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Tax Question, Losing Business of Jazz
Old 02-14-2007, 10:30 AM   #1
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Tax Question, Losing Business of Jazz

Each year my jazz career, when I figure in the cost of driving to gigs, rehearsals, etc., manages to lose about $1,000. It's a bother to keep track of all the miles and cash income, but I do it.

2007 will be the first year in which I have no income from a "real" job. However, I will be doing a large Roth IRA conversion.

So I figure it still makes sense to keep track of the jazz expenses, and fill out the Schedule C each year.

Correct?
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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 10:37 AM   #2
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Re: Tax Question, Losing Business of Jazz

Al, doesn't there have to be some reasonable expectation that a business will generate profit to be able to benefit from losses? If so, you might be singing the blues.
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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 10:55 AM   #3
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Re: Tax Question, Losing Business of Jazz

Yeah - I don't think you can keep writing off the expenses of a "hobby". And unless you start to turn a profit, the IRS will not consider it a business.

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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 11:03 AM   #4
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Re: Tax Question, Losing Business of Jazz

There's an irs pub out there that tells you what it means to reasonably expect to produce a profit. Something like you were profitable in 2 out of the last 3 years or something. It can't be a hobby.
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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 03:09 PM   #5
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Re: Tax Question, Losing Business of Jazz

Well, I bring this up with my accountant every year. I recalled a ruling that it had to make a profit three years out of five.

But he would always tell me that if if was run like a business, and had a reasonable chance of making a profit, that I was OK. I seem to remember someone telling me that if the 3/5 law were true, Ford (or GM?) would be designated as a hobby. Ha ha.

Also, sometimes, as in 2006, some of the places I play send 1099 forms. I wonder what would happen there if I didn't do a schedule C.

I'll look into it some more, especially since I won't be using my accountant anymore.
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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 03:14 PM   #6
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Re: Tax Question, Losing Business of Jazz

From IRS.GOV:

Is it a Business or a Hobby?

It is generally accepted that people prefer to make a living doing something they like. A hobby is an activity for which you do not expect to make a profit. If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit.

The limit on not-for-profit losses applies to individuals, partnerships, estates trusts, and S corporations. For additional information on these entities, refer to business structures. It does not apply to corporations other than S corporations.

In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

You carry on the activity in a business-like manner, Yes
The time and effort you put into the activity indicate you intend to make it profitable, Yes
You depend on income from the activity for your livelihood, No
Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), Yes, I don't get paid enough
You change your methods of operation in an attempt to improve profitability,Yes
You, or your advisors, have the knowledge needed to carry on the activity as a successful business, Yes
You were successful in making a profit in similar activities in the past, No
The activity makes a profit in some years, and the amount of profit it makes, and No
You can expect to make a future profit from the appreciation of the assets used in the activity. I sound better every day!

Bottom line: It's debatable.

Pros of treating it as a business:
Save $150/year
Don't get audited because I got 1099's

Pros of not treating it as a business:
Don't get audited because IRS says: hobby
Don't have to keep track of income/expenses/mileage




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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 03:19 PM   #7
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Re: Tax Question, Losing Business of Jazz

Quote:
Originally Posted by TromboneAl
Also, sometimes, as in 2006, some of the places I play send 1099 forms. I wonder what would happen there if I didn't do a schedule C.
Ooooh, I can answer that one!

"Dear Taxpayer: a recent review of our 1099 records indicates..."

When one of those places gives you a 1099 (if, for example, you've made $600 or more there in a year) then they also send a summary of those 1099s to the IRS as part of their form 1096 filing. So your copy of a 1099 is your warning to report that income somehow, even if it's not necessarily on a Schedule C.
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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 03:23 PM   #8
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Re: Tax Question, Losing Business of Jazz

Right. And I sure don't want to pay tax on that income without deducting the expenses.
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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 03:33 PM   #9
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Re: Tax Question, Losing Business of Jazz

More info:

Tax Tips for Musicians
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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 03:44 PM   #10
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Re: Tax Question, Losing Business of Jazz

Quote:
Originally Posted by TromboneAl
Pros of not treating it as a business:
Don't get audited because IRS says: hobby
Not quite. You might be audited, and the IRS might decide it's a hobby and not a business, but I think if you treat it like a business and behave in a business-like manner, you'll be OK. It's facts and circumstances type of stuff. What we did with our schedule C business were things like (a) had a dedicated area of the house, (b) had a business name registered with the secretary of state, (c) got a state sales tax exemption for purchases for resale, (d) had a separate business checking account and credit card, (e) deducted for a home office, (f) collected and remitted state quarterly sales tax, etc. The more of this kind of stuff you can show at an audit if you're audited, the better off you'll be IMHO.

