Here’s the video transcript:
Ideally, your Christian band is a ministry that changes the lives of people around you. But, how does your band’s ministry file taxes? How does your band get a bank account or a credit card? Does your band pay sales tax on equipment purchases? In short, how does your Christian band function in the business world? All the answers to these questions are defined by the government of the country in which your band is doing business. This video primarily deals with Christian bands doing business in the United States of America. Bands located outside the USA will find many similarities in the law, but some of the details will be different.
The first decision: Is your band a hobby or a business?
Band business structure does not define ministry or music quality. “Hobby” is not a derogatory term; it does not mean your band is less professional in its ministry. Nor does being a “business” raise your band’s professionalism or status in ministry. The goal is simply to choose the best business structure for you to do the most effective music ministry.
Why should you care? It is all a matter of paperwork.
Unfortunately, places like the IRS and your local bank care about your band doing the paperwork correctly and are more than happy to charge extra while making your life far more complicated when you don’t. Some bands feel that they do not need to bother with this legal stuff because they’re too small for anyone to notice. They can realistically coast along for a while, doing nothing until some event happens which requires some business documentation. This could be getting a gig that pays more than $500 from a college that wants to write a check and requires an employer ID number or social security number so they can send the band a 1099 form. Now that band has to decide whether to pay taxes, not pay taxes and hope they don’t get caught, or turn down the opportunity. It’s better to consider this issue ahead of time and make rational decisions before your band is put in a difficult situation.
To make the decision between business and hobby, the IRS uses the following questions:
● Does the time and effort put into the activity indicate an intention to make a profit?
● Does the taxpayer depend on income from the activity?
● If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
● Has the taxpayer changed methods of operation to improve profitability?
● Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
● Has the taxpayer made a profit in similar activities in the past?
● Does the activity make a profit in some years?
● Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
How Does the IRS Define “Profit”?
Look at the band’s financial records for an entire year (January 1 through December 31). If you do not have financial records for a year, use your best estimates of what you expect to make and spend in the next year. Add up all the money your band took in from performance fees, donations, merchandise sales, etc. Then add up everything your band spent on gas, merchandise, recording, etc. Subtract what you spent from what you made and the rest is “profit”—mostly. It’s the federal government, so of course there are loopholes, rules, and exceptions. Food, equipment, and practice space are huge issues for band expenses. The IRS allows musicians to count only half of food expenses, 1/7th of major equipment purchases each year, and does not allow expenses for practice space unless your band actually pays to rent it (although you might be able to take a home office deduction). After all that, did the band make a profit?
Now look at the last 5 years, and what you expect to make and spend in the next 5 years. Have you already or are you probably going to make a profit in at least 3 out of 5 of those years? If so, your band is a most likely a business. If not, the band is probably better off being a hobby.
The four main areas to consider when choosing a business structure are income tax, sales tax, bank accounts and liability. So now, let’s look at how these areas could affect your band’s business structure.
First let’s look at
How Does Being a Hobby Affect the Band?
Here’s How Hobby Income Tax Works:
Each band member must claim their share of band profit on their income taxes, but no one can claim the band losses. Your band creates a loss when related expenses exceed income. If your band is a hobby, band losses may not be used to offset other (not band related) income.
For example, let’s say you have a day job that pays $50,000 a year. You pay income taxes on that $50,000. But you put $5,000 of that $50,000 into the band to help pay for band expenses that cost more than the band made. You cannot deduct that $5,000 as a business expense or a charitable contribution. It’s just the same as if you spent $5,000 on any other hobby, like hunting or skateboarding.
If the band is a hobby, you should keep track of band expenses and income. Remember the general guidelines we used above for food, equipment purchases, and practice space when calculating your potential profit. If you see that the band is going to make a profit, be sure to alert your accountant. They may be able to help you find more expenses that can count as deductions so you do not end up paying income taxes on the band’s profit. If you still end up making a profit, you will have to pay income taxes but not self-employment tax.
The band can use one band member’s social security number and address for business purposes (like 1099 forms). Use the same member’s social security number for everything. Be sure to give all the records to your accountant at tax time.
Unfortunately, hobbies pay sales tax for all items not being re-sold. So, all your equipment purchases are a little more expensive when your band is structured as a hobby than if your band was a nonprofit corporation. But, the amount of equipment you purchase probably does not justify the extra work and expense to start up and maintain a nonprofit corporation. Other business structures still have to pay sales tax on equipment purchases, so you are really not losing a lot here by being a hobby.
Collecting sales tax is governed under state law, so every state is different. But, in general, you must collect sales tax if you’re selling retail merchandise to the public. Your band’s merchandise is considered retail. In most states, bands are required to collect and remit sales tax no matter what business structure you choose. It’s your responsibility to ensure that you are collecting the correct tax rate. Some states have guidelines as to the number of shows you play before you have to collect sales tax—be aware that it is usually very low (often 5 or less). Other states require sales tax to be collected and paid even if you only play one show in their state. Check each state’s sales tax office for the appropriate forms and guidelines. Most companies that sell you the products to re-sell will require a copy of your sales tax license (or at least the numbers from it) before they’re legally allowed to waive the sales taxes.
