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Avrakdavra Loyal user The Pine Tree State, USA 224 Posts |
Well, it looks like I am soon to have my first paid performances, and the question comes to mind: Does being paid something to perform magic mean that my own purchases (books, props, posters, tricks, etc.) are now tax deductions? Just some of the things I have spent money for in the past year? Do I have to make some minimum percentage of my overall income from magic to qualify for deductions?
I'll ask my tax preparer as well, of course, but would appreciate hearing from the pros and semi-pros here. Thanks, Bruce |
NormanMagic! New user Portland, Maine 15 Posts |
Hi Bruce,
You're from Maine? I am originally from Portland, Maine. I just moved to California recently. I believe all you need is an "intent to make a profit," in order to take those tax deductions. You don't need to make a profit you just have to show you are actively trying. You do this by advertising, marketing...and keep trying to get gigs. The IRS doesn't expect 1st year businesses to make a profit anyways. you need to file a shedule C on your 1040 to make those deductions. You should contact the Portland SAM #174. Some of the pros there can tell you more. PM if you need some names. Hope that helps. -Norman |
Jim Snack Inner circle 1338 Posts |
Your best bet is to check with your accountant and to pick up a few basic tax books for sole proprietors.
Yes, you can deduct expenses against your income. There is no minimum percentage, but you do have to demonstrate that you have a legitimate business and intend to make a profit, although I think you only have to show a profit for 2 or 3 years out of five. Again, check with an accountant. Make sure that you can demonstrate that you are operating as a business - have business cards and stationary. A separate business bank account is a good idea, as well as a business phone. All these things demonstrate that you are in business. Best wishes. |
ricker Special user Tampa, FL 914 Posts |
Im curious why most magicians pick a sole propriotorship rather than a Sub S corporation. With a SUB S, your profit or loss falls through to your personal income tax and the corp doesn't pay any taxes, but you get the corporation to handle liabiity.
It's worked for me in my business (not magic, software) for 16 years (17 in December) |
MagicalPirate Special user Shamokin, PA 828 Posts |
Mostly it is a cost thing. Sole Proprietors have less paperwork to perform to get the same end result. The corporation handling the liability for an entertainer isn't really a concern, you will still have to pay for the liability policy either way. Using the corporation benefits you more in the legitimacy of your business and the appearance to corporate. Will they hire Joe the Great or Empire Entertainment Inc. If you work birthday parties the moms won't care, but if you are after corporate it will make a mental difference to them. However, it still boils down to how good you and your show are. I would take the issue up with your tax professional and see which way he suggests you go. In the beginning I don't believe the income will justify the added expense of incorporating.
Martin
Martin Blakley, CSH, DASH, CMSA
http://www.thehypnoguy.com/HYPNORESOURCES http://www.docgrayson.com/ How To Sell Anything Online http://tub.bz/?r=1z Copyright to my own words retained 100%. |
Jim Snack Inner circle 1338 Posts |
Actually, I operate as a Sub S Corp.
Most magicians start out as a sole proprietor, then shift to a corporate structure when their income is high enough to justify splitting it into wages and dividends. Again, check with your accountant. |
cgscpa Elite user Ashton, MD 447 Posts |
I don't have much to add to the posts above but here are my thoughts:
The IRS defines a hobby as an activity done for pleasure or recreation where a profit is not expected. Generally, the IRS will assume a profit motive if profits are made three of the past five years. There are no hard and fast rules for defining a hobby (as IRS likes to say, it's based on the "facts and circumstances"). However, the IRS has specified the following factors that they use in determining a profit motive and thus not a hobby: 1. You carry on the activty in a business like manner (separate bank account, good bookkeeping, advertising, etc.) 2. Time and effort you put into the activity. 3. Whether you depend on the income from the activity for your livelihood. 4. Any losses are due to circumstances beyond your control or are normal in the start-up phase of a business. 5. You change the methods of operation in an attempt to improve profitability. 6. You and your advisors have the knowledge needed to carry on the activity as a successful business. 7. You were sucessful in making a profit in similar activities in the past. 8. Activity was successful I'm making a profit. If the activity is a hobby, then any income is reported on your tax return and any expenses, up to the amount of income, would be a Miscellaneous Deduction if you itemize your deductions. If the activity is considered a business then the income would be reported on Schedule C (if a sole proprietor) as mentioned in a previous post. In my opinion, the income a performer makes for a paid show three or four times a year would probably be considered hobby income. Someone who is compensated on a regular basis and holds them self out for hire would probably be considered a business. Everything in between would be based on the "facts and circumstances" and the tests above. Regarding S Corporations, they are popular. (My business is also an S Corporation). However, Limited Liability Companys (LLC) has become popular of late. They offer the same type of protection a corporation and no "double taxation" but involve less paperwork then a corporation. If the LLC has only one "member" then the income is reported on a Schedule C. No separate return is required and the need to draw out a salary and file payroll tax returns (if no other employees)is not required. The member of LLC continues to pay his taxes like a sole proprietor would. An LLC is usually recommended to someone starting out who wants that extra liability protection that an LLC has but this should be reviewed regularly to see if a corporation makes more sense down the road. Checks with your attorney and accountant for futher details. |
Avrakdavra Loyal user The Pine Tree State, USA 224 Posts |
As I anticipated, a wealth of information from Café members--my thanks to all of you.
Bruce |
Ricky B Regular user Northern California 172 Posts |
Quote:
On 2004-09-14 18:28, ricker wrote: In addition to the expense of incorporating, there is the expense (or inconvenience if you do it yourself) of a second tax return. A sole proprietor files a Schedule C, much simpler (no balance sheet for one thing). On top of that, there may be an annual fee for an S corp. In California, it is a minimum franchise tax of $800 per year. Net income is taxed at 1.5% by the state of California so an S Corp is not a tax-free pass-through at the state income tax level even though it is at the federal level. For most magicians, liability is not a big issue, and for them, insurance is a better answer. |
The Bonnie Kids Loyal user Sweden (Västerås) 267 Posts |
Hello friends!
Interesting thread! What about Sweden? I have just moved to Sweden and started a "one man company" (F-Skattesedel) as entertainer. Any recommendation/suggestion/warning? Thanks /Andrea |
newman1066 New user North Carolina, New York, Vermont, 53 Posts |
Cgscpa has provided you with good working descriptions of the criteria used by the Service to determine whether your activities as a performer constitute a hobby or a business.
In re. The limited liability aspect of straight C corporations or those making the Subchapter S corporate election: The limited liability protection afforded one by chosing the corporation as one's business form has been greatly diminished with the passage of time. The courts have allowed regularly piercing of the corporate veil of limited liability. As a practical matter, merchantile creditors and corporate lenders have almost universally implemented the the requirement that those individuals acting in a fiduciary capacity with corporate borrowers must serve as guarantors of the corporations' debt. This is done through the signing of personal liability agreements. As always, because your personal situation may differ, you should consult with your attorney or tax professional when dealing with matters such as these. |
Ricky B Regular user Northern California 172 Posts |
Quote:
On 2004-10-28 16:32, newman1066 wrote: Not true. There are occasions when the courts allow piercing the corporate veil, but they are exceptions. |
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