Musician and expenses

[DTS]

I need your help to make sure my thinking is on straight here, as some, but not all aspects are new to me. Forgive the long post, but I wanted the post to be clear.

Client is a musician. The band performs all the time (a little less in '07 & '08) and is almost finished recording and producing a CD, which will go on sale before the end of '08. This band really produces "Grammy quality" music, so not just a bunch of kids in a garage.

My thoughts are to allocate income and expenses between two Sch C's to keep all the reporting straight, one for the touring and performing and one for the cost of recording and producing the CD's.

On the performing side: to allocate appropriate costs incurred. Income is almost nonexistent, expenses to get to venues are quite hefty. Performing is done more for getting name recognition and to promote a 3-song promotional CD, given to audience members.

On the recording, producing and sale of the CD's: make the election to amortize the costs associated only with recording the CD (travel, equipment depreciation, etc) over the three-year period (50%-25-25) and then put the per-unit costs of producing the actual CD into COGS against any future sale of CD's.

Am I on the right path here?

Thank you in advance!

D

[erchess]

hmmmmmm

If you will pardon the pun, the idea of two Schedules C for a band strikes a wrong chord with me. I mean, suppose that I do some tax returns and some accounting or I do some services in my office and some in the homes and offices of my clients. Or suppose that I do both plumbing and electrical work as a contractor. Would I not in each of these cases have one entity for tax purposes? Now let's think about the band. If a band wants to be a commercial success it has to both tour the country giving concerts and sell CDs. I think the case of the band is similar to the other cases I mentioned.

Of course this discussion assumes that the band is owned by one person or a married couple and that the other performers are employees, contractors, or volunteers. I would have guessed that the usual band was jointly owned by all of the players but perhaps I am mistaken.

[ChEAr$]

That is puzzling,

about separate schedule c's. Is this a one man band maybe?

The right way to do it is if it is a multi member band, a partnership return should be
filed and good accounting records for the entity should be in place.
Or maybe the band should be an LLC, even an S corporation.

Is it your client who is in charge of the finances and production activities?
Might want to sit him down and make sure that all band members are
playing on the same page.

[DTS]

The right way to do it is if it is a multi member band, a partnership return should be
filed and good accounting records for the entity should be in place.
Or maybe the band should be an LLC, even an S corporation.

Is it your client who is in charge of the finances and production activities?
Might want to sit him down and make sure that all band members are
playing on the same page.

They are in the process of forming an LLC for '08, but for '07, no. It is a multi-member band, but at this stage, I don't know about contracts with other members, how monies, expenses, etc., will be divided for '08. We talked yesterday and are supposed to get together sometime this coming week to go over some of this. For '07, one member, my client, is paying all expenses and taking whatever money is earned as reimbursement.

The only reason I mentioned doing two C's is that I thought it might be better to report this way because of the two types of income. Maybe not. I suppose I could put the unit costs of producing the CD into cost of goods each year amounting to the cost of the number of CD's that were sold. If ever questioned, I could show how I arrived at this cost and against what income.

I'm just thinking out loud.

D

[DTS]

If a band wants to be a commercial success it has to both tour the country giving concerts and sell CDs. I think the case of the band is similar to the other cases I mentioned.

Erchess,

You are right. From so many conversations with this fellow over the last couple of days, my head was going in 60 different directions and I was sorting it out on this board.

My main concern about dividing the income sources was because I have a very big concern about the lack of income with regards to touring and recording in relationship to the tens and tens of thousands this fellow is spending. One reason for me mentioning the amortization issue. The cogs issue will not be a problem, just sorting stuff out, again.

I think my post was confusing because my thinking was not directed.

D

[erchess]

D

This board is especially helpful when we are not thinking straight. If we can think straight enough to lay out the relevant facts perhaps with some prodding from our friends, fresh eyes and minds will offer informed opinions that are often helpful.

