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Topic: OT: Taxtime question re: business vs. hobby

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  1. #1

    OT: Taxtime question re: business vs. hobby

    I have been composing for over 2 years now. Things have started to take shape a bit. A friend of mine told me that I may meet the legitimate requirements for a small home business, and that I can likely write off 1/6th of my apartment rent costs (and save over $700).

    Can anyone offer advice to me on this. How can I find consultation on this? Anybody know someone reliable? Is it costly to talk to someone? I just want to do the right thing and don't want to bend any rules or take chances, I just want to know if I have a legitimate home business!

    Thanks.

    Here are some facts if anyone is interested:

    1. My intention since I started producing music has always been to work towards quitting my day job.

    2. 1/6th of my apartment space is dedicated solely to music production. I work there 3 hours a night (on average).

    3. This last year I have had my first published work with a popular music library, my first TV airplay of that work, and my first ASCAP royalty check.

    4. I have 3 more cue's that I've written and are going onto the next CD release of the music library label, and they asked me to compose more for an upcoming Christmas CD.

    5. I have not upgraded any software/hardware since 2004. This past year (other than the apartment space), my "business costs" is about 20 bucks for a website domain name. My royalty earnings are > 20 bucks.

    6. I know the 3 of 5 rule, and I can honestly say that if I am not making a legit profit in 3 years, (even though I might be attempting to), then I would not try to apply for a tax relief.

  2. #2

    Re: OT: Taxtime question re: business vs. hobby

    Sounds legit to me. I assume you're already deducting equipment purchases and other expenses as well. I would if I were you.

    The 3 of 5 rule is known as the "hobby test." As long as you look like you're legitimately trying to turn a profit, you're OK.

    Most of your music deductions go on Schedule C. I think home office is on Schedule A, which is the form if you itemize your deductions. You should probably hire someone for your taxes. This is pretty standard stuff for them. Music gear goes on the same line on the Schedule C as dental office equipment, so you don't need a music specialist.

    - Mike Greene

  3. #3

    Re: OT: Taxtime question re: business vs. hobby

    So I used turbo tax to enter in my information to see what the results would be (without having to actually file my return just yet).

    The program basically told me that the maximum I would have been able to deduct this year is an amount = to my expenses (portion of rent for my apartment, etc), but it will only actually allow me to deduct an amount equal to the amount of profit I made this year (2 small royalty checks). The rest it said was an 'unallowable deduction' that I can't claim this year, but could next year, if my next year's profits are high enough.

    Confusing stuff, I'll try to find a good tax consultant to verify this. Just wanted to let you all know what I was able to find out.

    Thanks for the reply Mike

  4. #4

    Re: OT: Taxtime question re: business vs. hobby

    umm... best advice i can give you is go get yourself an accountant that deals with alot of other composers/musicians.


    you'll be very grateful you did when you start getting money BACK from the taxman


    the amount of stuff you can claim is incredible.

  5. #5

    Re: OT: Taxtime question re: business vs. hobby

    Keep in mind that a program like Turbo Tax has to be extremely cautious about deductions. They don't dare allow you to take a deduction where there's even a remote possibility the IRS will disallow it.

    I'd take the deductions. But like Richard and Lee said, the home office deduction is a red flag for the IRS, so be sure about that one. I'd hire a tax preparer.

    - Mike Greene

  6. #6

    Re: OT: Taxtime question re: business vs. hobby

    Well thanks so much for all the advice you guys had. I'm really getting the picture. I definitely will talk to a professional before doing anything. I don't want to become liable for back taxes if it should happen that I'm less than successful over the next couple of years. I am not without confidence, but I've never been a betting man! So I definitely don't want to place an unnecessary monetary "wager" on the outcome of my own ambitions.

    Can anybody recommend a reasonably priced tax professional who would be appropriate for this? I'm gonna just ask around my family and friends and such. (I'm from NYC btw).

    And thanks again, really.

    Andy

  7. #7

    Re: OT: Taxtime question re: business vs. hobby

    I would definitely talk to an accountant. I know you're renting, but for the benefit of others who own a house: my accountant gave me some very interesting advice when I asked him about this exact issue; it is a red flag, but even if that isn't a problem there's actually some kind of capital gains impact if you do this when you go to sell your house. I don't remember the exact details but it's something to the effect that whatever amount you saved by the home office deduction now in turn becomes some kind of capital gain in terms of the value of the house, tax-wise. I think it may also depend on how long you plan on being in your house, etc.

    I may have some of this wrong (I'm terrible with business stuff) but the bottom line was that in some cases it's a "pay me now or pay me later" kind of deal.

    But definitely ask yo' accountant 'bout it.

    buzz

  8. #8

    Re: OT: Taxtime question re: business vs. hobby

    I wondering what I could since I'm a music educator in public school. I've bought a lot of software/hardware that I often use for school.
    If anyone could point some links for me to read, please do.

  9. #9
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    Thumbs up Re: OT: Taxtime question re: business vs. hobby

    Go for it. Been doing it for years with several different "sole proprietorship" businesses. It's not important to show a net profit for the first three years - you should check this figure because it may have changed - as long as you show intent to make a go of your business.

    Personally, I would be somewhat leary of writing off home-office space - supposed to be a red flag item. I have never claimed even though I was perfectly in the right to do so.

    By all means, consult with someone because if they are knowledgable, they will give you the confidence needed to take advantage of a great opportunity to save some pellets.

    Brian

  10. #10

    Re: OT: Taxtime question re: business vs. hobby

    Quote Originally Posted by ziggy
    The program basically told me that the maximum I would have been able to deduct this year is an amount = to my expenses (portion of rent for my apartment, etc), but it will only actually allow me to deduct an amount equal to the amount of profit I made this year (2 small royalty checks). The rest it said was an 'unallowable deduction' that I can't claim this year, but could next year, if my next year's profits are high enough.
    Hey Ziggy,

    I do taxes professionally. It is true that home office deductions are limited to net income for that particular business. Any unused amount can be used in future years.

    The main test in determining whether you have a hobby or business is 1) do you have the intention to make a profit and 2) do you put in the effort and required actions to potentially turn a profit. The 3 of 5 year rule is not a requirement.

    I wouldn't lose any sleep over claiming a home office deduction. I haven't had the IRS come after anyone in a long time. The requirement is that you have an area set aside exclusively and used regularly for business.

    Lucas

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