Emergency Assistance for Musicians

Today I am writing something which I hope none of you will ever need: financial assistance for musicians who experience an emergency. The most common need is for medical bills, which can easily run into the tens or even hundreds of thousands today for an accident, injury, or serious disease. The phrase “unexpected illness” is redundant – no one ever expects that they will be the one who experiences a life-threatening illness or injury. When these cause a financial crisis, there are three charitable organizations whose mission is specifically to help musicians in their time of need.

Even if this doesn’t apply to you, please read this, and keep these organizations in mind for your friends and colleagues. Every year, I hear about someone I know who plays in local groups, or who I went to school with, who is experiencing a financial emergency. Please let them know about these resources.

Musicians Foundation  http://www.musiciansfoundation.org/

Since 1914, the Musicians Foundation has provided emergency financial assistance for medical bills and living expenses for musicians who are unable to work due to emergency circumstances. To be eligible, you must have been a professional musician for at least 5 years and reside in the United States. To apply, they have a 4-page application and require tax documents, a letter, professional biography, and medical documentation.

Grammy.org MusiCares Emergency Financial Assistance  https://www.grammy.org/musicares/client-services/emergency-financial-assistance

Grammy’s Emergency Financial Assistance Program provides financial support for musicians in times of financial, medical, and personal crises. This includes hospital and medical bills, addiction recovery treatment, psychotherapy, Alzheimer’s care, as well as living expenses such as rent and utilities. To qualify, you need to document employment as a musician for at least five years and on six commercially released recordings or videos.

Sweet Relief Musicians Fund  http://sweetrelief.org/

Sweet Relief helps career musicians in the US and Canada with financial emergencies due to illness, disability, or age-related problems. Grants are provided to musicians who have regular public performances or performed or wrote music for at least three widely distributed recordings.

All three organizations accept and rely on donations to provide this financial support to musicians in need. So, if you are able, please consider making a donation on behalf of other musicians.

If you know a musician experiencing a health care and financial crisis, the last thing they may be thinking about is filling out forms, writing letters, and submitting financial paperwork. I will help any eligible musician complete these applications at no cost whatsoever. It’s a few hours of my time, but hopefully this can help them and their family in their moment of need.

The exorbitant cost of health insurance has been a frequent conversation this year. This month, I spoke with a healthy, young musician who is spending $450 a month for insurance, and a family of three with a premium over $1,200. As awful as that is, going without insurance is reckless. It is rolling the dice and hoping that you never get ill or have an accident. Please do not go without health insurance – you are risking everything. For moderate and low income families, make sure to investigate tax credits for insurance purchased through the Exchange, under the Affordable Care Act.

Link: IRS Facts about the Premium Tax Credit

How to Save More as a Musician

For many musicians, saving is a challenge. You may have multiple employers and gigs, but no guaranteed salary to create a consistent budget around. You may not know what work you will have in 6 to 12 months, let alone how much you will make or can save. Things can be much more unpredictable than for someone in a traditional job.

As a musician, you might not have a 401(k) with a company match or other benefits. Instead, you need to think like an entrepreneur and become responsible for creating your own savings plans.

Saving and investing is the path to financial independence. Even if you don’t want to retire, you should still aim for financial independence, so you can work because you want to and not because you have to. Saving isn’t just for retirement planning, it’s developing a plan for financial security to free you from worry today.

How can we make saving easier? What steps make you more likely to succeed?

1) Put your saving on autopilot through automatic monthly contributions. Whether it is establishing an emergency fund, contributing to an IRA, or creating a 529 college savings plan, making it automatic is the way to go.

2) Emergency Fund Triggers. Hopefully you already have an emergency fund with at least 3-6 months of living expenses. I know that musicians often need to tap into funds during the summer when their income drops with fewer gigs and students. Coordinate your saving with an emergency fund target: if your target is $12,000, anytime your account exceeds $12,500, sweep $500 from your emergency fund into an investment account. When you have busy months, you will have funds to invest more frequently.

Having trouble getting your emergency fund started? If you contribute to a Roth IRA, you can always access your contributions (but not any earnings), without tax or penalty. Hopefully, you will not have any emergencies and can leave the Roth account intact.

