Tax Tips for Musicians: Tax Year 2005
Volume CVI, No. 2February, 2006
Each year, as the tax season approaches, Allegro publishes these updated tax tips provided by Local 802’s accounting firm, Gould, Kobrick & Schlapp P.C.
OVERVIEW AND HIGHLIGHTS
The following outline focuses on aspects of the tax law that specifically affect musicians. For additional information on deductions, exemptions or filing status, see a tax advisor or www.irs.gov.
Here is a quick overview of some highlights for this tax year:
- The top four basic tax rates above 15 percent remain the same. The rates are 25 percent, 28 percent, 33 percent and 35 percent.
- The basic standard deduction is $5,000 for singles; $7,300 for heads of household; $10,000 for married filing jointly and $5,000 for married filing separately.
- The standard mileage rate for business use of your car is 40.5 cents per mile for the period Jan. 1, 2005 through Aug. 31, 2005, then 48.5 cents for the period Sept. 1, 2005 through Dec. 31, 2005.
- Wages and self-employment earnings of up to $90,000 are subject to the Social Security tax in 2005. (In 2004, this amount was $87,900.)
- The personal exemption amount was increased to $3,200 in 2005. (In 2004, this amount was $3,100.)
- The maximum annual deduction for contributions to defined contribution plans is 25 percent of compensation up to the maximum dollar limitation allowed.
- For 2005 the maximum annual contribution to an IRA is $4,000 and a taxpayer age 50 or older can make an additional catch-up contribution of $500.
- A six-month automatic extension may be obtained by filing Form 4868 by April 17. (The previous extension was for four months.)
- Starting in 2005, if the claimed value of a donated car exceeds $500, a qualifying written acknowledgment must be obtained and attached to Form 1040 or no deduction is allowed. If the charitable organization sells the vehicle without having put it to significant use or improving it, a deduction is limited to the gross proceeds from the sale, which must be reported in the acknowledgment.
- Taxpayers can deduct either state and local income taxes or state and local sales taxes. The sales tax deduction is based on an IRS table or actual sales taxes.
- Eligible individuals in 2005 covered by a high-deductible health plan can make deductible contributions to a Health Savings Account (HSA) up to the lesser of the plan deductible or $2,650 for self-only coverage or $5,250 for family coverage.
- Last September, Congress passed the Katrina Emergency Relief Act of 2005. This act pertains specifically to those taxpayers affected by the disaster. Those who believe that this act applies to them should contact their tax professional.
INCOME & RELATED EXPENSES
Professional musicians may have income from which tax has been withheld (W-2) or income from self-employment where neither tax nor Social Security has been deducted.
If the musician is self-employed, all allowable travel and other expenses should be deducted on Schedule C before the adjusted gross income is entered on page 1 of the tax return.
If the musician has only W-2 wages, these expenses must be deducted on Schedule A. Reimbursements for expenses (e.g., travel and entertainment) received under an accountable plan do not show up on the musician’s Form W-2, are not reported as income, and do not give rise to deductions.
However, if the employee’s expenses exceed reimbursements, the excess may be claimed on Form 2106 as an employee business expense. Generally, reimbursements are considered received under an accountable plan if:
- They are made for deductible business expenses;
- The employee accounts for the expenses to the employer; and
- The employee returns any excess reimbursement.
Reimbursements received under a non-accountable plan (any plan other than an accountable plan) are subject to withholding and employment taxes and are shown as wages on Form W-2 and must be reported as income on Form 1040. The employee may be able to offset the extra income by claiming employee business expenses on Form 2106, but such expenses, along with other miscellaneous itemized deductions, may be claimed only to the extent they exceed 2 percent of adjusted gross income.
The deductibility of long-distance travel involving railroad or plane fares is fairly clear. The fares, plus related costs — such as taxis to or from the depot, baggage-handling charges and passports — are all deductible as travel expenses.
If you were away from home overnight, you may also deduct all of the following expenses: 50 percent of meals and entertainment; 100 percent of travel and lodging; laundry and cleaning; tips to bellhops and chambermaids; and transportation at destination. Musicians may also use their own cars for business travel.
The deductible items involved include: depreciation of the cost of the auto; gas, oil and tires; insurance, license and registration fees; parking expenses (e.g., garage rental or parking meters); parkway or bridge tolls.
