SBA Loans for Musicians

SBA Loans for Musicians

With COVID-19 cancelling concerts everywhere, it’s helpful to know your options for SBA Loans for Musicians. If you missed the June 30 deadline for the Paycheck Protection Program (PPP), it has just been extended until August 8. We previously wrote about the PPP here.

The SBA still has $130 Billion available for PPP loans. Those “loans” could be forgiven entirely, when you spend the money on qualified expenses, such as payroll. If you are a self-employed musician, take a closer look at the PPP. If you have Schedule C self-employment income (1099), you are an eligible small business!

The PPP was designed to support small businesses, to help them keep employees on the payroll and off unemployment. So, if you are already collecting Unemployment Benefits, you may lose them temporarily if you receive the PPP.

PPP and Unemployment

The extra $600 a week in unemployment is set to expire at the end of July. If you can time it right, you could collect unemployment through the end of the month, then switch to the PPP for 8 weeks starting August, once you receive that loan. You could pay yourself the full “average monthly earnings” as calculated in your PPP application, rather than the reduced Unemployment Benefits. That’s the benefit in applying for the PPP. The eligible period for spending the PPP has been increased from 8 weeks to 24 weeks. However, it might be preferable to pay yourself over 8 weeks, if that would allow you to resume or start unemployment benefits.

Under the Pandemic Unemployment Assistance (PUA) program, states are providing up to 39 weeks of unemployment benefits. Generally, this will run through the end of December. There is some discussion in Washington to extend the extra $600 a week (or maybe $450). We will have to wait and see what happens! For now, it might be best to assume these programs expire as scheduled, and plan accordingly.

EIDL and the PPP

For musicians who previously accepted the EIDL (Economic Injury Disaster Loan), you can still potentially do the PPP. The EIDL advance ($1,000 for individuals) would reduce the forgivable amount of the PPP loan, but you can just repay that $1,000 and close out the PPP loan. Here are instructions on applying for the PPP if you already took the EIDL.

SBA Loans for musicians are offering an important life jacket during this difficult time. I really want to get back to making music and miss it terribly. Until that is possible, we need to avail ourselves of any and all resources to stay afloat and keep paying the bills. If you want financial planning specific to musicians, I am accepting new clients this summer and we can help you with the issues you are facing today.

Paycheck Protection Program for Musicians

Paycheck Protection Program for Musicians

Here’s information on the Paycheck Protection Program for musicians (PPP): what it is, who is eligible, how to apply.

As part of the $2 Trillion Coronavirus Stimulus Package, $349 Billion will fund loans to small businesses. These loans are designed to keep employees on the payroll and off unemployment. The loans are forgivable. The government doesn’t want you to pay them back, as long as you spend the money to pay employee salaries and benefits for two months. It’s called the Paycheck Protection Program.

But you’re a musician, not a business, right? Hold on, if you are self-employed, you may be eligible, even if you are the only “employee”. You don’t have to be incorporated or have a bricks and mortar store to be a business. The rules are quite broad. We will give you an overview of the program and then explain how you can apply as a musician. Applying for the PPP is straightforward using a two-page application.

Before we get into the PPP: apply for unemployment benefits if you are unemployed, even temporarily. The CARES Act added unemployment coverage for self-employed and independent contractors, for the first time ever. Benefits will be increased $600 a week on top of usual unemployment amounts, for the next four months. If you are concerned that Coronavirus closures might keep you unemployed for more than 8 weeks, unemployment might be the better option than the PPP. States are not yet taking applications for unemployment benefits for Independent Contractors. Hopefully that will be online in a few days. If you aren’t unemployed, impacted and still open for business, read on.

PPP Overview

The Paycheck Protection Program is a loan to businesses under 500 employees. The Small Business Administration (SBA) guarantees the loans, which will be provided through 1700 Banks and Credit Unions. Your bank is probably already an SBA lender. Technically, the PPP is a 2-year loan at 0.50% interest. Payments are not required for six months. If you spend the loan on allowable expenses within 8 weeks, then the loan will be forgiven. You also have to keep the same number of employees and not reduce payroll during this period. The loan forgiveness will be non-taxable. Steps:

  1. Apply for the loan at your bank using Model Application (link below).
  2. Spend the loan in the following eight weeks on payroll, benefits, and rent.
  3. Apply for loan forgiveness and document that the funds were spent as intended.