Also, if you're retired I think you could argue that "You depend on income from the activity for your livelihood" doesn't apply.

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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 04:11 PM   #11
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Re: Tax Question, Losing Business of Jazz

Quote:
Originally Posted by TromboneAl
And I sure don't want to pay tax on that income without deducting the expenses.
Another option would be to have the payer reimburse your expenses instead of paying you a salary. Or you could just be paid in beer.

But there's a bunch of pros & cons for both methods.
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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 04:56 PM   #12
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Re: Tax Question, Losing Business of Jazz

I would continue to deduct it, and worst-case scenario is that the IRS says, "It's a hobby, not a business. So you owe us for the last X years you claimed this, plus interest at X% for the money." It's unlikely they'd tack on any actual penalties since you aren't actively trying to cheat the IRS.

Actually after reading this thread, I've decided to deduct the expenses for our website. Especially since we already do make a profit, and we are actively trying to grow the revenue stream.

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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 05:39 PM   #13
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Re: Tax Question, Losing Business of Jazz

T-Al...do you guys have a website, MySpace or any music online? I'd like to check out your rhythmic stylings...

Cb
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Re: Tax Question, Losing Business of Jazz
Old 02-14-2007, 11:59 PM   #14
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Re: Tax Question, Losing Business of Jazz

Al,
It might be a little sketchy to keep taking a loss if you have never shown any sort of profit, they might spank you one of these years.

Maybe you could not take all your deductions on your schedule C every couple of years. Come out with a couple hundred profit, I think if it's less than $400 or something you don't have to file the SelfEmployment tax form. That way you pay a tiny amount of tax maybe 2 out of 5 years to take a bigger loss the other 3 of 5 years. (or vice versa?) Then they won't be able to call you on it.
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Re: Tax Question, Losing Business of Jazz
Old 02-15-2007, 12:01 PM   #15
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Re: Tax Question, Losing Business of Jazz

Quote:
Maybe you could not take all your deductions on your schedule C every couple of years.
I've considered that, but heard that that is just as illegal as not reporting income.

Quote:
do you guys have a website,
Yes, PM me with an email address and I'll send you a link. I'd post it here, but I like to keep somewhat anonymous on public forums.
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Re: Tax Question, Losing Business of Jazz
Old 02-15-2007, 01:15 PM   #16
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Re: Tax Question, Losing Business of Jazz

Quote:
Originally Posted by TromboneAl
I've considered that, but heard that that is just as illegal as not reporting income.
Geez, Al, I had never heard that. Does that mean I'm in trouble for not recording/deducting for parking and tolls for the last 10 years because it's too much trouble? Yikes! I just figured the feds would endorse slackery[size=10pt]TM[/size] if it resulted in their getting paid more.
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Re: Tax Question, Losing Business of Jazz
Old 02-15-2007, 02:05 PM   #17
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Re: Tax Question, Losing Business of Jazz

I kinda wonder about the hobby loss rules as well - I own a small laundromat, and it puts money in my pocket during the year, but when tax time comes it shows a loss because of the depreciation.

Depreciation shows up as an 'expense', even though it doesn't really come out of your pocket.

So in reality I'm making money, but on paper I'm losing. Of course I'll take it in the shorts when I sell and you 'recapture' that depreciation.

I wonder how the irs determines who to audit, if they look at the potential $$$ income that they can get per hour of auditor time.

If so, we rinky-dink little operations are probably relatively safe..??

- John

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Re: Tax Question, Losing Business of Jazz
Old 02-15-2007, 03:45 PM   #18
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Re: Tax Question, Losing Business of Jazz

Quote:
Originally Posted by runchman
...Depreciation shows up as an 'expense', even though it doesn't really come out of your pocket...
Then where does it come from?

At some point, the expense does come out of your pocket.
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Re: Tax Question, Losing Business of Jazz
Old 02-15-2007, 03:55 PM   #19
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Re: Tax Question, Losing Business of Jazz

Quote:
Does that mean I'm in trouble for not recording/deducting for parking and tolls for the last 10 years because it's too much trouble?
Well, when you put it like that, it doesn't sound bad.

If I didn't record car miles (as in weekly 60 mile trip to drummer's for rehearsal), I could make a profit. But I would be giving false information in order to reduce my taxes in the long run.
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Re: Tax Question, Losing Business of Jazz
Old 02-15-2007, 04:13 PM   #20
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Re: Tax Question, Losing Business of Jazz

Quote:
Originally Posted by igsoy
...Maybe you could not take all your deductions on your schedule C every couple of years...
Illegal.
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