Taxes for Magicians, Part 1
In last month’s No Stone Left Unturned column, I mentioned some information about taxes. Well this month, I was able to pull my accountant away from his ten key and shift his focus to a key board. Please welcome a guest writer for this month and next to help you understand the magic of taxes.
Taxes for Magicians, Part 1
by William Brough, MBA, PB
“Let me tell you how it will be;
there’s one for you, nineteen for me.”
Taxman, The Beatles
As Jeff’s accountant, I have been provided a window through which I glimpse, at least a little, what it’s like to be a magician. I have seen how he plans for a gig, how he takes his act apart and puts it back together. I have watched him come up with an idea for a trick, experiment with it, and polish it before unleashing it on an audience. And of course, I have experienced the delicious “How does he do that!” moment that all magicians are shooting for.
Most of this was not that surprising to me. I have a background in music, and I went through much the same process working on my skills, developing my set and looking for gigs. I am used to how musicians think, and how they act around the public and around each other. The surprise for me is that magicians are nothing like that. The world of magic is very insulated-a private community with its own language and a vault full of secrets; a community that actively works to exclude outsiders.
So what’s my point? My point is that I’m not “in the club.” I don’t just sit on the other side of where you stand when you’re on stage, I sit completely outside of your creative life. You want it that way. In many respects, we couldn’t be more different. But one thing we have in common, whatever else we don’t, is that this time every year we share an inescapable obligation to file an income tax return. All year long you try to leave me out of your world, then suddenly you remember you need me.
Now it’s my turn to be the guardian of secrets you don’t completely understand. Lucky for you I don’t hold a grudge.
Okay, first secret: What is the difference between tax planning and tax preparation?
December 31st.
For any given tax year, the time to plan is before December 31st. After that, it is too late to do anything but prepare your tax return and let the chips fall where they may. There is darned little the IRS lets you do in 2008 to change your tax liability for 2007. So I’ll assume, for better or for worse, that you are where you are as far as Tax Year 2007. If you haven’t taken steps to reduce taxes…oh, well.
So let’s talk instead about what you should be doing to get ready for Tax Year 2008.
To begin with, you need to understand how the IRS recognizes magicians as taxpayers, and how they allow you to claim deductions that can lower your taxes.
First of all-and you may want to sit down for this-the IRS makes no allowances for magicians as a class, at least not that I’ve been able to discover. There are no special “magician deductions.” But they do allow deductions for businesses, and it doesn’t matter what the purpose of the business is.
As a result, some magicians, like Jeff, actually form a separate business entity. Jeff has an LLC called Stone Cold Magic. Many more magicians operate as sole proprietors, which is also a business structure, but one that makes no legal distinction between your personal and professional identity.
As a sole proprietor, you might work under your own name, as in “Ladies and gentlemen, please welcome Jeff Stone.” Or you might have a DBA (literally, “Doing Business As”), which can be a business name or stage name. Jeff could have legally formed a Sole Proprietorship and also called it Stone Cold Magic. He would be Jeff Stone, dba Stone Cold Magic. Or he could have assumed a stage name, like The Great Jeffdini, and his legal, business name would be Jeff Stone, dba The Great Jeffdini. Either way, he would be entitled to deduct legitimate business expenses, just like he can as an LLC.
However, you don’t need to form a business in order to enjoy tax deductions from your magic career. A less well known provision of the tax code lets you claim the same kinds of deductions by reporting what the IRS calls “hobby income,” and you can claim any related expenses and write them off, just like a business can.
So the first lesson is that you don’t have to feel that, just because you haven’t jumped through the legal hurdles of forming a business entity, you are excluded from any tax benefits for working as a magician.
Next Time: Write-Offs, Right On!
Until Next Month…
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