You must state on the application that your business was impacted by the Coronavirus and you need this money to meet payroll and expenses. This is easy. Concerts were cancelled. Music lessons are a non-essential business and were required to close in your area due to the shelter in place rules.

Loan Amount and Application

The application provides instructions to calculate your loan amount. You are eligible to borrow 2.5 months of payroll, up to $10 million. Payroll includes gross pay plus taxes. Salary eligible for loan forgiveness is capped to $100,000 per person annually.

Then over the next eight weeks, you can spend the loan on payroll, payroll taxes, employee benefits, including health insurance premiums, retirement plan contributions, and sick leave or vacation. You can also spend the money on rent or mortgage interest for your business property (if you have a studio, for example). Non-payroll expenses cannot exceed 25% of the total.

Eligible businesses includes corporations and LLCs, but also includes non-profit organizations, sole proprietors, and those who are self-employed or independent contractors. Many businesses can apply for the loan starting on April 3, 2020, and Independent Contractors can apply starting April 10. The program will close once the $349 Billion is gone. Don’t delay!

Here is the required application for the Paycheck Protection Program. Your bank may have additional paperwork for the loan. The SBA is paying all the application or service fees for the loan, so it costs you nothing. Amazingly, the Federal government is pushing cash so fast into the economy that neither banks nor state unemployment departments are prepared. In fact, the final rules from the SBA are not expected until around April 13. So, it’s grab the cash now and figure out the details later! I guess desperate times call for desperate measures.

Musicians, you are a business and you have absolutely been impacted by the Coronavirus, resulting in loss of income. If eligible, take the time to apply for this benefit. It’s a two page application with two pages of instructions which could replace two months of income for you and your employees.

Employee Retention Credit

If you own a business with multiple employees, such as a music school, band, etc., you should also know about the Employee Retention Credit. It’s another part of the CARES Act. To qualify, you must have either been temporarily closed down due to local regulations or have your gross receipts fall by 50% this quarter versus last year. For business owners with lower income or part time workers, it may be better to use the Employee Retention Credit rather than the PPP. You have to choose one or the other: if you take the PPP you are ineligible for the Employee Retention Credit.

The Employee Retention Credit is for 50% of income per employee up to $10,000 a year. So the maximum credit is $5,000 per employee for 2020. Now if your employees will make less than $5,000 in 2.5 months but more than $10,000 for the rest of the year, you would be better off with the ERC versus the PPP. The ERC is not available to self-employed individuals and will apply to income from March 12, 2020 to the end of the year. Full details and eligiblity here on the IRS Website.

I know these are difficult times and musicians are hurting. Many lenders, mortgage companies, and credit cards, are allowing people to delay their payments. There is federal aid coming and expanded unemployment benefits. If you have questions on the Payroll Protection Program for musicians, please feel free to send me an email.

Unemployment Benefits for Musicians

Unemployment Benefits for Musicians

With the Coronavirus causing cancellations of concerts, schools, church services, and other gigs, many of you are wondering about unemployment benefits for musicians. Are you eligible?

Unemployment insurance is provided at the state level and each state has its own eligibility, rules, and application process. To find the link for your own state, visit the US Department of Labor website here. This site includes any new rules or benefits offered because of the COVID-19 crisis.

If you are a W-2 musician (an “employee”) you are generally eligible for benefits if you have lost work due to Coronavirus. You don’t have to be a full-time employee or work exclusively for just one employer. Even if your lay-off is temporary, and you are not permanently “fired”, you may still be eligible for benefits. Please check your state rules and verify before assuming you aren’t eligible. And know that filing for benefits doesn’t cost your employer. They already paid premiums to the state for this insurance.

Here in Texas, the state will need your past five quarters of earnings and will base your benefit on the first 4 of 5 quarters. Benefits range from $69 to $521 a week, depending on your past wages. You should apply as soon as possible to avoid missing any weeks of benefits. There is often a lag of three or so weeks until you receive your first payment.

