This is the second in a guest blog series by Jonathan Cain, Chartered Financial Consult®, cellist, engineer, and (if I may add) husband extraordinaire! The goal of this series is to provide basic information on taxes for independent artists, such as performers, dance teachers, and choreographers, to answer some common questions about income, expenses, and related issues.
In Part 1 of Tax Basics for Independent Artists, we explored the difference between employee income and self-employment income. We found that Independent Artists receiving self-employment income are responsible for a larger portion of the tax burden, rather than an employee who receives employee income. In this post, we address the next piece of the tax puzzle for Independent Artists–business expenses–which only apply to Independent Artists, and not to employees.
Independent Artists run a business, and they are considered small business owners. Examples include Sole Proprietors, Independent Contractors, a Limited Liability Company (LLC), or a person operating under a trade name or Doing Business As (DBA)–the tax treatment is exactly the same by the IRS. As a business, Independent Artists have business expenses, allowing them to deduct dollar-for-dollar against earned business (self-employment) income.
A simple Google search reveals lists of several business expenses, including:
- Marketing and advertising: Social media, websites, newspaper ads, business cards, flyers, Google Ads, Facebook Ads.
- Office supplies: Printers, printer ink, computers, cables, paper, books.
- Cell phone service
But there are several more business expenses specific to Independent Artists, including:
- Memberships to professional organizations
- National Dance Education Organization (NDEO)
- Dance Scholars Association
- Dance Master of America
- Attending any performance of any dance group (local, professional, community)
- Accounting, Legal, Service, Insurance Fees
- TurboTax or an accountant (CPA) fee for tax preparation
- Professional Liability Insurance for teaching
- Gym Membership
- Classes (Modern, Jazz, Pilates, Yoga, etc.)
- Continuing Education and Training
- Certifications (Pilates, Progressing Ballet Technique)
- Intensives or Workshops
- Conference Fees
- Studio space for rehearsals or teaching
- Trade Magazines
- Clothing and Gear (Note: Must be used exclusively for business purposes. For example, if you buy a top for a performance, but wear it for any other reason, it is not a business expense.)
- Shoes (Pointe, Jazz, Tap)
- Teaching Supplies
- Class Props
- Books or other educational resources used in class, like posters
- Markers, poster paper, flashcards used in class
- Items from The Holistic Dance Teacher Collection, perhaps?!
- Non-Routine Business Travel
- Routine Business Travel (to local, regular places of business like the studio where you teach or rehearse)
- Transit costs
These are the most common business expenses, and while lists are great, let’s go a couple of steps further by offering some tips.
- Vacation. Going on a personal travel? Make it a business trip! Schedule a concert, teaching engagement, attend a workshop or networking event. You will be able to expense all or portions of the airfare, hotel, and meals.
- Caveat: If you’re business doesn’t make or spend money, the business activity needs to show significant business value. A legitimate expense example is attending a free day-long workshop or class with a prominent artist that will give you leverage to grow your business at home. A bad example is giving an impromptu, free “performance” on the beach, where the only attendees are folks walking by.
- Marriage. Married to another Independent Artist? If your filing status is “Married Filing Jointly,” then both your income and expenses can be pooled together. For example, the significant self-employment income from one artist can have the tax burden reduced by the spouse’s significant business expenses.
- Caveat: If one artist hasn’t make any self-income in the past few years, it is probably not a good idea to include their business expenses, since they are not really contributing much to the business. But if there is a pattern over a several year period (which can go into the future a couple of years) with both married artists producing self-employment income, then pooling business expenses on years with little or no income is legitimate.
- Vehicle. Driving to and from a regular place of business? Most commonly, this is a studio for teaching, where the teacher is an Independent Artist receiving self-employment income. But it can also be a performance, gig, or studio rental. Your personal vehicle can be used as a business asset, and you can take either the standard vehicle deduction or itemize expenses such as maintenance, interest of car payments, and insurance. The amount you can expense for business is proportional to the amount you use the vehicle for business versus personal, which is determined by miles.
- Tip: Keep a log (digital or paper), where at the first day of the year, you record the odometer reading (total number of miles). Then, on the next line, record the miles to/from your place of business, along with the date, which can be done using Google Maps, and doesn’t need to use the odometer readings on the car. This allows one to retroactively construct the log by looking at their previous schedule. Finally, on the last day of the year, record again the odometer reading. For calculations, subtracting the last odometer reading from the first gives you total miles. There are apps that will do all of this for you.