3) Set goals. If you don’t have a finish line – a target amount for your nest egg – it’s hard to feel any sense of urgency to saving. When I was 30, I knew where I wanted to be at 50, which also meant I could determine where I needed to be at 35, 40, and 45. Those specific goals have helped me stay on track through the years. Without long-term goals, short-term actions often lack direction and a clear purpose.

4) Think big, not small. How many times have you read that you can fund your IRA by giving up your daily coffee fix. Forget that! If you get the big decisions right, the small stuff takes care of itself. Instead, be very smart, calculating, and objective on two essential things: housing and cars. These are the biggest expenses for almost everyone, and we have tremendous discretion in choosing how much we spend on these two categories.

If you want to jump start your saving, take a close look at all your recurring monthly costs: insurance, utilities, cell phone, cable TV, and memberships. Comparison shop, look for savings, and drop items you don’t use or won’t miss.

5) Focus on maximum saving. There is an oft-repeated rule of thumb that you should save 10% of your income. I am guilty of saying this one, too, especially as a “realistic” goal for new savers. However, there is nothing magical about the number 10%, and there is no guarantee that if you start saving 10% today that you will have enough money to accomplish all your financial goals. Try to contribute the maximum to any employer retirement plans, which for a 403(b) or 401(k) means $18,000 or $24,000 if over age 50. And if you are also eligible for an IRA, fund a Traditional, Roth, or Backdoor Roth IRA. If you have self-employment or 1099 income, you may also be eligible for a SEP-IRA.

If it helps you to increase your saving, then let’s calculate each need separately and contribute to:

  • Employer retirement accounts
  • IRAs
  • Health Savings Accounts
  • 529 College Savings Plans
  • Term life insurance policy
  • Taxable brokerage account
  • Savings for a first or second home down payment
  • Savings for your next car, so you can pay cash when you need to replace your current vehicle

In other words, you have lots of reasons, needs, and ways to save!

Link: If your Adjusted Gross Income is below $30,750 (single) or $61,500 (married), you may be eligible for The Saver’s Tax Credit when you contribute to an IRA or other retirement account.

I know a lot of millionaires who were great savers and invested in generic, plain mutual funds. But I have yet to meet anyone who has turned $5,000 into a million through their brilliant investing. Investing decisions matter, but you are likely to reach your goals faster if you can figure out how to save 50% more rather than spending your time trying to increase your returns by 50%, because it is not possible over any meaningful measure of time.

Saving is the foundation of financial planning. It’s the first step which leads to many other good things. Unfortunately, it is also the most difficult step for most of us! But if you spent years practicing an instrument and studying in a conservatory, you already have the discipline, organization, and drive to be successful. It’s just a matter of applying that same process and curiosity to your finances!

Is Your Car Eligible for a $7,500 Tax Credit?

As a free-lance musician, I can think of many times when I have spent three hours or more in the car, round-trip, for a two and a half hour rehearsal. In most cases, our pay for a gig is fixed, so the only way to take home more money is to reduce our expenses.

If you are in the market for a fuel-efficient vehicle, you may want to know about a tax credit available for the purchase an electric or plug-in hybrid vehicle. Worth up to $7,500, the credit is not a tax deduction from your income, but a dollar for dollar reduction in your federal income tax liability. In other words, if your tax bill was $19,000 and you have a $7,500 credit, you will pay only $11,500 and get the rest back.

This credit has been available since 2010, but in the last two years a significant number of new car models have become eligible for the tax credit. If you drive a lot of miles, these cars may be worth a look.

The credit includes 100% electric vehicles like the Tesla Model S or the Nissan Leaf, and it applies to the newer plug-in hybrid models, including the BMW i3, Chevrolet Volt, Ford C-Max Energi, Hyundai Sonata Plug-In Hybrid, and others. The credit does not apply to all hybrid vehicles, only those with plug-in technology. While the plug-in cars may be more expensive than regular hybrids, they are often less expensive once you factor in the tax credit.

The amount of the credit varies depending on the battery in the car, and may be less than $7,500. The credit is phased out for each manufacturer after they hit 200,000 eligible vehicles sold, with the credit falling to 50% and then to 25%. So, for those 400,000 people who put down a deposit on the Tesla Model 3, most will not be getting the full $7,500 tax credit. Only purchases of new vehicles – not used – are eligible for the credit.