Self-Employed?

The bigger challenge for musicians is that many of us are 1099 or “Independent Contractors”. If you are self-employed, you are generally not going to be eligible for unemployment benefits. Minnesota offers benefits to the self-employed, but only if you paid into the program in advance. So, you need to check your own state rules to verify.

This brings up an important point. Many ensembles incorrectly classify musicians as Independent Contractors, when they should be Employees. Some musicians point out that they have more tax deductions as an Independent Contractor. That’s true. However, you miss out on two big advantages as a Employee. First is Unemployment Benefits, which you don’t get as a 1099. Second is that an employer has to pay 7.65% towards your Social Security and Medicare taxes. This cuts in half the Self-Employment tax that you would pay as a 1099. That’s like a 7.65% raise by going from 1099 to W-2.

The Lancaster Symphony Case set a legal precedent that orchestra musicians are employees. It’s time for orchestras to stop classifying musicians as Independent Contractors. That would allow more Unemployment Benefits for working musicians.

Stay healthy. I hope this will pass soon so we can all get back to performing, teaching, and sharing our love of music. Don’t be afraid to ask about Unemployment Benefits for Musicians. Yes, it can be a pain to apply and meet all the ongoing eligibility requirements. But if you are out of work, don’t delay in getting the benefits you deserve.

UPDATE April 3, 2020: The CARES Act passed last week is expanding Federal unemployment coverage to include self-employed individuals. While this benefit is supposedly available immediately, the states are still working on how to actually do this. Here in Texas, there are presently no instructions or process to apply for unemployment benefits for self-employed, “gig economy” workers. But this should be available soon. We will have to see how they will calculate your income and benefits, it will be interesting!

Roth Conversions for Musicians

Roth Conversions for Musicians

I want to get the word out about Roth Conversions for Musicians. So many of us are missing out. If you make less than $105,050 married, a Roth Conversion is a great way to potentially save on future taxes. For a married couple, the 12% Federal Income tax rate goes all the way up to $80,250 for 2020. That’s taxable income. With a standard deduction of $24,800, a couple could make up to $105,050 and remain in the 12% bracket. Above those amounts, the tax rate jumps to 22%.

For musicians who are in the 12% bracket, consider converting part of your Traditional IRA to a Roth IRA each year. Convert only the amount which will keep you under the 12% limits. For example, if you have joint income of $60,000, you could convert up to $45,050 this year.

Roth Conversions for Musicians requires paying some taxes today. But paying 12% now is a great deal. Once in the Roth, your money will be growing tax-free. There will be no Required Minimum Distributions on a Roth and your heirs can even inherit the Roth tax-free. Don’t forget that today’s tax rates are going to sunset after 2025 and the old rates will return. At 12%, a $45,050 Roth conversion would cost only $5,406 in additional taxes this year.

Take Advantage of the 12% Rate

If you or your spouse has a large IRA or 401(k), the 12% rate is highly valuable. Use every year you can do a 12% Roth Conversion. Otherwise, you are going to have no control of your taxes once you begin RMDs. If you have eight years to convert $40,000 a year, that’s going to move $320,000 into a tax-free account. I have many clients who don’t need their RMDs, but are forced to take those taxable distributions.

Here are some scenarios to consider Roth Conversions for Musicians:

  1. One spouse is laid off temporarily, on sabbatical, or taking care of young children. If you have a low income year as a musician, that’s a good year to look at a Conversion. This could be at any age.
  2. One spouse has retired, the other is still working. If that gets you into the 12% bracket, make a conversion.
  3. Working less in your 60’s? Hold off on Social Security so you can make Roth Conversions. Once you are 72, you will have both RMDs and Social Security. It is amazing how many people in their seventies are getting taxed on over $105,050 a year once they have SS and RMDs! These folks wish they had done Conversions earlier, because after 72 they are now in the 22% or 24% bracket.

Retiring Soon?

