'Financial Management for Musicians' Author Offers
Tax Tips (Part II)
By Doak Turner,
[Question] What does
it cost someone to get audited - fees for an accountant?
Cathy McCormack The better your records are,
the less the cost. Sometimes we have to find court cases to prove
the IRS does not know what they are talking about with our clients.
[Question] Whether you are acquitted
or not, those fees are your responsibility and not deducted from your
MusicDish Network Sponsor
Cathy McCormack It is tax deductible if you
have to pay an accountant to represent you. Cost versus benefit
- nine out of ten times you are better off with an accountant on
your side. You are not going to know how to negotiate or what to
look for when dealing with the IRS.
I had a client recently that if he would have represented
himself and not know the laws about schedule E and Schedule C, he
would have owed the government about $25,000. Instead, he owed them
$1,000. My fee was nominal in comparison of how much I saved him
in the audit. I try hard to make the client do the legwork so they
do not have to pay me to calculate their receipts, mileage and expenses.
You do not want to have to pay me $200 an hour or my staff at $60
plus an hour to run a calculator when you can do that yourself.
I am very conscientious about keeping fees down for my clients.
It is my job to save you money, even on accountant fees.
[Question] I use Quicken
and have my receipts. What do you need to see for my records if
I came to you?
Cathy McCormack I do not need to see your receipts
unless there is an item that I need to break down, such as equipment
that you buy. We sometimes make what we call section 179 election.
The tax code that allows you to write off equipment for the full
purchase price in the year that you buy it. It is a wonderful thing
as they have been increasing the limits as we go along. The limit
is getting ready to go up to $100,000.00 a year that you can write
off, as long as you have earned income to write off against it.
We have to have the details of your equipment, whether
we make that election or not. If you put good details in your Quicken,
the report will tell me what it is that you are deducting from your
taxes. If you know you are going to have a nice income coming forward,
you can go ahead and make the election, knowing it is not going
to benefit you until next year. I have clients going to buy these
big SUVs that they use for at least 50% business and writing them
off on their taxes.
[Question] When I show
a positive Schedule C income, what percent of that can I apply to
Cathy McCormack There is an algebraic formula
when you are self-employed. It is 25% of your income, but because
you have to subtract from the income, it actually becomes 20% of
your net profit on Schedule C. It used to be 15%, which actually
algebraically became 13%. It has recently changed to the new figures
on Schedule C.
You can now do a one-person 401K. If you see that
you are going to make a lot of money the next year, you may want
to go ahead and set up a 401K. That law was new in 2002. If you
had up to $12,000 profit for the year, you can put that amount in
your 401K. This is ideal when you know you are going to have a huge
Auto expenses: what should we know about them and the records that
we keep for them?
Cathy McCormack That is probably one of the
area that most people are the weakest in keeping records - everyone
hates to keep mileage logs. Unfortunately, the mileage logs are
the only perfect way to support you in an audit. You do not have
to write down your odometer reading every time you are in and out
of the car -- just the business miles for the trip. You do need
to write your odometer reading on January first and December 31st.
For your business miles, use your trip counter to
track the daily miles. If you are going to 10 places in one day,
just write the list and your mileage for the day. Write down where
you went and the business purpose of the trip. I keep my business
purpose written in my calendar and where I went in my mileage log.
There are two ways to expense your car. You can use
the standard mileage rate in effect for that year or your actual
expenses at the time of your business percentage usage. The problem
is you still have to keep a log either way, because you have to
calculate how much you are using your car for business. I use credit
card for expenses, and import those charges and records to my Quicken
program. It can get you in some deep debt too, so be real careful.
I pay my credit card off every month and download my transactions
enough to know what I am spending to make sure that I do not overspend.
You have to monitor yourself or you will get in trouble with the
[Question] I use a Day
Runner to write down every day where I am going, the mileage logs
and gas expenses. Is the OK?
Cathy McCormack There are a million ways you
can keep track of your miles and expenses. I have a lot of clients
that spend a lot of time and miles on the road. They may get one
of those expandable files to keep their expenses and I have some
that just won't keep the records. I just give them an envelope and
at the end of the year, someone will spread the expenses out. Put
them in stacks by category and pile them up. You have to find the
method that works for you. The key is keeping the receipts and the
proof of your expenses. You have to think that if this is in any
way a business expense, that you are keeping that receipt. It is
lost money if you throw the receipt in the trash and it can add
up over the course of a year!
[Question] Working out
of your home office, what should we look for in writing down expenses?
Cathy McCormack Using your home, you can deduct
a percentage of your rent and all the expenses in relation to where
you are staying. You must have a room that is designated 100% business,
cannot be multi-use, and you cannot have a bed in the room. You
may also write off a percentage of your utilities, insurance and
rent. Those items are what we call operating expenses. If you do
not have profit, they are not deducted, but they are carried forward.
With respect to your telephone expenses, they go right
on your schedule C for business deduction. The government says that
the first phone line in your home is personal because all households
have one, and you will have it whether you have a business or not.
Any features that you add to the phone are tax deductible 100%.
Your cell phone is considered a second phone, even if it is multi-use.
It is your second telephone and 100% write off. If you do not have
a landline phone, just your cell phone, you will have to allocate
it based on business and personal calls. You can ask the cell phone
company to give you detailed billing. You go through and highlight
the business calls. The key to taxes is keeping records as organized
[Question] Are there
other home office deductions that we can claim for our taxes?
