Taxes and the freelance harpist

[Alyson Webber]

Hi, all!

I am getting my business going this year, and I want to do it right. I have no idea what to do about taxes. I’m keeping a record of what I have made and kept receipts, etc. I don’t know if I need a business license or not.

My big question is if I can include my harp payments (as I am still paying off my pedal harp I bought a few years ago) in this year’s expenses. If anyone has a way of doing that, it would be very helpful!

[charles-nix]

Congratulations on doing it right. It is much easier to start off right with proper books than to find out after an audit.

Suggestions:

TL;DR
1) Find an accountant
2) 🙂 Find an accountant.

Long version:
Regarding business license: that will be entirely subject to your local laws (city and county). Unless you happen to live in Tennessee, I would have no idea. You may get different answers depending on whom at your courthouse you talk to, also.

Musical instruments are assets, and the original purchase price is part of the asset column on your balance sheet. (The other two main categories being liabilities and capital(or equity).) Your payments are not expenses, but a reduction in your liability. Your income and expenses form the income (or profit/loss) statement of your business. If there is a separate interest portion of the payment, then that portion only might be an expense, if you can come with an amortization table for the loan. The rest of the payment (against the principal of the loan) is a journal entry debiting the harp loan’s liability account on your books and crediting your payment source (checking account?). Assets also generally depreciate over time: this year’s portion of the depreciation is also an expense for this year.

Where this will be a problem is if the rules say that a harp depreciates over, say, 10 years, but the loan is for 5. You may also be eligible for a Section 179 deduction on the expense, which would make that a moot point.

My guess is that the preceding reads like greek–which is why you need an accountant to help you get it set up correctly from the beginning–for your specific locality. You can keep the records–it is the set up that is important.

I’ll be glad to help however I can.

Charles Nix

[billooms]

There are two ways of going with this — Income producing hobby or business. As has been said, you need an accountant to talk you through the pros and cons of each approach. In general, an income producing hobby requires you to report income which exceeds direct expenses (materials and supplies). It does not allow you to do depreciation or deductions for home office. As a business, you will be able to depreciate your capital assets (i.e. harp) and expenses for a home office or studio (if you teach, for example). This will require you to fill in a schedule C on your tax returns and will cost you more for an accountant to keep you straight on the fine points of the tax law.

I’ve had a business for many years (woodworking) when it was a major portion of my income. Now that I’m “retired” I’ve cut it back to income producing hobby.

[Alyson Webber]

Thanks for the advice. Yes, this is way over my head. I will definitely look into talking to an accountant. I’m beginning to fear that my venture into business in order to keep my harp (since I became a stay at home mom and lost my income), is going to end up costing too much in taxes. I am currently barely making enough to make my payments, but that’s a lot in “income” if I can’t take into account all my profits going to keep the main asset of my business! *sigh*

[charles-nix]

Setting up as a business will surely save taxes, not cost extra. But you do have to be treating it as a business: professional, have cards, invoice, separate checking account is nice, and, most of all, have consistent profit–even if only a small amount net each year.

Any cash you receive for playing is reportable as income, regardless of whether you have a business, a hobby, or nothing. Even if they pay you in cash, you are supposed to report it on income tax forms. However, it is only as a business (Schedule C for sole proprietors) that your expenses are deductible from that income, so you are taxed only on the net profit, not the gross income. If you play several times for the same venue within a year (more than $600), they are required to report the income to you and the IRS on a Form 1099-MISC, which is the equivalent of a W-2 for sole proprietors.

Not deducting the payments does not make taxes higher; instead, you will most likely be deducting the entire depreciation of the harp at one go, the first year, as a section 179 election to expense rather than depreciating over 7 years. So you will have a capital loss to start out with and carry forward. There will be other things to handle if you later sell the harp, or stop playing, but nothing that is worse than paying full taxes on all of the income up front.

You will have additional expense for an accountant, especially at the set up, but you can do the later book work yourself. Professional tax preparation is also not expensive. You probably need that for a year or two at least. I understand that some of the tax prep software handles schedule Cs now, but I’ve never used TurboTax or the like. Around here I’d expect a personal 1040 plus a schedule C at an accountant to cost less than one harp at a wedding, maybe $250. 🙂

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