Here’s the video transcript:
In Part One of this series we talked about Why Your Christian Bans Should File Income Taxes. Now we’re talking about the information and records you need to keep to file your Christian band’s income taxes correctly.
Good record keeping is a part of any business or ministry. Most people do not like to do paperwork, but it can help you make wiser decisions in planning the future direction of your band. For example, if you see a trend that your merchandise sales are going down you will want to take action to fix it. Good records will help you figure out if you have been playing fewer shows, if there are less people at each show, if each person at the shows is spending less money, or if you simply have some nasty looking merchandise. Knowing the root of the problem will help you decide what to do about it.
Of course, where there is money involved, the IRS wants to get its share. The best method to save on taxes is to maintain good record keeping, especially for all the little expenses, and then communicate any expected changes from last year to your accountant. Any ordinary and necessary business expense can be a tax deduction if the band has kept receipts. Those small receipts can add up to large deductions at the end of the year. When hiring people, such as roadies or musicians, keep a record of social security numbers and addresses so the band can claim the expense at tax time.
Here’s what you should be doing:
If your band took in any money, including performance fees, merchandise sales, or donations, you need to report that income to the IRS.
There has been a misconception that if the band did not make more than $500 you do not have to report that income. So, many bands operate under the table by never getting paid more than $500. This seems to be based on the fact that businesses do not have to issue a 1099 (which is like a W-2: it tells the IRS they paid you) until they pay out $500 or more to you. So, the truth is that it is far less likely the IRS will catch you not reporting income if you do not have a 1099 issued to you, but the IRS still requires you to report the band’s income even if it is under $500. This is where your Christian conscience comes in to play—ask yourself, “What should I do in light of what the Bible says?” You will probably not get caught, but does that make it right?
There is also the misconception that just because your band is Christian or is involved in doing some kind of good in the community that you do not need to pay taxes. This is absolutely false. The band is not nonprofit just because you are religious, and nonprofits still have to file taxes. If someone tells you anything like this, ask them who their accountant is and be sure not to use them to do your taxes. (Most likely, they will not have an accountant or they do not tell their accountant that they have a band.)
Keep track of all the band’s income for the entire year. It is best to categorize types of income. The categories I like to use are Performance Fees, Merchandise, and Miscellaneous Income (which is where I show donations). You can use any method that works well for you such as a spreadsheet, accounting software, or a pen and notebook.
There’s a link below to get forms for easily recording your band’s income called “Managing Your Band’s Finances the Easy Way.”
While your band’s income is pretty straightforward, expenses can get crazy. But, this is where you can really help reduce your tax bill. The key is to keep absolutely incredible records and receipts. Keeping receipts is a big challenge for almost every band. It is just plain hard to remember to do it every time. But, receipts for all the little expenses really add up to big savings at tax time, so it is worth the extra effort. Keep a legal sized envelope of receipts for each month of the year in the merchandise cash box. Continually remind each band member to put receipts in the envelope as they get them.
Here is a list of possible expenses that may be deductible: batteries, drum sticks, guitar strings, cords, reeds, banking and credit cards fees, accounting and tax preparation fees, ads, flyers, press kits, telephone calls (the actual calls made for the band, not the full monthly telephone bill), legal services, website development and maintenance, hired musicians and roadies, practice space rental, auto or trailer rentals for traveling to gigs, mileage traveling to gigs can be deducted on a personal vehicle, hotels, food when the band is traveling, airfare, and instrument or vocal lessons.
As with income, expenses need to be written down on a spreadsheet, using accounting software or pen and paper. It is very important to group expenses by category because some categories are deducted at different rates (for example, food deductions are 50% while equipment is depreciated over time). The most common categories are: Merchandise, Equipment Repair and Purchase, Gas and Tolls, Food, and Miscellaneous Expenses.
One other expense you should keep track of is mileage. This includes travel to and from gigs and errands run for band business. Keep a separate log in the vehicles to record the odometer readings. Keeping a log is annoying to do, but creates hundreds of dollars of tax deductions each year, so it is worth the extra effort.
Be wary of taking a deduction for home studio and practice space. There are very specific requirements to qualify for that. The rule for the home office deduction is that the space must be used exclusively and regularly for the business. As of 1999, the band must use the room to do substantial administrative duties. Holding band practice in a band member’s living room once a month does not qualify as either exclusive or regular use. The space must be used only for the band and often by the band to practice as well as perform administrative business tasks. Then the band is able to deduct a portion of the home’s mortgage interest, property taxes, utility bills, insurance, and improvements made to that space as a band expense. Most bands do not meet the requirements, although some try to take the tax savings anyway. This is an area the IRS specifically looks for when deciding to do an audit.
There’s a link below to get worksheets for expenses in our freebie called “Managing Your Band’s Finances the Easy Way.”
When the band purchases equipment, the cost shows up as an expense. But not all expenses get to be deducted from your taxes in the year you paid for them. The general rule for band expenses is anything used up within a year will qualify for full deductions. Most band equipment is expected to last about 7 years, so the government wants you to deduct 1/7th of the expense of the equipment each year. If you sell the equipment before the 7 years are up, you get to keep the previous year’s deductions but you also have to show the sale as income. The math gets tricky; I do not advise you to take this on yourself unless you are an accountant. What you should do is keep a record of your equipment: when you bought it, how much you paid, when you sold it, and for how much. One simple spreadsheet will do the trick. Depreciation of equipment can add up to substantial deductions and tax savings. “Managing Your Band’s Finances the Easy Way” has a worksheet for this too.
Gather all this information and you are ready to do the band’s taxes. Keep one page for income and one page for expenses each month. At the end of the year, transfer the totals from each page on to one summary sheet. Keep one page for depreciation for the entire year. Store all this info in a file on a computer (which is backed up on a thumb drive or on the cloud) and print a hard copy, to keep in the band’s physical files. “Managing Your Band’s Finances the Easy Way” has all the forms you need including, the summary sheets.
This article is an excerpt from The Christian Band Handbook.
takes you through a step-by-step process to set up and run
your Christian band’s business in a way
that supports and grows your music ministry.
to get your copy today.
Do you prefer to listen to the podcast of this article?
Here’s the SoundCloud link:
Get Your FREE Christian Band Booking Calendar
Christian musicians need places to play to be able to do their ministry.
Sign up to get a FREE booking calendar that shows you which booking tasks to do each month. Know what to do and when to do it to get more gigs so you can do more ministry.