Cathy McCormack If you own your home, the property
tax and mortgage interest is deductible regardless of whether you
have a loss on your schedule C. There are several reasons that you
want it on your Schedule C. One in particular relates to medical
expenses. Some of the expenses, such as medical that you deduct
on your return the limits, are based on your adjusted gross income.
When you have Schedule C, that income or loss impacts your adjusted
gross income on page one of your 1040. You want that number to be
as low as possible. Whenever you can put something on your Schedule
C, you want to do it.
[Question] I have a one-bedroom
apartment. Do I need to partition it off to write the deductions
on my taxes?
Cathy McCormack Some people use their dining
room or a little nook that can be written off as you have your computer
and desk in the area. Measure off the space, even though you rent
[Question] If you have
a DSL line or cable Internet, can you write those off?
Cathy McCormack I have cable and Internet and
write 100% off on my taxes. Your cable for your TV is NOT going
to be 100% deductible. Most musicians write off 50% of cable and
those in the TV production business tend to write of more than 50%.
We us usually categorize Cable as research - MTV, CMT, GAC - and
those types of programs. The cable for your computer is a 100% write
off. Also - if you buy CDs of other artists for research, you may
write off 100% of the music purchases. A musician's CD collection
is ten times what a normal person would have, and is most definitely
used for research.
[Question] Where do you
list CDs as expenses?
Cathy McCormack On the second page of Schedule
C there is a place to put "other deductions" that do not fit into
any other category - write down research.
[Question] Demo costs
are astronomical and I list them as professional services. What
do you recommend that I list demo cost in what category?
Cathy McCormack If they are not much money,
I write them off as demo costs under the "other categories." However
there is a rule that demo costs are supposed to be capitalized and
amortized over the revenue stream. A lot of people have no revenue
stream or no determinable revenue stream. There is what we call
a Safe Harbor election that you can make to amortize those costs
over a three-year period. You get 50% of the demo cost in the first
year, then 25% and 25% the following years.
[Question] What is the
category "Professional Services" used for in the tax forms?
Cathy McCormack They are used for a lawyer,
accountant, songplugger, or consultant that you hire for your business.
You do not want that number to be astronomical or it will go into
[Question] Do you 1099
the songplugger and your accountant?
Cathy McCormack You are actually supposed to
1099 your accountant, lawyer, and song plugger. If you hire someone
to fix equipment, you are supposed to give him a 1099 form if he
makes more than $600.00 from doing business with you.
[Question] How much is
the Quicken program?
Cathy McCormack I just got the 2004 version
personal version for about $60.00. Something else that I should
mention regarding credit cards. When you charge the item, it is
deductible when charged, not when you pay the bill. This applies
if you charge an item in November, and maybe pay the bill in January.
Write it off for the previous year - when you bought the item. Go
shopping on December 31st, put it on your credit card, and pay for
it the next year. Health insurance is also deductible if you are
self-employed and that comes off before your adjusted gross income.
However, you must have profit on your Schedule C or it will have
to be reported on Schedule A as medical deductions.
[Question] I have paid
my quarterly tax bill late this past year. How does that affect
my reputation with the IRS - do they flag me?
Cathy McCormack They do not flag you, but charge
you interest for late payment based on the number of days that you
are late. I always check the IRS penalties, as I have caught them
using the wrong figures to penalize some of my clients.
[Question] If I go to
lunch with a co-writer, can I deduct our lunch off my taxes?
Cathy McCormack Yes, you deduct half of it,
but keep the receipt, even for meals under $25.00. The only time
you do not have to have the receipt is when you are on a per diem.
Per Diem is deductible for overnight travel only. Travel days are
included if it takes you overnight to get to your destination. The
IRS website has downloadable per diem amounts for you to use. Each
city has it's own per diem rate, so be sure to use the IRS information.
Hotels are fully deductible and meals are only 50% deductible.
[Question] I have events
for songwriters at my house. What do I need to show that this is
not ordinary household expense for the extra food, paper supplies,
Cathy McCormack Keep a record of your invites,
print out of the invitations, and take notes on how many you are
planning on having for the events. That is fully deductible, it
is not entertainment. Call it a networking meeting event. It would
go under "Other" on your Schedule C, and call it whatever creative
name you want to call it.
[Question] What are the
most common mistakes songwriters make for their taxes?
Cathy McCormack Probably not keeping good records.
I have one client that it is difficult for her to keep receipts.
I tell her that if she does not have a receipt, it does not exist
and I cannot pull it out of the air. We dig through her wallet,
purse and pockets to find receipts. It is the hardest thing to get
clients to do - receipts. You need to develop those good habits
to keep your records of your expenses. Seek qualified advice to
make your decisions. Peers are good to help conjure up questions,
but make decisions from advice of a professional.
The Songwriters Guild of America Nashville Office
recently hosted a tax and accounting seminar with Certified Public
Accountant Cathy McCormack of Nashville, TN. Cathy McCormack is
co-author of the book, "Financial Management for Musicians," (Hal
Leonard) by Pam Gaines and Cathy McCormack. Many of McCormack's
clients are musicians and songwriters. "Financial Management For
Musicians" is the title of the book, but she says it is really more
about organizing your financial life for what she calls this business
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