Every year you probably get your income taxes filed and paid, but do you always feel 100% confident? Did you get all your expenses? Were there opportunities missed by waiting to gather your info at the end of the year? Could further analyzing your income and expenses help you make better choices with you finances?
Here are 4 common music accounting mistakes that could be holding you back. Fixing these mistakes could help you save time in the long run, reduce your taxes, and make better decisions about your music career.
Not Taking all your Deductions
I recently re-watched the Seinfeld episode where Kramer encourages Jerry to pin a broken stereo on the United States Postal Service.
Jerry – “How is it a write-off?”
Kramer – “They just write it off.”
J – “Write it off what?”
K – “Jerry, all these big companies, they write off everything.”
J – “You don’t even know what a write-off is.”
K – “Do you?”
J – “No, I don’t.”
K – “But they do. And they’re the ones writing it off.”
J – “I wish I had the last twenty seconds of my life back.”
Most people don’t know what “writing off” means, but unfortunately, as a musician, artist, independent contractor, or small business owner you need to actually know it works if you can correctly leverage the benefits.
“Writing Off’ or writing of an expense is a term used for claiming an expense for the purpose of reducing your business income, and therefore your tax liability. Your business could make $100,000 in year, and would have to pay taxes on most of that income, but if you also made $90,000 of “ordinary and necessary” expenses to support that business you would only be getting taxed on $10,000.
Not recognizing and tracking all your expenses can be costly. A quick estimate of the benefit can be made by looking at any possible expense and multiplying the highest marginal tax rate (the income tax rate that your next dollar of revenue would be taxed at). A $100 expense at a 25% tax bracket would reduce your business income by $100, therefore saving you $25 in taxes.
So, can do you write offs?
It’s best to keep a record of anything you think is a business expense. Some common expenses for musicians are:
- Instrument upkeep (strings, reeds, parts)
- Travel expenses (gas, hotel, food)
- Marketing and Branding (business cards, Twitter Ads, Marketing Class)
- Networking (Coffee at networking meeting, Networking event fee’s)
Some other notes on recording expenses:
- Keep a receipt for each expense, hard copy or saved via a receipt tracking App
- Make sure you note details of expense like date, location, and if it’s a business meeting the people involved and purpose of the meeting
- Large expenses for assets that will be used for years will be treated differently. Keep the same records but consult with a tax professional on how to strategies these expenditures
Not Learning from your Past…Data
For musicians looking to grow their audience or income, one tool often overlooked is using their past accounting data to analyze their business performance. Before planning how you can grow, you need to fully understand where you are. Which activities are growing your fan base? How much is it worth for you to travel 30 minutes twice a week for rehearsals?
To be able get useful analysis you must first have good data. The better your data, the more easily you will be able to discover meaningful trends in your performance.
For example, let’s assume you have a simple Excel sheet listing all your expenses and income for your band. There will probably be the basic data points like date, dollar amount, and a basic description. If you have months of data you can break it up by months and see if things are getting better or worse, but what if you had more in-depth questions like; What venue sells the most t-shirts? What cities have the highest costs? Which bands do you play with help you grow your email subscription list the most?
By adding in these additional columns in your spreadsheet you can easily reorganize your data to answer these questions. Don’t limit yourself to these topics; think about what numbers are important for you to reach your goals, and find ways to consistently track them so that you can analyze your performance.
Not having a Process – “If it’s not a Process it’s a Problem”
I had a boss a long time ago that said a lot of things (most not worth remembering), but one great saying he picked up was, “If its’ not a Process, it’s a Problem”. This fantastic advice is in line with the Six Sigma management techniques which aim to “improve business processes by greatly reducing the probability that an error or defect will occur.”
You don’t need a Six Sigma to create your accounting and record keeping system. Just rethinking what you currently do can greatly improve your accuracy and efficiency.
Research apps and tools
Make sure every transaction you make gets recorded. I.e., how do you make sure you get all your cash payments recorded – record it in your app when you get paid at the club.
Pay Other musicians often? Find an invoicing and payment app to help manage payments and track those expenses.
When you get a receipt, do you put in your gig bag until you record it on the first of the month, or do use an app to digitize the receipt and forget about it?
Having a process that can repeat automatically is the key.
Don’t make changes you don’t think will be worth it, but be open minded about utilizing new tools and ideas.
Not making enough Time for Bookkeeping
I know you have a million other things to do and every other year you have gotten away with cramming a few hours gathering all your financial data and getting it to your accountant. Nevertheless, you should set time at least monthly to review your accounting.
First off, just because you were able file your taxes in previous years doesn’t mean you did them 100% correctly. By saving all your receipt collecting and tax work for the end of the year, you may be missing out. You might miss deductible expenses by rushing to put everything together before Tax Day or because it’s just difficult to remember what receipts were for 8 months ago. Checking your bookkeeping monthly can help decrease errors and increase tax savings.
Reviewing your financial account often also helps prevent major problems. You will be able to see if there is any fraudulent activity in your accounts. You can also see if you have any billing issues or outstanding payments owed to you. Catching these errors early make them a lot less difficult to fix than if you don’t realize you are being incorrectly charged for 6 months.
Some other great things to review during your monthly accounting time;
- Update and review your monthly budget for upcoming month
- Compare last month’s budget and actual spending
- Check that all expenses and revenues are properly categorized and include additional data points you need as discussed above
I encourage you to take another look at your accounting and record keeping to see what areas you can improve on. It’s difficult to set the time aside to work on something that is undoubtedly boring and has no direct impact on improving your musicianship or growing your brand. Preventing major cash flow issues and preparing for long term financial stability will allow you to focus more on your music in the long term by not being distracted by financial issues.