Considering retirement? Let’s say you will receive a $48,000 pension at age 65. (You are lucky to have such a pension – most workers do not!) For a married couple, that’s only $23,200 in taxable income after the standard deduction. Hold off on your Social Security and access your cash and bond holdings in a taxable account. Your Social Security benefit will grow by 8% each year. The 10 year Treasury is yielding 1.6% today. Spend the bonds and defer the Social Security.

Now you can convert $57,050 a year into your Roth from age 65 to 70. That will move $285,250 from your Traditional IRA to a Roth. Yes, that will be taxable at 12%. But at age 72, you will have a lower RMD – $11,142 less in just the first year.

When you do need the money after 72, you will be able to access your Roth tax-free. And at that age, with Social Security and RMDs, it’s possible you will now be in the 22% tax bracket. Don’t think taxes go away when you stop working!

Read more: 7 Missed IRA Opportunities for Musicians

How to Convert

When should you do Roth Conversions for Musicians? The key is to know when you are in the 12% bracket and calculate how much to convert to a Roth each year. The 12% bracket is a gift. Your taxes will never be lower than that, in my opinion. If you agree with that statement, you should be doing partial conversions each year. Whether that is $5,000 or $50,000, convert as much as you can in the 12% zone. You will need to be able to pay the taxes each year. You may want to increase your withholding at work. If you are a self-employed musician, be sure to make quarterly estimated payments to avoid an underpayment penalty.

What if you accidentally convert too much and exceed the 12% limit? Don’t worry. It will have no impact on the taxes you pay up to the limit. If you exceed the bracket by $1,000, only that last $1,000 will be taxed at the higher 22% rate. Conversions are permanent. It used to be you could undo a conversion with a “recharacterization”, but that has been eliminated by the IRS.

While I’ve focused on folks in the 12% bracket, a Conversion can also be beneficial for musicians in the 22% bracket. The 22% bracket for a married couple is from $80,250 to $171,050 taxable income (2020). If you are going to be in the same bracket (or higher) in your seventies, then pre-paying the taxes today may still be a good idea. This will allow additional flexibility later by having lower RMDs. Plus, a 22% tax rate today might become 25% or higher after 2025! Better to pay 22% now on a lower amount than 25% later on an account which has grown.

A Roth Conversion is taxable in the year it occurs. In other words, you have to do it before December 31. A lot of tax professionals are not discussing Roth Conversions if they focus solely on minimizing your taxes paid in the previous year. But what if you want to minimize your taxes over the rest of your life? Consider each year you are eligible for a 12% Roth Conversion. Also, if you are working and in the 12% bracket, maybe you should be looking at the Roth IRA or 401(k) rather than the Traditional option.

Where to start? Contact me and we will go over your tax return, wage stubs, and your investment statements. From there, we can help you with your personalized Roth Conversion strategy. I know taxes are a headache for most musicians. But with some planning, we can add a lot of value by taking advantage of the years where your earnings are in a lower tax bracket.

Musicians Disability Pension

Disability and The Musicians’ Pension

Are you no longer performing due to injury or disability? If you are a participant in the Union Pension, the AFM-EPF, you should know about the plan’s disability benefits. The reason why a disability pension is more desirable than a retirement benefit today is that under the ERISA rules, the pension cannot reduce payments for Disability Benefits. You would be immune to the expected cut in benefits, versus if you were planning to wait to make an application for regular retirement benefits.

With the plan entering Critical and Declining status this year, the AFM-EPF has announced its intention to reduce benefits to retirees and participants. We won’t know the extent of the cuts needed until later this year, but the plan is underfunded by about one-third, and only about half of all participants would be subject to a cut in benefits, due to age, disability, or a small benefit. Read More: Musicians’ Pension to Cut Benefits.

There are two ways to qualify for disability. First, if you have already qualified for disability under Social Security, you can provide a copy of your disability letter when applying for the AFM-EPF benefits. This is the more difficult way, because Social Security requires you to be totally disabled for any type of work. But if you have already qualified under Social Security, that should suffice.

The second way to apply for disability through the AFM-EPF is by submitting a physician’s statement with your application. This requires a three-page form attesting to your disability. Link: Attending Physician Statement. This states that you are unable to continue to perform, which could be due to repetitive use injuries, back or shoulder problems, mental or nervous impairment, etc. This is an “own occupation” definition of disability, which unlike Social Security, means you could still do other work such as teaching music, or you could switch to another career.