The IRS does not require a hobby to have an employer identification number. But banks need that number to open a commercial checking account. They will not issue a commercial checking account to a hobby. They will, however, issue a personal checking account to members of the band. Generally, personal checking accounts have far fewer fees than commercial accounts, so this is good news for hobbies! Choose two unrelated members of the band to open a joint personal checking account with debit cards. When anyone wants to pay your band by check, have them make it out to one of the two signers on the account.
As a hobby, the band members have no liability protection. Do the members of the band need protection from lawsuits as a result of the band’s activities? Generally, when a band is first starting out, the risk of being sued is very low and most band members do not have enough personal wealth to protect. Consider your specific circumstances, but most bands feel that they do not need liability protection at first, and then shift to business structures that offer increasing amounts of protection as the band becomes well-known.
Bands are most often sued for plagiarism or negligence. Plagiarism occurs when you write and record a song that is substantially similar to someone else’s song. Negligence happens when you should have done something better, and then someone got hurt or property damage occurred, such as using faulty equipment that starts a fire. Bands on the local level almost never get sued but as the band gets more famous, lawsuits become increasingly common.
Court fees and attorneys are expensive. If the band loses a court case, damages awarded by the court can be astronomical. The liability protection of some business structures limits the amount the band can be forced to pay to the band entity. If the band chooses to exist as a hobby, without liability protection, individual members of the band could be forced to pay from their own income and personal assets in the event of a lawsuit.
Now let’s look at
How Being a Business Affects the Band
According to the IRS, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that’s common and accepted in the taxpayer’s trade or business. A necessary expense is one that’s needed to do the business. One of the main advantages to operating as a business is that you can deduct business losses from other income to lower your overall personal tax bill.
For example, Let’s say you have a day job that pays $50,000 a year. You’d normally pay income taxes on that $50,000. But you put $5,000 of that $50,000 into the band to help pay for band expenses that cost more than the band made. You can deduct the $5,000 as a business loss, effectively turning your $50,000 income into $45,000. Your accountant should fill out the paperwork to make sure it’s done correctly, but this strategy may save you a lot of money at tax time.
The downside is to this tax benefit is that the losses must be great enough to justify the expense of additional accounting and tax preparation.
Like hobbies, businesses do not pay sales tax on items they re-sell (such as band merchandise). Also like hobbies, businesses pay sales tax on equipment purchases unless the business structure is a nonprofit corporation. If your band chooses to become a nonprofit corporation, you’ll definitely want to take advantage of this tax break. But, becoming a nonprofit solely based on this one way to save money is not recommended. Do your homework before you embark on the nonprofit path.
Like hobbies, businesses have to collect and remit sales taxes on merchandise they sell. Contact the state’s sales tax office from each state your band will be performing in to find out how to handle these taxes.
Businesses will be issued a commercial checking account from almost any bank, but fees for that account vary widely. It is not unusual to accrue hundreds of dollars in bank fees each year. (Hobbies are looking really good about now aren’t they?) Shop around for your best deal. Be sure the bank has online banking and convenient ATM locations for the times that you may need access to your money while on the road. Your bank will ask for the band’s employer identification number (we will discuss how to get this number in Chapter Six) and the band office address. Usually one of the band members agree to use their home address for the band’s office.
Personal liability is one of the most important considerations when choosing which business structure the band will use. Sole proprietors and partnerships have the least amount of protection, while corporations provide the most. But, in the end, there’s no such thing as being completely not liable for your actions. For the purposes of this discussion, you need to know that you may be just as personally liable if your band is a business than if your band is hobby, but you may be able to limit the damages you have to pay as a business to the assets of the business.
My Recommendation: Start with Easy and Work Your Way to Complicated
It’s easiest to start the band as a hobby, because as a hobby there is no extra paperwork associated with being a small business. The IRS considers it to be perfectly legal for a band to exist as a hobby or as a small business. Most bands start out as a hobby, either because the members don’t know any better or because of the perceived ease of paperwork. However, easy paperwork does not mean there is no paperwork to be done. Records of band income and expenses should be kept, as income will have to be shown on income tax returns. Of course, most bands do not make a profit initially, but the band should be able to prove it. IRS auditors may want to look at past band records if the band is financially successful in the future.
After all band members are sure this is the ministry God has called them to do, the band may want to change business structure from a hobby to a business to take advantage of the tax breaks available to small businesses. Remember that a band that exists as a small business must have a clear and reasonable intention to make a profit, a hobby does not.
Some components that help prove the band intends to make a profit are:
● Businesslike operation and bookkeeping
● Previous experience and expertise of the band members
● Quantity of time devoted to the business
● Financial status of the band members
● Amount of personal pleasure derived from the business
Most successful bands will have to become a small business at some point. But the government does not require bands to start up as a business. It is completely acceptable to be a hobby initially and then restructure into a small business.
This video is an excerpt from the Christian Band Handbook.
This resource book covers topics such as defining your ministry’s mission, how to find the right band members, choosing and protecting your band’s name, copyrights, press kits and booking, music marketing, how to make the most of your ministry dollars, and a whole lot more.
We know what it’s like to be a Christian musician. Between us my husband Mark and I have over 60 years of experience in almost every aspect of music ministry. I wrote this book so you can learn from our experience. We want to help you launch your band on the journey to impact the world around you while avoiding the pitfalls along the way.
The Christian Band Handbook is available as a paperback or e-book on Amazon and most e-book retailers.
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