Tax Tips for Singers : NEGATIVE NET INCOME

The Hobby Loss Rule

There is a one-way tax rule for hobbies. Income is taxable. Expenses are deductible only up to the amount of the income. Expenses that exceed income are not allowed. Yes, I said not allowed if your activity is deemed a hobby. If the activity shows a loss in three of the last five years, the IRS could challenge your profit-seeking motive. When you do not seek a profit from an activity, it is a hobby. Real hobbies, such as stamp collecting, are presumed to be not for profit since collectors will probably spend more money acquiring stamps than they will receive selling them. After all, that’s how you build up a collection. It is reasonable for the IRS not to allow excess expenses. If they did, it would encourage all kinds of hobby activities since there would then be tax advantages. If all hobbyists paid less tax, collectively we would have to pay more to make up the difference. After all, it is our tax money that pays the government’s huge expenses.

Qualifying for a New Profession Rule

The cost of education that prepares one for a new profession is not deductible. The medical training an aspiring doctor takes, costing thousands of dollars, is not deductible. After becoming a doctor, brush-up education is allowed, since it maintains and improves skills. Generally, all undergraduate college expenses are not deductible. If they were, again, collectively we would have to pay more to make up the difference.

The two rules above are very important. They come into play for classical singers all the time. As we all know, the nature of the profession, being so competitive with a limited amount of work, often lends itself to very long periods of time before the income from performing exceeds expenses. Having a negative net income from singing for three out of five years could lead the IRS to impose the Hobby Loss Rule. They could also argue that all of the educational expenses (coaching, language and voice lessons) are qualifying the taxpayer for a new profession and therefore not allow them. After all, many people sing as a hobby or in non-professional activities. Church choirs are usually made up of non-paid volunteers. Lots of folks take voice lessons just to be able to sing better in general. Many take language courses just to learn for fun. A friend of mine took private coaching just to be able to sing one song at his daughter’s wedding. Take a look at the last five years of your tax returns. Do your singing expenses exceed your singing income? Do the two rules above apply to you?

If questioned by the IRS about performing/singing deductions, professional classical singers must first distinguish themselves from amateurs. Impress the IRS auditor with things you do that nonprofessionals don’t do. Here are some suggestions:

You belong to a union.
You have an agent or manager.
You have performed in various paying jobs.
You have professionally done photos or resumes.
You go to paying job auditions.
You coach with teachers who teach only professionals.
Your recording equipment is of a professional level.
You subscribe to this magazine.
Your music library is beyond that of amateur singers.
You’ve memorized eighteen operatic roles.
You are ready to stand on the desk of the IRS auditor and give a very loud demonstration of your favorite audition aria, complete with the optional high C.

Gordon Voorhees

Gordon Voorhees is an Enrolled Agent whose financial planning and tax practice has been located in New York City for more than 30 years. His client base is primarily in the performing arts. Enrolled Agents are federally authorized tax practitioners who have technical expertise in the field of taxation and are empowered by the U.S.Treasury Department to represent taxpayers before all administrative levels of the IRS. You can contact Mr. Voorhees at gvoor4@rcn.com.