How to File Federal Income Taxes
discussed why we should pay taxes.
In Part Two we talked about which
Please go back and read those posts before you move on to Part Three.
In this post I am assuming you have settled in your heart that you will pay whatever taxes you legitimately owe and that you have all your records organized so that you can pay the least amount of taxes legally possible.
So, let’s move on to how to file Federal Income Taxes for your Christian band. Where do you show this income, expenses and depreciation on your tax forms? It depends…
The Federal government allows us to organize and structure our lives and businesses in a way that we pay the least amount of taxes. Yes, that’s right—there are legal ways to cut taxes. Huge corporations spend a lot of time and money figuring out all the loopholes. But, most of us have just a few steps we can take to reduce the amount of taxes we pay. If you file your taxes correctly, your band can decrease the amount of taxes it owes as a business as well as the amount of taxes you owe personally.
The most important decision you can make to reduce the bands taxes is to choose the best business structure for your situation.
Your Bands Business Structure
Many of the decisions about which form to use to file your taxes are decided by the business structure of your band. There are only a few possible structures: hobby, sole proprietor, partnership, LLC (limited liability company), corporation, and nonprofit corporation.
The first decision (which you should have already discussed and made with your band mates) is if your band is a business or a hobby.
Many, if not most, Christian bands are considered hobbies by the IRS. If your band is a hobby, your taxes are the easiest possible. Each member should file a Form 1040 for their personal taxes. Take the total amount of band income (before any expenses are subtracted) and divide it by the number of band members. This number is shown on each band members 1040 on line 21 which is called “Other Income”. You should write “Hobby Income” in the description. If none of the band members itemize (which means each one of you claims the standard deduction) you do not need to do anything else… simply fill out the rest of the form as you normally would with this income included. Easy Peasy! You can probably do this yourself without the help of a tax professional.
If any one of your band members itemize, you have a little more work to do. When you itemize your deductions, you can claim your share of band expenses up to the amount of band income (this reduces your overall tax bill). Every band member does not have to itemize, some can claim the standard deduction while others itemize. The choice depends on which is more beneficial for each band members personal finances.
To come up with an amount for band expenses, you cannot simply take all the expenses and total them up. (Yup, it’s the government—taxing income is easy; deducting expenses is more work.) The two items you must take at less than full value are food and equipment purchases. Food is claimed at 50% of the total expense. (i.e. if the band had $400 in food bills for the year, the band can claim only $200 of it.) Equipment purchases are depreciated over 7 years. Depreciation means that the band can claim 1/7th of the purchase price each year for seven years. This is where the Equipment List from
is used. You have to keep track of each piece of equipment the band owns and come up with a depreciated amount each year. One more expense you can deduct is the bands mileage to and from gigs as well as any errands that were done for band business. Total up the miles from your mileage log for the whole year (hopefully you have kept a mileage log with odometer readings). Every year the government decided how much you get for each mile you drove. It changes from time to time, so you have to check. The easiest way to check is to Google “2015 (or whatever year it is) Standard Deduction Mileage Rate”. For 2014 it is 56 cents per business mile. Multiply .56 by the miles you drove to get the total dollar amount you can claim as mileage expense. Add up all the expenses and divide by the number of band members. That number is the amount each band member can deduct as a band hobby expense.
But wait… there’s more. That is only the bands expenses. Each member can also deduct expenses for personal equipment purchases. Of course, it also has to be depreciated in the same way the bands equipment was depreciated. The difference is that each member gets to deduct the full depreciation of their own equipment (rather than dividing it by the number of band members).
And yes, there’s still more… the total amount you claim as hobby expenses cannot be more than the total amount of income you claimed from the hobby. There is no way to claim a loss on your hobby. The best you can do is to beak even. So, most people never need to figure out the more complicated things like depreciation or even mileage because the bands expenses are so much more than the income. Claim all the expenses you can up to the amount of the bands income, just make sure you have records and receipts to prove all the expenses you are claiming. Hobby Expenses can be easy enough for the average person to do themselves if the expenses are far greater than the income. If it is close and you have to get into depreciation of band and personal equipment in order to equal the band income, I would recommend seeking the help of a tax professional.
If you itemize, all of your hobby expenses are shown on your 1040 on Schedule A line 23. Write “Hobby Expenses” in the description line.
Every other method of filing your bands taxes involves the band being classified as a business. Once you reach this point, I highly recommend that you use an accountant or tax professional that is familiar with small business taxes to file your taxes. It can get expensive, but you need to figure that expense into your cost of doing business (the bands budget).
