log of those, than can claim mileage at gsa.gov POV rate, and fuel/toll expenses too. – CrossRoads Sep 21 '18 at 16:18
-1

I'm not exactly sure how musicians set them up, but you'll probably need to report these purchases under a business if you want to deduct them for tax purposes.

Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Not the answer you're looking for? Browse other questions tagged or ask your own question.