The program is under Internal Revenue Code 30D; you can find full information on the IRS website here. An easier-to-read primer on the program is available at www.fueleconomy.gov.

Some states also offer tax credits or vouchers for the purchase of a plug-in hybrid or electric vehicle. Unfortunately, Texas is not one of those states! You can search for your state’s programs on the US Department of Energy website, the Alternative Fuels Data Center.

Do you have a plug-in hybrid or electric vehicle? Send me a note and tell me how you like it.

Are orchestra musicians independent contractors?

Are Orchestra Musicians Independent Contractors?

Are orchestra musicians independent contractors? Landmark court case says  no, musicians are employees.

In April 2016, the U.S. Court of Appeals ruled that the musicians of the Lancaster Symphony are employees. The orchestra’s management argued that musicians were independent contractors with no right to unionize. The musicians eventually prevailed after an eight year legal fight.

It is odd that you can be an employee in one orchestra and yet do the exact same thing for another orchestra and be considered an independent contractor. It doesn’t matter if an orchestra is full-time or per service, the work is the same. Part-time has nothing to do with whether or not someone is an employee.

IRS Definition

Unfortunately, the IRS does not give a precise rule to decide what makes someone an independent contractor. Rather, they have a set of guidelines. An employer will always prefer to have independent contractors. Orchestras say musicians are independent contractors because we have to provide our own instruments. But, the IRS says the key determinant is actually this:

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

Link: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined

Every conductor believes that their job is to control “what will be done and how it will be done.” Musicians are told what to do, when, what to wear, and how to act. You are not an independent contractor.

If an employer really had any doubt as to a musicians’ status, they could file Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS will review the facts in the case and make a decision. Since employers are not required to submit this form, many simply make the choice on their own.

Employee vs. Independent Contractor

There are a couple of differences between being an independent contractor versus an employee.

  • Independent contractors receive a 1099. Employees receive a W-2 at the end of the year. If you receive a 1099, you report your income and expenses on Schedule C.
  • Independent contractors pay Self-Employment Tax, which means paying both halves of the Social Security and Medicare payroll taxes. For employees, your employer pays one-half of the tax (7.65%), and you pay the other half. Even a per service orchestra likely has several hundred thousand dollars in payroll each year, so 7.65% is a significant expense.
  • Employees have a right to unionize.
  • Musicians who are employees might have a right to unemployment and worker’s comp benefits. Also, employers pay unemployment taxes for employees, but not for independent contractors.

As a musician, you are better off being an employee. The Lancaster Symphony didn’t like that the National Labor Relations Board determined that their musicians were employees. So, they spent eight years in court trying to overturn the NLRB decision and were unsuccessful.

Harvey Mars Interview

I play in a per service orchestra where musicians are considered independent contractors. What does this ruling means to musicians who are independent contractors?

Harvey Mars, Esq. is the counsel for AFM Local 802 in New York and an expert in employment law for professional musicians. Mr. Mars recently wrote about the Lancaster ruling here. (He is also, like me, an Oberlin trombone graduate!) Here’s our conversation:

FFM: Is the Lancaster Symphony ruling grounds to compel other per service orchestras to classify musicians as employees rather than independent contractors?

Mars: Yes, the ruling does establish a precedent and will be considered persuasive authority.

FFM: Do you foresee orchestras making this change voluntarily, or would the players or union need to pursue this on a case by case basis?

Mars: I believe this ruling may change some, but not all employer practices.

FFM: What are the benefits for musicians to be employees rather than independent contractors? (Ability to unionize, unemployment benefits, employment taxes?)

Mars: In addition to what you have, take advantage of statutes that only benefit  employees, such as civil rights statutes.  In New York we have City Laws that only apply to employees covering paid leave time.

The reality is that most orchestra musicians have always been closer to the definition of employee than independent contractor. But no one had ever challenged that status in court. Are orchestra musicians independent contractors? Thanks to the Lancaster Symphony ruling, we have now an answer. Similar per service orchestras should take note!

Musicians: Get Your Student Loans Forgiven In 10 Years

Many musicians work for a non-profit organization, such as an orchestra, opera company, chamber music group, or university. If you work full-time for a non-profit, you are eligible for the Public Service Loan Forgiveness (PSLF) Program. This program will forgive 100% of your eligible loans after you make 120 monthly payments.

