Owning a business provides one of the best means for lowering your taxes. If the IRS determines that you are not engaged in your singing business to make a profit, however, then it won’t allow any deductions for losses?so it is vital that you learn to run your singing business as a legitimate business.
What is a “legitimate business” in IRS terms?
Congress has given you a way to help solidify your business as a business so the IRS doesn’t treat it as a hobby. If your activity shows a profit for any three or more years in a period of five consecutive tax years, the IRS presumess you are engaged in a business.
What if you didn’t have a profit three out of five years, however? In fact, what if you may have losses for many years in the future? All is not lost. If you follow the criteria below, you will be more successful with your singing business which is exactly what the IRS wants you to be and the IRS won’t be able to treat your singing business as a hobby.
The government uses numerous standards to determine whether your activity constitutes a business or a hobby. Here’s how to meet those criteria.
You must be in business to make a profit.
The IRS wants you to make a profit and therefore expects that if you are a legitimate business you will do what other business owners do to be profitable. What are these activities?
Business plan and projections: The IRS knows that businesses that have a business plan are more profitable. If you have ever read through a business plan, you know that creating one can be a daunting task—so simplify it!
Put together a vision of where you ultimately would like your business to be. How much money per month would you like to be making? What level of opera houses and concert halls would you like to be singing in? What are your primary objectives? What is your mission statement? How many operas and concerts would you like to be performing in each year? In a business plan this vision is called the executive summary; it will be extremely helpful for your singing business.
Now that you have written all of this down, write down how you’re going to get there. I call this an “action plan.” What are you going to do during the next month to advance toward your goals, and what w level of income do you project these activities will bring during the next three months, six months, etc.? Where will you be one year from now, five years from now, or 10 years in the future? Once you’ve completed this exercise, you have your “action plan,” otherwise known as a profit projection plan.
Conduct your business activities in a businesslike manner: You must run your business similarly to other successful businesses of the same size and type. Thus, you need to consult with experts about how similar businesses are run and follow their advice. Make sure, for instance, that you keep your subscription to Classical Singer magazine current. Do you know how to market your singing business? What is your marketing plan? If your marketing plans aren’t working, what are you doing to improve them?
In addition to what I learn from Classical Singer magazine and consulting successful singers, I have a weekly mastermind group with a friend of mine who is a businesswoman. We talk about our businesses, set weekly and long-term goals, and document our goals. I also occasionally consult with a marketing expert I take out to lunch to brainstorm with on how I can market certain aspects of my singing business better. I take notes using my Pocket PC and a keyboard then sync it into my computer’s singing/marketing file. I then add things I need to do to my action plan.
Work on your business: What are you doing to improve your profits? How are you documenting what you are doing? The IRS knows that people who actually spend a little time every day working their businesses are more likely to have successful businesses and therefore be profitable.
Track your business income and expenses: To improve your profitability by making necessary changes, you need to determine what is happening in your business. One of my future CS articles will address how to track your cash flow. You can do this easily for your business using an Excel spreadsheet, or for more complicated finances, a great software program for personal use or small businesses such as QuickBooks or Quicken.
Have a business checking account or credit card dedicated solely to your business: Using a dedicated business checking account or credit card will help with your accounting even if you are simply a sole proprietor and help show the IRS that you have a real business.
Continue your education: Good business owners continue to study, attend seminars and conventions such as the Classical Singer Convention, listen to training tapes, and read books. Singers who are serious about improving the product they provide also take singing, coaching, and language lessons.
Keep good records!
Document all of your business activities: All of these activities will do you no good if you cannot prove that you actually did them! The IRS wants to see documentation, so you need a very good filing system to keep information on your taxes and business activities well organized and easily accessible.
Besides keeping orderly and updated files, I put together a big notebook with tabs that contains documentation for anything I deduct from my taxes, which I give to my accountant when she files my taxes. She gives it back to me when she has completed my taxes, along with a copy of the tax documents she prepared. I file the notebook with the other tax notebooks I have and never throw these tax notebooks away. I also document my business activities on my computer and back it up every week with redundant backup systems in case one fails.
Organize your receipts: When you receive a receipt for a possible business deduction, immediately write down on the receipt what it was for—office supplies, educational purposes, travel expenses, etc. If it was a business meal, write on the receipt who you dined with and what business matters you discussed. The ink on these receipts tends to fade with time, so you may also want to write on the receipt the date, the amount paid, and the location.
Be sure to talk with your accountant. You may be surprised to find that meals you’ve been deducting would be disallowed if you were audited. You may also want to read a wonderful book, Lower Your Taxes Big Time, by Sandy Botkin, to get clear on what you can and can’t deduct.
