Being in a “trade” or “business” as defined by the tax laws certainly has its advantages. It does, however, have disadvantages.Being in a “trade” or “business” as defined by the tax laws certainly has its advantages. It does, however, have disadvantages.
You write songs. Are you in a “trade” or “business.”
There is a criteria you must meet in order to be classified as a “trade” or a “business.” First, you must meet the definition of a writer. The tax laws define a “writer” as an individual whose personal efforts create, or may be reasonably expected to create, a literary manuscript, musical composition, or dance score. Second, such efforts must be to create this work for resale with reasonable expectation of a profit. Reasonable expectation for profit is the key. Personally, since I could not make a rhyme for a dime anytime, I would be hard pressed to convince anyone that I was in the business of songwriting.
If you have passed the above two tests, you are officially in the “business” of both creating and selling your work. Now, you can offset your royalties (which are taxable as ordinary income from self-employments income) with your writer’s expenses such as supplies, demos, instruments purchased to assist you, music room, business auto use and any other expenses associated with your trade.
In trying to determine what’s deductible and what’s not, ask yourself “Can I reasonable expect this expense to help me make taxable income?” If the answer is yes, then keep track of the expenditure for use on your tax return. If you have doubt, and you use a tax preparer, save the record and talk with your preparer. If your preparer is wishy-washy, have him explain why you cannot take the expense. If you lose a receipt, make your own expense. If you lose a receipt, make your own receipt at or about the time of the expenditure with its amount, date, purpose, and place. Guaranteed, you will never get credit for an expense if you never put it on the return. Also, remember the business use of your auto begins when you leave your place of business for a business trip. If you are writing at home then the home is your business address.
While we’re on the subject of the home office, know that the current interpretation of the term allows a deduction as long as it as long as it is the primary place you conduct your business, and if the space is used exclusively for business purposes (no beds, etc.). You would be able to take a pro-rata portion of rent and utilities or home interest, taxes and insurance along with any direct expenses associated with that space. Although the expense cannot create or be a part of any loss, it can be carried forward to the next year.
The business meal/entertainment expense has become less important now that the 50% non-deductible rule is in effect. You will still need the amount, date, place, and business purpose on your receipts. When traveling, you might want to consider the allowable business per diem rate for food of $28 and $36 (depending on what city you are in) each day of an overnight trip. You may also seriously consider the auto allowance of 29 cents per mile rate for business use rather than keeping the actual auto expenses.
When would you not want to be in a business? Since the net royalties are taxable both for income and self-employment, if you were blessed with but one song and had no further ambitions, you would want that income to be non-business and not taxable for self-employment taxes.
After you have established your “business,” the most important concern for your taxes and business expenses is to keep good records. If an expense is important to take, it’s important enough to keep records. We all have good and bad habits; develop good record keeping habits and pay only your fair share of taxes.