Public service jobs include those with a federal, state, or local government agency or public school or library. Luckily for musicians, a full-time job with any 501(c)(3) non-profit organization is also considered a public service job, regardless of what the organization does. You must meet your employer’s definition of “full-time” or work at least 30 hours per week. If you work part-time positions, you can still use the program if you have multiple qualifying jobs that total at least 30 hours per week. If you are off summers, you still qualify, as long as you work 8 months per year and your employer still considers you employed over the summer.

Only loans received through the William D. Ford Federal Direct Loan Program eligible for the PSLF. However, if you have Perkins or FFEL loans, you may consolidate them into a Direct Consolidation Loan and then they will become eligible for the PSLF. Payments made prior to becoming a Direct Loan will not qualify. For other types of consolidation, be very careful – moving a Direct Loan into a bank loan could cause you to lose the opportunity to use the PSLF. Private loans are not eligible for the PSLF.

To qualify for the PSLF, you should use one of the federal income-drive repayment plans, including the Federal Income-Based Repayment (IBR) Plan, the Pay as You Earn Repayment Plan, or the Income-Contingent Repayment (ICR) Plan. The standard repayment plan also qualifies, but since that is a 10-year program, it would leave a zero balance after 120 payments. However, if you switch from the standard plan to one of the income-driven plans, you can still count your previous payments towards the PSLF.

I know a lot of musicians who make sacrifices to pay off their student loans in 10 years or less. If you work for a non-profit, I’d encourage you to use one of the income-driven plans instead, so you can become eligible for the PSLF. With the lower monthly payments, use the difference for other financial goals. Pay off your credit cards, build up your emergency fund, or contribute to an IRA. If the government is offering to forgive 100% of your remaining loan balance after 120 payments, you should send the smallest payment amount they will accept.

Payments made after October 1, 2007 may qualify for the PSLF. So if you’ve been making payments for 4 years, you may have only another 6 years to go! For further details on the program as well as instructions on how to verify and record your eligibility, please visit the Federal Student Aid Website. You will need to have each employer complete the Employment Certification Form to document proof of your eligibility. Although you are not required to submit the form until after 120 payments, it is recommended that you do so annually or whenever you change jobs, to make sure that your progress is being tracked.

Another great feature: the loan forgiveness you receive from the PSLF is non-taxable! Managing student loans has become one of the biggest hurdles today for people in their 20’s and 30’s. As a CFP(R) practitioner, I’m here to help you with all your financial goals and concerns, so if you thought I only do investments, I’d like to introduce you to the benefits of having your own financial plan.

12 Tips to Prepare for an Orchestra Lockout

If you’re a musician in an orchestra, a lockout may be among your worst fears. In 2012, the Minnesota Orchestra musicians were without pay for a devastating 15 months. Only after accepting a 15% pay cut did the orchestra return to work. Today, musicians in the Fort Worth Symphony are facing a stalemate in which management will not budge on draconian proposals to cut pay and benefits. Other groups have faced similar labor disputes and it is becoming increasingly commonplace for management to use brazen tactics to force musicians into accepting pay cuts and other concessions.

In light of this reality, orchestra musicians everywhere would be smart to plan ahead and take the financial steps below to ensure that they could survive a lockout of 15 months or longer. Here are 12 tips to put your personal finances on stronger footing:

