George M. Cohan and Keeping Receipts

Happy Birthday today, July 3, to George M. Cohan, broadway composer of Yankee Doodle, You’re a Grand Old Flag, Over There, and countless other hit songs. In 1930, George found himself in hot water with the IRS. He lived a lavish life, spending cash, and deducting his expenses without receipts or evidence. The IRS challenged his tax return, and he took them to court. Remarkably, the Judge ruled in Cohan’s favor, establishing what today is called “The Cohan Rule”, and still legal precedent.

In the current IRS Guide for the Self-Employed, here’s what they say about The Cohan Rule:

The “Cohan Rule,” as it is known, originated in the decision of Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). In Cohan, the court made an exception to the rule requiring taxpayers to substantiate their business expenses. George M. Cohan, the famous entertainer, was disallowed a deduction for travel and business expenses because he was unable to substantiate any of the expenses. The judge wrote that “absolute certainty in such matters is usually impossible and is not necessary, the Board should make as close an approximation as it can.” In general, the Tax Court has interpreted this ruling to mean that in certain situations “best estimates” are acceptable in order to approximate expenses. The Cohan Rule is a discretionary standard and can be used to support a reasonable estimate of compliance requirements.

My advice: keep your receipts to document your business expenses. The Cohan Rule may be a valid defense in the Tax Court, but it would be much more pleasant if you didn’t end up in a legal battle with the IRS to begin with!

However, it may be helpful to know that the IRS does currently does not require you keep receipts for travel, meals, or entertainment if the expense is below $75. Instead, you may keep a log of such expenses, listing the date, amounts, location, purpose, and people involved in each expense. To be considered current, the IRS expects you to maintain the log weekly, so it’s not something you can just put down on paper a year after the expense occurs. While the IRS can accept a log of these expenses, they can also challenge a log and request other documentation, such as bank or credit card statements. All of which brings us back to the best practice of keeping your receipts in the first place.

Happy Birthday, George!

The Musician’s Guide to Mileage, Part 1

When can you deduct your driving expenses as a musician?

Between travelling to rehearsals, concerts, or lessons, you probably spend a fair amount of time in your car, and it is a legitimate, and often significant, business expense for the professional musician. In Part 1 of this guide, we will look at when you can and cannot deduct mileage and your driving expenses. In Part 2, we will compare using the IRS standard mileage rate versus your actual costs.

It’s easiest to begin with what is not a deductible travel expense: you can never deduct “commuting”, which the IRS defines as driving between your home and primary workplace. For example, if you work at a University as a full-time tenured professor, then your drive to your office or studio would be considered commuting.

Before we dive into situations which are deductible, let me first explain what we mean by “deductible”. If you are a W-2 employee, you would list qualifying driving expenses as an unreimbursed employee expense on your itemized deductions on Schedule A of your tax return. You would take the Standard Deduction of $6,300 (single, 2016) or $12,600 (married), unless your itemized deductions exceed these levels. Until you have $6,300 in total itemized deductions, mileage isn’t going to reduce your taxes as a W-2 employee. If you are self-employed or receive a 1099 as an Independent Contractor, you will have an easier time by deducting your driving as a business expense on Schedule C. For most musicians, you will have some work which is W-2 and some which is 1099, so your mileage for each of these jobs needs to be deducted appropriately.

Here are types of mileage which you can deduct:

  1. Second job of the day. If you teach during the day and then drive to a rehearsal for a different employer in the evening, your drive to the rehearsal – as the second job of the day – is deductible.
  2. Temporary job sites. If you are working at a site that is not your primary work site, and the job is reasonably expected to last less than a year (and does), then your travel is deductible. For example, if you play a musical for six weeks, that would be a temporary job site. When you are called to sub with a group for a week or two, that’s a “temporary job site”. A non-tenured position with a 8-9 month contract, for a per service orchestra or adjunct teaching position, may also qualify. Your position could be renewed the following year, but in each case, the contract is temporary without any permanent guarantee of employment, and you are not employed by that organization for the 3-4 months between seasons.
  3. Travel “between offices”. If your home qualifies as your primary place of business, then driving to any secondary offices (such as schools, venues, etc.) would be deductible. Link: Home Office Deduction 101 Or, if you drive from your primary office (studio, concert hall, etc.) for run-out concerts or events, that travel would be deductible.
  4. Driving to the airport for business travel.
  5. Job interviews and auditions.
  6. Trips for errands or supplies, meals and entertainment, and customer visits are also deductible.

The key to successfully deducting these expenses is to have contemporaneous documentation, showing the dates, locations, and mileage covered. The most common reason expenses are disallowed by IRS auditors is lack of supporting evidence. Keep a detailed mileage log, keep contracts showing dates of gigs, and be organized.

There are a number of apps to track your mileage, such as MileIQ, QuickBooks Self-EmployedEverlance, and others. These use your phone’s GPS to track your distances automatically, and then you can later categorize each trip as business or personal. This is very helpful if you, like me, often forget to write down your mileage! Just remember that you may be required to produce this documentation up to seven years in the future, so make sure you have saved your information in a hard copy or other permanent location.

I know it is a pain to keep track of all this mileage, but it’s likely that your regular trips of 10 or 20 miles each way can add up to thousands of miles per year. For 2016, the IRS standard mileage rate is $0.54 per mile, so for every 1000 miles you drive, you can deduct $540 from your income. If you are in the 25% tax bracket, that will lower your tax bill by $135. If you are in a higher tax bracket, your savings will be even higher.

Next up: Part 2, where we compare the Standard Mileage Rate and Actual Cost methods for taking the deduction.

This information is for educational purposes only and should not be construed as individual financial advice. Please talk to your CPA or tax preparer regarding your personal situation.

Introducing Finance For Musicians!

No one becomes a professional musician for the money. It’s a labor of love. But we all have responsibilities: mortgages to pay, families to feed, and important goals like financial security and retirement. I’m a trombonist who has been a Financial Planner since 2004. Over that time, I’ve worked with hundreds of families, including quite a few of my fellow musicians. And what I have discovered is that while there are a lot of musicians who could use sound financial advice, there are almost no advisors who understand anything about the life of a musician. That’s why I created Finance For Musicians.

My goal is to help musicians achieve peace of mind regarding all their financial affairs. Finance For Musicians is your source for useful, objective information on saving, investing, insurance, taxes, and retirement planning. Being a musician isn’t a 9-5 job and you have unique financial concerns that are vastly different from people in traditional careers. All the information here is written specifically for professional musicians like you. I’ll be posting new articles weekly and encourage you to sign up so you don’t miss any valuable ideas.

Have a financial question? Send me a note or give me a call, I’m always happy to chat with a fellow musician. If you are looking for personal financial advice, you can find out more about hiring me as your Financial Planner here.

Thank you for reading!

Scott Stratton, CFP(R), CFA

President, Good Life Wealth Management LLC