By Allan Rosenthal, CPA

I've been fortunate to have several musicians, songwriters and music business executives as my clients for the last twenty years — about as long as I have been going to the NAMM show and doing NAMM's annual audit. Hopefully, I'll be able to share some tax advice in this article that goes beyond what the typical accountant may tell you.

But, just to make sure you get some of the non-musician basics, hang in there with me for a moment so we can cover some of the more "boring" stuff ;-)

If you simply receive a paycheck and a W-2, your tax planning should consist of buying a house, give away clothing or other non-cash items to charity, and putting as much as you can into your company's 401K Plan, especially if your employer matches your contribution (never turn away free money :-)

If you don't have a 401K Plan, you'd be wise to put money in a traditional IRA (if you are in a higher tax bracket). If you are in a lower tax bracket, and you qualify, consider putting your money into a Roth IRA, instead of a traditional IRA. If you've changed jobs during the last tax year, and had to re-locate, don't forget, you may be able to deduct your moving expenses. And if you've paid a mover lately, you know how expensive that can be. Don't miss that deduction!



If most or all of your work is freelance and receive your money in 1099's, you should seriously consider setting up a corporation. Typically, an S Corporation is best for most small businesses. You have much more flexibility as an S Corporation, and the IRS spends much less time auditing corporations than they do auditing Schedule C's and their associated deductions on individual tax returns.

All of your freelance income goes into the S Corporation and you take money out as salary or distributions. All your business expenses are deducted in the corporation, including interest expense on your business loans and credit cards that you cannot deduct personally. This can really add up, and it will most likely more than offset the cost of setting up the corporation — certainly, if you consider the tax savings over a few years. You can deduct things like musical instruments, recording equipment, books on music, CD's and even your TAXI membership (consult your accountant, as rules vary from state to state)!

It is generally not a good idea to deduct more than you earned, so be careful not to get carried away. Remember that corporate taxes are due one month before the personal deadline. That's March 15 unless you file for a 6- month extension, then corporate tax returns are due on September 15. Most S Corporations have a December 31 year-end.

The net income from the S Corporation goes right into your personal tax return and you pay personal tax on that money, but the benefits typically make it well worth it. The S Corporation also pays no Federal tax. Certain states tax S Corporation earnings at the corporate level, so check with your local accountant or tax professional — it just depends where you live.

Using a CPA with experience in the music industry should help you reduce your taxes or at least better understand what your options are. While no one can guarantee that they can cut your taxes, having a professional that truly understands the business you're in is likely to save you some money — maybe lots of money! And an independent CPA can usually do a much better job for you than one of the store-front tax services that you'll see advertising on television in March and April each year.



Allan Rosenthal & Associates is a CPA firm with offices in Calabasas and Los Angeles, California, as well as Las Vegas, Nevada. www.rosenthalcpa.com. Contact Allan at 818-591-1550 or at allan@rosenthalcpa.com. He represents musicians, writers, composers, artists, production companies, a Radio DJ and even some major-label A&R people. Two of his clients have been nominated for Academy Awards, and one of his clients won an Emmy for best musical score. We're pretty sure those awards were based on talent and not tax advice;-)

All tax advice given may vary by individual, and it is strongly suggested that you seek professional tax advice before implementing any of the advice given above.


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