Every year, too many singers miss out on opportunities to save money on their taxes because they are not aware of the benefits the government has put in place for them. Being properly prepared for your tax professional can mean hundreds, even thousands of dollars in tax savings each year!
In my experience, the majority of singers are unaware of the possible benefits of good record keeping. Even the ones who know there is something they can do to save on taxes are not aware of what information they are supposed to track to help their tax professional. All this equals extra dollars for Uncle Sam, and less money in your pocket!
I am here to tell you that the overpayment of taxes is very simple to stop. The answer is not to keep every scrap of paper, receipt, and electric bill. Instead, learn about which items are deductible and keep good records of those only! This will help your tax professional optimize your tax benefit when tax time comes around each year.
Create a physical file or space where you can keep track of your expenses throughout the year. Organize your receipts according to expense type, not by date. This makes your tax professional’s job much easier and helps you keep better track of where you are spending the most money. You may also want to create a spreadsheet that keeps track of your expenses, again organized by expense type. This will not only make your expenses clear when it comes time for deduction calculation, but will help you to budget for the next year. [Editor’s note: If you already have a computer, you should go one step further and consider a reasonable but very useful personal finance program such as Quicken.]
A suggestion I always make to my clients: have a separate business credit card. This keeps the paper down to a minimum, and gives you a monthly statement of all of your business expenses. If you lose a receipt, you have a proof of the expense, with the amount and description of the expense right there on your monthly statement. I also suggest that the card be one that offers benefits, such as frequent flyer miles or reward points. Individuals who work for corporations have frequent flyer benefits from their company card, why shouldn’t you?
If you are concerned that the cards which offer benefits usually charge a yearly fee and sometimes have higher interest rates, well, good news. If you use that card only for business, the yearly fee and the interest you incur on that card are tax deductible! Many people miss out on this very beneficial deduction.
Now that you are organized, what should you put into that very nicely organized file? Here are some examples of deductible expenses:
Travel: Any travel-related expense you incur while going on auditions or while hired for a job is deductible, provided that your potential employer or current employer has not reimbursed you for it. If a company brings you to their site on their dollar, or reimburses you for your travel expense, you cannot deduct the expense.
Examples of deductible expenses while on the road include airfare, taxis, car rental, tips, laundry (when away from home only), hotel stays, tolls, mileage (at the current federal mileage rate), and parking.
Meals also are deductible. You can keep track of them in two ways: You can keep all of the receipts for your meals while away from home, or use a federal per diem rate. If you use the per diem rate, you don’t need to keep receipts for each meal. I prefer to use per diem because it is adjusted according to the cost of living of the city you are in, and cuts down on the amount of paper you need to keep.
What you must keep are the contracts that provide proof you were in the city for the number of days for which you claim the per diem rate. Remember, only 50 percent of meals and entertainment are deductible, a limitation that also pertains to the per diem rate.
You can also use a per diem rate for hotel stays, if it yields a better tax savings for you. Ask your tax professional to figure out the per diem rate that applies to your specific needs, or visit www.irs.com for per diem rate tables.
Artist Development: The development of an artist involves so many things that it is impossible for me to list them all here. Books, music, recordings, movie rentals, voice/instrument lessons, acting lessons, coaching, accompanists, language classes, and continuing education classes are just some of the things that fall into this category. Keep in mind that anything that helps you to become a better performer is considered research and development.
If listening to the latest Pearl Jam CD broadens your musical vocabulary, the cost of it is deductible. Your subscriptions to Classical Singer magazine and other trade magazines are deductible!
This category of expense prompts a lot of disagreement, however. What one person may deem a part of your development as an artist, another may feel is not related. Be sure to ask your tax professional’s opinion about which items are allowed before submitting them to the IRS—but be certain to keep all receipts of anything that you think could fit into this category. It is better to have too many receipts than to have forgotten to save that receipt for those character shoes you had to buy and later find out they were deductible!
Business Expenses: This category covers all expenses related to applying, acquiring, and keeping your jobs. Headshots, office supplies, business phone calls, business percent of your cell phone bills, health insurance, interest paid (credit card interest or business loan interest), tax preparation fees, legal/contract fees, manager fees, pension plan contributions, postage, advertising, and taxable donations are all examples of the expenses that fit into this category.
When keeping track of these expenses, you may want to designate subcategories that explain the type of business expense it is. For example some subcategories could be office supplies, postage, and correspondence.
Self-employed health insurance is completely deductible now, so take advantage of it. Many singers do not have health insurance, but the government is providing a deduction for it and thereby underwriting a percentage of it through tax savings. To deduct this, however, you must be self-employed. That means that you file a Schedule C for self-employment income. If you have one or more contracts a year that pay you without tax being withheld, you must file a Schedule C.
You cannot deduct the portion you pay into a corporation if that corporation supplies insurance to you as a benefit of full-time employment. Ask your tax professional if you can deduct your health insurance premiums.
Most importantly, keep good records. It will pay off in the end. Maintain a mileage log and keep it in your car. Write notes on each receipt that you keep to remind yourself of what it was for. Trust me, you won’t remember what it was for when tax time comes 12 months later, or even worse, when audit time comes three years later!
I think it is very helpful to separate your business expenses from your personal expenses. Get a credit card that you use only for business purchases; it will make your job easier come year-end.
Perhaps one of the most important things: Get an artist friendly accountant! Most of the people at the chain tax-filing companies are not aware of deductions specific to artists; actually most of them are not even accountants. Unless you are making a great deal of money, the person you deal with at the chain companies is just a data entry clerk with some training courses.
Always ask your tax professional if they know about the Qualified Performing Artist (QPA) deduction and ask if you qualify for it. The QPA deduction will allow you to take a deduction for your business expenses as well as take a standard deduction. The requirements that you must meet this year to qualify are:
• You must perform services in the performing arts for at least two employers during your tax year. (Each employer must have paid you $200 or more.)
• Your allowable business expenses related to the performing arts must be more than 10 percent of your gross income from the performing arts.
• Your adjusted gross income must not be more than $16,000 before deducting these business expenses. [Information from www.irs.gov, Oct 2004.]
If you do not meet these criteria, your deductions are either deductible as expenses on your Schedule C, directly offsetting your self-employment income, or deductible as unreimbursed employee business expenses in your itemized deductions. Don’t panic if you do not meet these criteria, there are other ways to deduct your expenses.
Tax law and regulations are not designed to be readable or understandable by the general public! They are written with loopholes and difficult language to confuse you, in hopes that you will make a mistake and miss an opportunity to save money on your taxes. Do not feel badly if these regulations do not make sense to you, they are not supposed to.
Lately the IRS has been more helpful in offering common language interpretations of the regulations. These can be found at the IRS Web site, www.irs.gov, but they still have a long way to go.
Every year, performing artists overpay thousands of dollars of their hard-earned money to the government. Take advantage of the tax breaks that the government supplies for performing artists and join the groups of people who maximize their tax benefits each year by maintaining good records—and be prepared for your tax professional.