If you are no longer playing due to a disability, or if you are playing today in pain, you may want to consider if you want to apply for the disability benefit now. Since the EPF plans to cut benefits, your future benefits under a Disability application could remain higher than if you apply under a regular Retirement application. Here are the full instructions for a disability application:

To be eligible for a disability pension, a participant must:

(1) file a complete application with the Fund Office;

(2) stop working in Covered Employment because of a condition of Total Disability;

(3) have at least 10 years of Vesting Service;

(4) have not started to receive a Regular Pension Benefit;

(5) be determined to have a Total Disability by the Administrative Committee of the Board of Trustees;

(6) not be eligible, on his or her Pension Effective Date for a Regular Pension Benefit; and

(7) have earned at least 1 Year of Vesting Service in the three calendar year period immediately preceding the Pension Effective Date.

To clarify requirement #6, you become eligible to receive a Regular Pension Benefit when you meet either of the following requirements:

  • You reach  your  Normal  Retirement  Age  (generally  age  65)  while  you  are  still  an  Active Participant; or
  • You reach age 55, are vested, and retire from all Covered Employment.

Have questions about your retirement planning? Does your financial advisor have the specific expertise and experience of working with professional musicians? Send me a message and let’s discuss your goals.

Tax Parity Act Would Help W-2 Musicians

In 2018, the Tax Cuts and Jobs Act (TCJA) eliminated Unreimbursed Employee Expenses as a tax deduction. For musicians who are W-2 employees, this meant we lost the ability to deduct expenses, often significant, like our instruments and equipment, concert clothes, repairs, a home office, travel for work, study, or auditions, and even Union dues.

There is a new bi-partisan Bill in the House of Representatives which would restore some of these deductions for Performing Artists, including musicians. First, this would not change the new TCJA definitions of what is an itemized deduction. Rather, the bill expands an old tax benefit from 1986 and would allow musicians (who are employees) to take an above-the-line deduction for employee related expenses.

The original 1986 version is called the Qualified Performing Artist (QPA) tax deduction and you probably never used it because you had to make less than $16,000 to be eligible. The 2019 Bill is called The Performing Artist Tax Parity Act (PATPA) and amends the old law by increasing the eligible income thresholds to $100,000 (single, with a phaseout to $120,000), and $200,000 (married filing jointly, with a phaseout to $240,000). These income limits would be indexed for inflation. If you make below those amounts you would be eligible for the deduction.

Back in May, I was asked to comment on a draft version of this Bill, before it was made public. I am glad to see that the Bill has been officially introduced as H.R. 3121 (text here).

Important considerations:

1. The definition of Qualified Performing Artist requires that the individual have at least two W-2 employers. If someone only works for one employer, say the Fort Worth Symphony, then they wouldn’t qualify. But if they worked for the Symphony and had another W-2 job as a performing artist, then they could take the deduction. If their second job was teaching accounting, then no. 

If this is passed, it might become very valuable for a musician to play a show or church gig as a W-2 just so they could have a second job to qualify for this deduction! As long as you make at least $200 from an employer, it counts as a second employer and you become eligible for the QPA deduction that year.

2. QPAs can only take this deduction if their expenses exceed 10% of their gross W-2 income as a performing artist. (Expenses incurred for 1099 work would still be subtracted on Schedule C.) It’s a high threshold, but it would help those musicians with significant expenses. It would also encourage stuffing expenses into one year rather than spreading them out over a number of years.

3. The expenses are deducted on IRS form 2106 under “qualified performing artist”. Here are the instructions for 2018: https://www.irs.gov/pub/irs-pdf/i2106.pdf

The PATPA deduction would allow W-2 musicians to reclaim many of the lost itemized deductions under the TCJA, including vehicle mileage, unreimbursed travel expenses, study, home office, and equipment, including musical instruments. This does not require itemizing your deductions – musicians could take the standard deduction and still take the QPA.