[ChEAr$]

Now we have the picture

They are in the process of forming an LLC for '08, but for '07, no. It is a multi-member band, but at this stage, I don't know about contracts with other members, how monies, expenses, etc., will be divided for '08. We talked yesterday and are supposed to get together sometime this coming week to go over some of this. For '07, one member, my client, is paying all expenses and taking whatever money is earned as reimbursement.

The only reason I mentioned doing two C's is that I thought it might be better to report this way because of the two types of income. Maybe not. I suppose I could put the unit costs of producing the CD into cost of goods each year amounting to the cost of the number of CD's that were sold. If ever questioned, I could show how I arrived at this cost and against what income.

I'm just thinking out loud.

D

Since the music production activities are all in 2008, and assuming you will be
the accountant of record for the LLC, everything should be counted under
that entity. When setting up the LLC books, give each member credit for
whatever monies he has contributed, whether in the form of money or
other expenditures on behalf of the group.
In this way, you can keep your client's musical playing activities on schedule c,
at least until the time the LLC is formed and those activities start to be recorded
on the LLC books.
Make sure LLC opens bank account as soon as possible. Forming an LLC is
really simply, anyone can do it on the web. Just look for secretary of state
website, download the forms, fill in and file with appropriate authorities, be they
local probate court of secretary's office in state capitol.

[S T]

Llc

I believe Dennis is in California and probably then so is his client. So might not be so simple and might not be necessarily wise to open a LLC.

California has an $800 fee for LLC then also the t/p is subject to a gross receipts tax on actual gross receipts in excess of $250,000.

California is not a friendly state to operate an LLC unlike some other states.

Sandy

[fliszt]

Dennis, I have

a similar client, only guitarists. I use one sched C for the client which includes income and expenses for gigs and for studio recordings. The sales of the CD's are slow but still, time will tell. They have lots of $ tied up in musical equipment and related equipment. I have depreciated equipment over 7 years.

[Nashville]

Gaap

Hi Dennis -

Some situations cry out for a knowledge of GAAP, and until things materialize for the group (if they ever do), you might consult with a CPA. Not necessarily for tax treatment, but it sounds like there are so many issues here that a proper set of books under GAAP should really be a priority.

Please be forwarned (this coming from a former musician), that groups are normally very amorphous, often short-lived, with new members replacing old members. Keep this in mind if you envision partnership treatment. Every group envisions an unending stream of record sales and the same people performing for 20 years. But the reality is far from that. No one has done that since the Sons of the Pioneers.

[JohnH]

You mean when I see the Temptations singing on the Public TV special, they aren't the same guys who performed at my high school prom 42 years ago? I'm crushed.

[DTS]

JohnH

At first I was shocked when I saw 42 years since your prom and then it hit me that it's been 39 years since my last one.

I was so happy to see that I'm way younger than you by 3 years! I needed this today

D

[Uncle Sam]

Musician's Expenses

There is an MSSP Guide on the Music business you should read.
It will most likely give you some helpful hints on how to handle.
On the practical side, I have a client who pretty much performs like your client does.
He has a full time job (completely unrelated to music).
As a second "occupation" he performs on his own AND produces his own CDs, and also is in a partnership (1065 K-1).
As far has the CD projects go, I charge off the various production expenses under the income-forecast method. What I do is, capitalize the expenses, and ask my client how much gross income he expects to produce from the CDs. By hook or by crook, I do get an answer out of him. Then I take the gross he gets each year and proportionalize over the total gross to get the % of total expenses to charge off - over the life of the project.

[erchess]

Uncle Sam

I am interested in why you used the income forecast method of depreciation for your musician's tax reporting and in what method you use or is used and why, for his books? I would not have known any better than to use MACRS over the appropriate class life for tax purposes and straight line over however long he expected to to keep the equipment for his books.

[Uncle Sam]

Musician

Fixed assets I depreciate the normal way - Sec 179 where feasible - or MACRS.
It's only the production expenses I use the income forecast method for.

I learned this from when I first started out in public accounting. I worked for a CPA firm that handled businesses in the entertainment world - bands, musicians, broadway shows. I remembered it from back then.