- Caveat 1: To/from business miles are from a non-business location to the business location, plus leaving the business location to a non-business location. For example, you start from home, stop at a coffee shop, go to your place of business, then drive to a place where you are an employee, then head home; your business miles are from the coffee shop to the place of business, plus the miles from place of business to the place where you are an employee.
- Caveat 2: Your car is a personal and business asset, so if you sell it, then the business part of the proceeds are considered self-employment (business) income, for which you must pay taxes.
- Ensembles and Paying Others. Are you coordinating a performance? For example, you’re getting four of your colleagues together for a performance at a festival, where you’re selling tickets, and each of the five performers (including yourself) will take an equal cut. You collect $500.00 in ticket sales. For tax purposes, the money must be claimed in one of two ways, for which the ultimate payout and tax consequences for each performer is exactly the same:
- Each performer simply takes $100.00 each in self-employment income.
- If there are performance expenses such as venue fees, rehearsal studio rentals, or advertising, then you may want to consider having one of the performers take charge of the budget and taxes for convenience-sake. Since you’re reading this, you may volunteer! Let’s say that you have $150 in performance expenses, but all other conditions remain the same. So, you’d claim all $500.00 as self-employment income for yourself. Then, you’d take the entire $150.00 business expense. This leaves $350.00 ($500.00 – $150.00), which split five ways is $70.00 for each performer. So, you’d also include a business expense of $280.00 ($70.00 times 4), which you pay out to each performer. This leaves you with $70.00 for yourself as self-employment income ($500.00 – $150.00 – $280.00), and each of the other performers is expected to include their $70.00 as self-employment income on their own taxes.
- Concert or Gallery Attendance. Attending a concert? This can be networking, research, or advertising, and you’re admission can be a business expense.
- Caveat: Your attendance must show meaningful impact to your business. If you are auditioning for a company, attending their performances for research is legitimate. If you’re attending a Taylor Swift concert, probably not. However, sometimes meaningful impact means to blog or share your experience on a social media post, which highlights your business.
- Meals. 50% of meals while traveling for work are considered business expenses, plus some other situations for meals.
- Caveat 1: For routine travel, you must be between two seperate engagements of self-employment income to be considered traveling for work. For instance, you cannot stop on your way to your place of business for coffee and expense it as a business expense. But you can pick something up at a coffee shop during a break between teaching two seperate classes at the same studio (as long it is self-employment income).
- Caveat 2: For non-routine travel, if you are going solely for business, then you may expense 50% of each meal. However, if you start mixing business and personal time, then Caveat 1 from above applies.
- Internet. Like your vehicle miles and corresponding business expense, the amount of time you spend doing business work and not personal use represents the portion of your home internet bill you can expense.
- Caveat: You must keep detailed logs of the separate times you access the internet. Given the personal connection Independent Artists have to their art, the internet expense represents a very slippery slope, and it is recommended that you find other business expenses before trying to document business or personal use every minute you’re on the internet.
- Opportunity Cost: Bigger is Better. Experience has shown that finding a few large and easy expenses is better than working hard to get every single penny of several small expenses. For example, your time spent logging every minute of your internet use may be better spent working on growing as an artist. This is called opportunity cost: The cost associated with not doing a particular activity or pursuing some investment. Go big and make it easy on yourself by using, for example, the vacation tip above–the airfare alone may be more than your yearly internet bill, but requires zero logging!
- Reporting a Loss. In some years your business expenses are greater than your self-employment income, and you have a loss. Losses can be carried forward 20 years; however, having several years in a row of losses may increase your probability of audit by the IRS.
- Social Security Caveat. Using your business expenses to reduce your tax burden for your self-employment income is a great way to keep more of your money come tax time. However, if you’re not paying into Social Security, you cannot expect to get a lot out of Social Security later down the road.
- Accountants are worth it! Certified Public Accountants (CPAs) are guides and counselors for your growth as a business, and your holistic growth as an artist. Besides coaching you, they can also give you peace of mind that if you should be audited, then you have an advocate in your corner. Plus, their fees are considered business expenses.
What tips do you have? Please share in the comments section below.
In the next post (Part 3 of our series), we will look at examples self-employment income combined with business expenses together on what is called a cash flow statement.
About the Guest Author:
Jonathan Cain is a Chartered Financial Consultant® and cellist with over a decade of experience as an Independent Artist. From 2015 – 2017, he worked in a research lab at State Farm Insurance implementing machine learning algorithms for a variety of applications.