  1. Know when your Collective Bargaining Agreement (CBA) is up for renewal. If your contract is up in the next year, conserve cash. Be careful about buying a car or making a major purchase if it means creating increased monthly expenses. Even if you think your orchestra has a good relationship with management, be cautious. Sometimes labor disputes can take a surprising turn, as my friends in Syracuse learned several years ago.
  2. Keep 6-12 months cash. The old rule of thumb was to have an emergency fund of 3-6 months of cash to cover your basic living expenses. Today, it may be more prudent to reserve 6-12 months of cash. This is tough to do – especially since you should continue to fund your retirement accounts – but when you’re in trouble, cash is king.
  3. Create a Budget. To calculate your emergency fund, you need to make a household budget and know how much you spend each month in both fixed and discretionary expenses. While you are evaluating your budget, look for ways to lower costs on recurring expenses such as cable TV, cell phones, insurance, and other monthly bills.
  4. Get ahead on your mortgage. If you send in extra principal payments on your mortgage (or other bills), you may want to stop. Instead, send in advanced payments, so you are several months ahead. Then if your pay is suspended, you will have a cushion of a couple of months before your next mortgage payment is due. This is especially helpful if you find that keeping a lot of cash on hand is a temptation to buy things!
  5. Pay off those credit cards. You cannot afford to be paying 20 to 30 percent interest on credit cards, especially if there is a possibility that your paycheck could vanish. I would say this takes priority over #2, keeping an emergency fund. In other words, go ahead and pay off your credit cards even if it means dipping into your cash significantly. Keep the credit cards open; they will be your source of emergency funds while you are rebuilding your cash account.
  6. Ask for an increase in your credit limits today. Maybe you’ve never exceeded $2,000 a month on your credit card, but having a $10,000 limit or higher could be helpful if you do end up locked out. If you wait until you are without a paycheck, when your income is zero, the credit card company is not going to increase your limits.
  7. If you have federal student loans, look into the Income Based Repayment Plan. This benefit is a good reason to not consolidate your loans into private bank loans. If your kids are in college, notify the school’s financial aid office immediately if your pay or employment changes. They may be able to increase your child’s need based financial aid.
  8. Research unemployment benefits, which vary by state. Here in Texas, you are eligible for unemployment if you are locked out, but not if you are on strike. New York is the only state that offers unemployment benefits to striking workers. If you are eligible, apply immediately for benefits. Link: Texas Workforce Commission: If You Are Involved in a Labor Dispute or Strike.
  9.  Supplement your income. Look for church gigs, weddings, private students, and other opportunities to moonlight and make some cash. While this is unlikely to replace your full orchestra salary, freelance gigs may go a long ways towards paying your monthly bills. Note that most unemployment benefits will continue if you have gigs, but will simply reduce the amount of your benefit in the weeks you receive income. If you can, try to schedule all your students on weeks you have gigs. You are better off having one huge week of income and three weeks of no income, rather than spreading that income over the course of the month. That way you can still receive unemployment benefits for the weeks you have zero income.
  10. Don’t dip into retirement accounts. If you take a withdrawal from your 403(B) or Traditional IRA before age 59 1/2, you will have to pay income tax on the withdrawal, plus a 10% penalty. You could lose as much as 35% to 50% to taxes and penalties, and that is just too costly. Plus, you are then sinking your future retirement and all the hard work that went into saving that money in the first place. Retirement accounts are creditor protected. Even if you were to face bankruptcy or foreclosure, you are not required to dip into your retirement accounts. Talk with an expert before ever taking a premature retirement distribution.
  11. Consider a Roth IRA. If you are struggling with prioritizing retirement accounts, building an emergency fund, and other needs, consider funding a Roth IRA. You can withdraw your contributions (but not any of the earnings), without tax or penalty, even if you are under age 59 1/2. For example, if you put in $5,000 to a Roth IRA, and it grows to $6,000, you can withdraw your original $5,000, tax and penalty-free. If you’re eligible for a Roth, it is a good tool to save for retirement, while still giving you the flexibility to use your money in case of an emergency.
  12. Health insurance. Take care of your annual physical, prescriptions, dental visits, eye exams, and any other health expenses while your insurance is in place. Budget for COBRA or look into an individual health plan, and make sure there is no gap in your being covered.

Hopefully, you will never find yourself locked out by your employer, but being prepared financially for such a situation should help you sleep better at night. Management knows that many musicians cannot afford to be without a paycheck for long and will use this threat at the bargaining table. I’ve been on a negotiating committee before and can tell you that things can get pretty ugly. The better prepared musicians are for the possibility of a strike or lockout, the stronger position you will have in negotiations to be taken seriously.

If you want to organize your finances and create a plan to accomplish your goals and address the risks you face, please give me a call or send me an email. I have a passion for the details of financial planning, but most of all, I love to help people. Thank you for reading! Best Regards, Scott

The Musician’s Guide to Mileage, Part 2

Are you missing out on driving expenses you could be deducting from your taxes? In Part 1 of this series, we differentiated between commuting and types of travel which are tax deductible for professional musicians. Now, in Part 2, we will consider which will maximize your tax deduction: using the IRS Standard Mileage Rate or the Actual Cost method.