There are a few things you can do to cut accounting costs:
• Keep accurate, clear records to save the accountant time (most charge by the hour). You may want to ask the accountant which software they prefer and use it for your records to save them even more time.
• Ask around, you may find an accountant that will donate all or part of their time to your ministry. If they do, be sure to recommend them to potential paying customers whenever possible.
• Use the same accountant every year (unless they did a bad job the previous year). They will already be familiar with your business, so this will save even more time.
• Ask your accountant if there is anything you could be doing or doing differently that will make his job easier.
The following is an overview of what you can expect from your accountant for each type of business structure:
The second most common business structure for Christian bands is a partnership. Do not assume that because you have not filed any paperwork to state that your band is partnership, that you are not one. If the IRS determines that your band is a business (not a hobby) the band will be classified as a partnership because there is more than one person involved. If you have not filed paperwork, the partnership will be governed under the laws of your state. Most state law presumes that your band is an equal partnership, meaning (among other things) that all members are equally responsible for debts, have equal say in decisions, and are equally liable for taxes. In other words, if your band chooses not file income taxes you are responsible for that decision. The IRS does not let you off the hook just because no one else wanted to file taxes.
Your bands accountant will prepare the bands taxes, which are not your personal income taxes. You will use the bands tax forms to figure out your personal income taxes. So, the bands taxes have to be done before you can file each member’s income taxes. The accountant will use Form 1065 to file the bands taxes and issue Schedule K-1 for each band member. But the band does not actually pay any taxes; instead each member pays their share. Each member will use Schedule E to show their share of the bands income or loss from the partnership on their personal taxes. This will include all the bands expenses with 50% of food, mileage and equipment depreciation. The good part about being a business is that you can deduct ALL the bands expenses to show a loss. This loss can be subtracted from any other income individual members of the band may have on their personal income taxes. At the bottom of Schedule E will be the total income or loss each member can use on their personal income taxes. Note that if each band member makes an income of more than $400 you each have to pay self employment tax. WOO HOO—yet another tax to pay and form to fill out!
I highly recommend that the band uses an accountant to do the bands Form 1065 and schedule K-1. The band should pay for this (unless the accountant is working pro bono; do not forget to show this as a band expense on the next years books. Then, I would also recommend that the members of the band use the same accountant to do their Schedule E and the rest of their personal income taxes. Each member should pay for their own taxes to be filed.
Most solo Christian artists that form a business use a sole proprietor structure. Bands are almost never a sole proprietorship. Sole proprietor means that you are the only person who owns the business. If the IRS determines you are not a hobby and you are a solo artist, they will classify you as a sole proprietor even if you have not filed any paperwork. The guidelines for determining if you are a business or a hobby are the same as for band.
What you can claim on your taxes for income and expenses is the same as partnerships taxes. The primary differences in filing are that you do not file Form 1065 or Schedule K-1 and you do not divide the bands income or loss between band members. The accountant will use Schedule C. It will include all your businesses income and expenses. You are allowed to claim a loss against any other income you have earned. You will also have to pay self employment taxes if you make a profit of more than $400.
Limited Liability Company (LLC)
Most Christian bands start out as a hobby, and then move to a partnership, and eventually to an LLC. This business structure gives the band members some protection against personal liability while retaining most of the benefits of a partnership. LLC’s cost a bit to start up, which is why most bands wait until they have a stable membership and have some cash to pay attorney and accountant fees. LLC taxes look exactly like partnership taxes.
There are hopefully no Christian bands that are regular corporations. If you happen to be one, talk to your attorney and your accountant to make sure this structure really is best for your band. The tax forms can get really crazy.
Most Christian bands should not be nonprofit corporations.
Income tax issues with nonprofits are complex. It is not true that nonprofits do not have to file taxes. The truth is that they do not have to pay taxes, but they still have to file both Federal and State tax forms every year. Filing fees can be expensive depending on which state the nonprofit is located. IRS penalties for not filing can be in the thousands of dollars range. If you are a nonprofit stay in touch with your accountant—there are forms to fill out all year long!
Remember that I am not an accountant or attorney. Do not try to use this post as a guide to do your own business taxes. This post is written to give you a very basic overview of your potential tax situation so that you can walk in to your accountants’ office without feeling stupid. It is completely OK to tell your accountant that you want to pay whatever tax you legitimately owe, but that you also want him to help you get every deduction you can legally take.
My best advice: Pay what is right in the eyes of God, but don’t donate extra money to the government due to poor record keeping or laziness. Structure your Christian band to take the best tax advantages.
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