The point to remember in deducting auto expenses is that after you have totaled all of these costs, you must subtract that portion used for personal purposes.
The regulations call for an allocation based upon both time and mileage used, and this is often the most difficult part of the calculation.
An alternate method involves computing the amount of business mileage and then multiplying that amount by 40.5 cents a mile for all business miles driven from Jan. 1, 2005 through Aug. 31, 2005 or 48.5 cents from Sept. 1, 2005 through Dec. 31, 2005.
You may still deduct direct costs such as parking and tolls (but not depreciation, gas or oil). The real problem in travel expenses is determining what portion of local travel (that is, not away from home overnight) is deductible.
In no case are personal meals deductible if the musician does not sleep away from home. The regulations say that commuting costs are not deductible. This means that if the musician travels only from home to the hall and back again, the costs of travel are not deductible — even if the instruments are so bulky and heavy that it is impossible to use public transportation. The costs of transporting instruments to and from work are deductible only if extra costs were incurred.
If you are playing more than one job during the day, you may use the business mileage formula described above for travel between jobs. Again, except for any additional expenses, there is no auto deduction for travel to the first job or home from the last.
Bills are required as proof for all job expense items exceeding $75 but there are many items of a lesser amount — such as tips and taxi fares — where no proof may be obtained.
Detailed records must be kept of these expenses (and of business mileage if a car is involved) through a careful diary or log. Keeping such records takes time and effort. If your return is ever examined, however, you could lose your entire deduction in the absence of a good log or diary. Numerous other items are deductible by the professional musician. Among these are education expenses, accounting fees and fees for investment advice.
With regard to education, you may take a deduction for any training or coaching that sharpens your present job or professional skills, or meets the expressed requirements of your employer for you to retain your job. You may also be able to deduct the cost of a course if you are entering a new specialty within the music field.
Also deductible are employees’ expenses incurred in the practice of your profession. In addition to the travel expenses discussed above, they include:
- Union dues, assessments and initiation fees;
- Commissions paid to agents and booking offices;
- Dues to other professional societies;
- Rehearsal hall, studio or office rental;
- Sheet music, transcriptions, arrangements, records, manuscript paper, etc.;
- Stationery, printing and postage used in business;
- Telephone used for business (a portion of your home phone may be deducted);
- The costs associated with your cell phone, as long as the calls are made for business purposes;
- Books and subscriptions to professional journals;
- Advertising and photographs for promotion;
- Other promotional expenses such as entertaining potential purchasers of music and gifts (not exceeding $25 per recipient);
- Repairs and upkeep of instruments;
- Insurance on instruments;
- Substitutes’ pay;
- Legal expenses for drawing up contracts of employment;
- Rental of instruments;
- Depreciation of instruments or recording equipment.
Self-employed musicians (those who use Schedule C) may take tax deductions for contributions made to formal pension or profit-sharing plans for themselves and their employees. The procedures for this are quite complicated, and we advise that professional assistance be employed. Note that two items — home office expenses and expenses for uniforms — were omitted from the above list. A word of caution is needed as to their deductibility.
HOME OFFICE EXPENSES
You may claim a deduction if you use your home office exclusively and regularly for the administration or management activities of your business, and you have no other fixed location where you conduct such activities. Exclusive use means that the office space must not be used for personal purposes. And you may not deduct home office expenses in excess of your net income as a musician.
EXPENSES FOR UNIFORMS
The cost of uniforms and other apparel, including their cleaning, laundering and repair, is deductible only if the garments are specially required in order for you to keep your job and are not adaptable to general or continued wear, to the extent that they could replace your regular clothing.
You may not deduct the cost of ordinary clothes used as work clothes on the grounds that they get harder use than customary garments; that they are soiled after a day’s work and cannot be worn socially; or that they were purchased for your convenience to save wear and tear on your better clothes.
That your job requires you to wear expensive clothing is not, according to the IRS, a basis for deducting the cost of the clothes, if the clothing is suitable for wear off the job. Deductions have been allowed to musicians for formal wear and the costs of theatrical clothing and accessories, if these items are not suitable for ordinary use.
PROCEED WITH CAUTION!
A great deal of specific information appears in the booklet every taxpayer is sent with pre-addressed income tax forms. If you have a complicated return or a particular tax problem, consult your own tax advisor or, if you prefer, contact one of the IRS taxpayer assistance sections at any of its offices.