The Standard Mileage Rate is used most often by musicians because of its ease and simplicity. Each year, the IRS sets a rate which is supposed to reflect the current costs of driving a car. For 2016, the rate is 54 cents per mile. Is this a good rate or a bad rate? There’s no way to know the answer to that question, because it will vary from situation to situation and person to person. For some people 54 cents will be more than their actual costs. For many others, however, 54 cents doesn’t even come close to covering the actual costs you have in operating your car for business purposes.

The IRS doesn’t care which method you use, as long as you can document your expenses. In fact, in Publication 463 “Travel, Entertainment, Gift, and Car Expenses”, the IRS shares this tip: “If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction.” But very few musicians actually bother to do this. Most just use the Standard Rate, which could be less than your actual costs by thousands of dollars a year.

The Actual Cost method means that you can deduct all of your car expenses, including not only gasoline, but also depreciation (if owned), lease payments (if leased), registration fees, oil changes, tires, repairs, insurance, garage rent, tolls, and parking costs. If you use your car for both personal and business use, than you will calculate the percentage of business miles to your total miles driven that year. If 80% of your miles are for business, then 80% of these actual costs are tax deductible.

Gas is almost never your largest expense as a car owner. At 25 mpg, driving 10,000 miles a year costs only $900 at today’s price of $2.25 for gas. You probably pay more for insurance than gas. Your largest expense is almost always depreciation. A car generally loses at least 50% of its value in 5 years, but the IRS may allow you to depreciate your vehicle even faster than this. I think a lot of tax payers are scared away from using the Actual Cost method because of the complexity of depreciation.

There are a number of depreciation methods that the IRS uses, including Modified Accelerated Cost Recovery System (MACRS), straight-line, and section 179. It’s beyond the scope of this article to define these, but suffice it to say that a CPA will understand these, and frankly, so will most tax software, and guide you to the correct method.

Your actual costs might look something like this:

  1. Depreciation $3050
  2. Insurance $1622
  3. Gasoline $900
  4. Registration $73
  5. Oil Changes $97
  6. Repairs $388
  7. Tolls $526

Total Actual Costs: $6,656. If you drove 10,000 business miles, then you could choose between a $5,400 deduction using the Standard Mileage Rate, or a $6,656 deduction using your Actual Costs. In this case, using the standard rate would mean that you missed out on $1,256 in additional deductions that you could have claimed.

In general, if you have high fixed costs like depreciation or insurance, and average or low miles, you will probably be better off with actual cost. The same is true for years when you have expensive repairs. The Standard Mileage Rate may be higher when you drive a ton of miles, or if your fixed and operating costs are low.

One of the most effective ways to use the Actual Cost method is by using one car exclusively for business, so you can deduct 100% of the costs. How to do this? If you are married or have a partner, and your spouse has also has a car, use that car for personal uses like getting groceries. This is important, because if you claim a vehicle is 100% used for business, one of the first things the IRS will ask you is if you have another vehicle available for personal use. And the answer had better be yes.

If you do end up using the Standard Mileage Rate, please note that you can also deduct any tolls and parking costs for your eligible business driving. A lot of musicians miss this one. Here in DFW, it seems like all the highway construction of the past 15 years has been to build toll roads, so we are paying tolls more frequently and in larger dollar amounts to get to gigs. Download your Tolltag statement, compare it to your datebook and highlight the trips you made for business each month. Or if you do use one car 100% for business, you can simply deduct all the tolls for that vehicle.

Lastly, if you are self-employed, you can deduct any interest you pay on a car loan, in the percentage of miles that you use the car for business. However, if you are a W-2 employee, you cannot deduct the interest, even if you use the car 100% for business.

There are a lot better uses for your hard earned money than paying taxes. That’s why I want musicians to use every available legal tax deduction to minimize your tax bill each year and keep more of your income in your pocket. Being a musician is a passion, but it also is a business, which means keeping good records and being smart about taking whatever tax deductions are allowed. The mileage deduction is a big one for many musicians.

Was this article helpful? I’d love to hear from you. What topics would you like to see in future articles? Email scott@goodlifewealth.com.

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!

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

scott@goodlifewealth.com