Where do you put the receipt once you’ve written the proper notes on it? I divide my receipts into two groups: one for receipts I can writte off at 100 percent of the expense and the other for those I can writte off at only 50 percent (meals and entertainment). I order my receipts by date, staple them to a piece of paper, number them, and record them in an Excel spreadsheet. At the end of the year I print this spreadsheet, place it on top of my receipts, put it all into my tax notebook and hand it to my accountant.
Keep your calendar or scheduling book: A good calendar or scheduling book will help you document that you actually worked at your business. I run my life out of Microsoft Outlook. I print out a monthly calendar that I place in my tax notebook for documentation purposes. I track my business mileage in my calendar as well as my appointments.
Document your mileage or vehicle expenses: Put extensive documentation to back up your mileage or vehicle expense deductions into your tax notebook. Print out e-mails that talk about the business event you will be attending. Do a MapQuest search from your home to the business event’s location to show the exact mileage, print it out, and put in your tax notebook. Cross-reference the business meal receipts with your mileage documentation. Keep the scheduling documentation of the business event. Print out documentation of the notes you took at the business event. Keep a notebook in your car to write down your mileage or track it in your calendar.
Your singing business must act like a business!
Have business cards: Have a logo designed and use it on your résumé, business cards, e-mail signature, and biography.
Register with your state: Go to your state’s Department of Commerce website and register yourself as a business.
Get a business license: Contact your city’s Chamber of Commerce and have them send you the paperwork to get a business license.
Get a good accountant
The IRS knows that people who do their own taxes are more likely to make mistakes, so you are running a higher risk of being audited if you do your own taxes.
Two heads are better than one, especially if you hire an expert. You need to be in the driver’s seat and be knowledgeable about taxes, but you will save yourself money in the long run by having an accountant on your team who can consult with you and suggest ideas you may not have come up with on your own or that a tax program would have neglected to mention. Singers don’t have the time to keep track of tax laws as well as a certified accountant. In Robert Kiyosaki’s book, Rich Dad, Poor Dad, “Rich Dad” says that some of the most expensive advice you’ll ever receive is free advice.
Why would you be spending your time doing your taxes anyway, rather than working on your business? Good business owners don’t try to know everything or do everything themselves. They build a good business team, including a knowledgeable, aggressive accountant who is an expert in small business tax accounting.
“But it’s a tax writeoff!”
I often hear this excuse from clients to justify their bad spending habits or bad financial decisions. It is wonderful that when you eat out as a business owner you can write off 50 percent of your meal, when it is legitimately for business purposes. However, when you consider that you could be eating at home for about one-fourth of what it costs you to eat out, and that you can deduct only 50 percent of the meal, you would be much farther ahead financially (and probably health wise) by eating at home.
A friend told me he deducted $1,800 in meal expenses last year. I question how many of those meals he could actually prove were legitimate deductions, but let’s assume they were. If he deducted $1,800, then he spent $3,600 eating out. Let’s say his income last year was $45,000. Deducting his meal expenses reduced his taxable income to $43,200. If he is in a 28 percent tax bracket, he will have reduced his taxes from $12,600 to $12,096, resulting in a tax savings of $504. If you subtract his tax savings from his total eating out costs, eating out still cost him $3,096.
Let’s say that by eating at home those same meals would have cost him approximately $900. That would result in a savings of $2,700 on food. If he were to apply that extra money towards his mortgage by adding an extra $225 to his monthly house payment, with a $150,000 mortgage at 6 percent interest he would save a whopping $75,517 on interest and would have his mortgage paid in 19.5 years instead of 30!
Have I made my point about how ridiculous this excuse is?
A Few Final Thoughts
Always tell everyone you are in business to make a profit. Never say you are in business just to get tax deductions. Once the IRS sent me a nice little survey to get information on my business. One of the questions read, “Do you consider your activity to be a business or a hobby?” Fortunately, I was educated enough to put down that it was a business. Never tell the IRS your activity is a hobby.
If the IRS determines that you are not engaged in activities to make a profit, it won’t allow any deductions for losses. Your deductions from the hobby are limited to the income from the hobby. In addition, the IRS doesn’t allow you to carry over those losses to the next 20 years or carry them back for the last two years of losses. Ouch!
Following these suggestions and treating your singing or teaching career as what it is—a business—can save you hassles, headaches, and money when tax time rolls around.
Lynnette Owens is not a licensed CPA and not authorized to give tax advice. Consult with an accountant on any tax suggestions in the article.
