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Disc
Makers' Fast Forward e-Newsletter
 |
The
Band Business
by Scott
McCormick |
Your band is a business. By having it officially recognized as such
by the I.R.S., you can take advantage of tax deductions available
to other business owners. The process is a bit tricky, but worthwhile:
You may actually be able to afford more new gear by starting a small
business. The following tips will help you on your way.
Setting Up
Decide whether you want your band to be recognized as a partnership
or a corporation. A partnership spreads responsibilities, earnings,
and risk of loss to every member in percentages determined by your
partnership agreement. On the plus side, the tax structure is quite
simple, since all earnings and losses are passed on to the partners
and taxed according to their individual tax rates. On the minus side,
if a lawsuit is ever brought against your band everyone in the partnership
is held responsible according to the agreement.
A corporation is a legal entity which offers protection, known as
a corporate veil, to its shareholders. It is the corporation and not
the shareholders that enters into all contracts and agreements (protecting
the band members in case of a lawsuit). The tax structure is more
complicated than for a partnership. Not only must the corporation
pay taxes, but the individual shareholders (i.e. band members) must
also pay taxes on their dividends. When you consult an attorney to
set up your corporate structure, consider these questions: Do you
want all band members to be equal shareholders? Do you want to offer
shares to others outside your band as a way of raising money? If so,
you can sell shares to up to 35 people without an offering statement.
You may also consider including health insurance and/or a retirement
plan.
To get the best of both worlds, you may want your band to be either
a limited liability or Subchapter S corporation, which has the tax
benefits of a partnership with the legal protection of a corporation.
Not every state recognizes this, but most do. You need an attorney
to file the necessary forms to legalize your business, but this expense
can be written off.
In Practice
Once your band is officially a business, there are certain practices
that you must follow to operate as such and be sure all your records
are in order. You need to apply for a tax identification number for
your payroll and tax filings. Call your I.R.S. Regional Center or
go to your library to get an SS-4 form. This registers your business
for tax purposes at the Federal level; you will also need to register
with your state or locality (depending on your type of business).
You do not need to incorporate within the state in which you reside
some states offer better benefits for corporations than others. Seek
the advice of a qualified attorney or accountant to make that decision.
You need to register the bands name with the state (for a corporation)
or the county (non-corporation) in order to open up a bank account
in that name. This will also prevent other bands from using your name
in the state where you are registered. Call your local courthouse
for more information. If you need to protect your name nationally,
apply for a trademark. This is best handled by an attorney who specializes
in patents, trademarks, and copyrights.
When manufacturing items for resale (like CDs or T-shirts) from a
vendor in your state, get a tax resale certificate so you wont have
to pay taxes on that merchandise. Contact your state tax authority
for information on how to get one. Of course, you are liable for sales
tax on the merchandise you sell, although the tax rate is small in
most states.
When gigging try to get paid in cash since you have only the venue
owners word that the check is good. However, if the owner insists
on giving you a check, have it made out to your business so you arent
personally responsible. Endorse it, and give it back to the owner
to cash it out.
Now that you've set up your business, you can start reaping the benefits.
Through deductions you can purchase that PA system or eight-track
you need with Uncle Sam picking up a portion of the cost. However,
you first need a way to maintain proper records.
Business Ledger
No business should ever operate without a business ledger. You need
to have an accounting system in place, advises Barry Ussery, of Hall
& Ussery business management services, of Fairfax, VA, so you'll know
where all your money is coming from and going to. A well-designed
ledger allows you to formulate your budget, chart your bands success,
keep a record to use in the unlikely event of an audit, and help decide
which venues to play again and how much money to negotiate for. Elect
one member of your group to maintain your records.
Use Quicken or a spreadsheet program like Lotus 1-2-3 or Excel and
include: date of performance, amount paid to band, amount paid to
musicians (if you have hired guns), commission paid to managers, agents
and/or technicians (if applicable), advertising, and miscellaneous
expenditures. In a comments section, record how the shows went and
whether there were any cancellations. After getting paid, ask the
owner how much was taken in at the door. This will give you an idea
what your draw is at a particular venue. Record this information and
use it when calling to secure another gig at that venue or in that
region.
Taxes
Music is largely a cash business, so it is very easy to forget about
(or ignore) paying taxes. However, as a business owner, this isn't
an option. This may seem like more trouble than it's worth, but make
no mistake: You must pay taxes even if your band is not legally recognized
as a business. Starting out properly can eliminate a lot of pain several
years down the road.
One of the benefits of running a business comes in the form of tax
deductions for ordinary business expenses. There are some very specific
rules and regulations, so you should have an accountant file your
income tax forms. Here are some items you may deduct:
Section 179 of the tax code states that up to $17,500 ($18,000 for
1997) in expenses for capital assets (like a new amp or PA) may be
deducted per year; however, that deduction is limited by item cost
and taxable income. This means that if you made only $2,000 you can
take only a $2,000 deduction even if the item costs more. In order
to qualify for a 179 deduction, you must fill out Form 4562 and attach
it to your tax return. Record keeping is especially important in this
case to identify what is being deducted.
Items that cost over $500 may be depreciated over a period of time,
depending on the item--instruments, for example, depreciate over seven
years. You can deduct depreciations in conjunction with the 179 deduction.
For instance, if you buy a PA system that costs $6,000 and you earned
$2,000 this year, you can deduct $2,000 the first year; the remaining
$4,000 would depreciate over the next seven years.
Travel expenses like mileage, gas, tolls, and meals (you must have
a receipt for meals over $75), as well as equipment under $500, equipment
repairs, commission to agents and technicians, advertising costs,
and band vehicle insurance can all be deducted (as can your accountants
fees). Just remember to stash all receipts and keep a log of your
mileage!
Finally, make sure you send out all of your tax forms to the I.R.S.
via certified mail.
Red Flags
While you want the music industry to take notice of your band, that's
the last thing you want from the I.R.S. An accountant will help you
avoid any obvious red flags, but sometimes they are inevitable or
the result of a legitimate deduction. If your band has an especially
profitable (or unprofitable) year, for example, it might send up a
red flag. Also, if a venue at which you've performed is audited they
will have to prove (through canceled checks) that they paid your band.
As a result of this, the I.R.S. might check to make sure you've paid
taxes on your earnings. Careful record keeping will prove invaluable
should this happen
While all of the above advice will make you knowledgeable about the
reasons for organizing your band as a business, the first step should
be to hire a qualified accountant (preferably a CPA who is licensed
by the state and is recognized as a professional). Although this may
seem costly at the outset it is relatively inexpensive compared to
the costs and pitfalls involved in running afoul of the I.R.S. and
other taxing authorities or not taking full advantage of tax deductions.
For more information on these or any other business matters, call
Hall & Ussery at (804) 460-1461.
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