4. Some musicians would not be eligible for the QPA deduction if their income is above the limits. Prior to 2018, those musicians were probably able to use those expenses as itemized deductions; they won’t be helped by the new Bill. For musicians in expensive cities like NY or LA, they might make too much for this deduction, even though they also have a very high cost of living.

It’s too early to make plans as we don’t know if this Bill will become law. This Bill has bi-partisan support, introduced by Reps. Judy Chu (D-CA) and Vern Buchanan (R-FL), so we will see if it makes it. I hope it does. Presently it is under consideration in the House Ways and Means Committee. I will keep you posted as new information becomes available.

Until then, if you have any financial planning questions or would like to discuss our financial planning services, please feel free to email me anytime.

Musicians’ Pension to Cut Benefits

On May 24, the AFM Employers’ Pension Fund (AFM-EPF) announced that the plan has entered Critical and Declining status and would be applying to the Treasury Department for authorization to cut benefits to its 50,000 participating professional musicians and beneficiaries. The plan is calculated to fail in less than 20 years, including anticipated future contributions and expected returns from plan assets.

This announcement should come as no surprise to participants, and I think plan administrators have provided significant transparency and detailed communication in recent years. Today’s union officials inherited a program that was overly optimistic in its design a generation ago. While no one wants to see benefits cut, there’s no use in finger-pointing today. We have to work on a solution.

Read more: What is Critical and Declining Status?

The details of that solution aren’t known right now, but we do have some new information in terms of what retirees and participants might expect, and a timeline for the process. Here’s how it might impact you:

If you are presently retired and receiving benefits, you may or may not see any change to your benefits. If you are at least age 80, or disabled, there will be no cut to your pension. If you are between age 75 and 79, your benefit will be reduced on a sliding scale. And if you are under 75, your benefit will be cut to no less than 110% of the protected amount under the Pension Benefit Guarantee Corporation (PBGC). The PBGC benefit is based on years of service and has fairly low guarantees, relative to what some musicians have accrued.

Read more: How to Calculate your PBGC Guarantee.

For vested participants in the plan who are not yet receiving benefits, your future payout will be reduced “equitably”. The good news is that the plan has confirmed that they plan to protect the $1 multiplier.

Originally, the plan was designed to pay out $4.65 a month (at age 65) for every $100 in contributions received while you were working. Trustees realized this was an unsustainable payout: $55.80 a year in payments from $100 in contributions. After 2003, they reduced the multiplier from $4.65 to $3.50 to $3.25 to $2.00 to $1.00 by January 1, 2010. However, all contributions received before 2004 are still under the old $4.65 multiplier.

What the Pension trustees and actuaries are going to do next is to calculate how much savings will be needed to prevent insolvency. This week, they indicated that they will propose a fixed percentage reduction to all the multipliers above $1.

For example, if they calculate a 35% reduction is necessary, that would reduce the $4.65 benefit to $3.02, the $3.50 multiplier to $2.28, and so on. The $1 multiplier would be unchanged. They expect to make this calculation in 2019 and apply to the Treasury Department to approve cuts by the end of the year. The cuts would become effective at the end of 2020 or beginning of 2021 at the earliest.

Some 60% of participants would receive no cut at all, due to age, the 110% PBGC floor, or if they are new since 2010. However, that also means that all of the cuts will be coming from 40% of participants, primarily those with significant benefits accrued prior to 2004, who are under age 75. Any cuts would be permanent.

How much of a cut will be necessary? The plan’s funded status one year ago was 64.5%. It is probably lower today; the most recent data is from 3/31/2018. That’s why I would anticipate a reduction of 35% or more. The actuarial value of plan assets were $1.8 billion, and the present value of liabilities is $3.0 billion. My estimate could be under what is necessary, since so many participants will not see any reduction in their benefits.

While we wait for this process to unfold, it might be helpful for all musicians, and especially those close to retirement or retired and under age 80, to calculate how this might impact them. In preparing your financial plan, we can estimate your PBGC Guarantee and consider how your payout might be calculated at a 35% reduction or other level. In some cases, this may merit changes to your retirement expenses or planning. I’d suggest looking into this now rather than waiting until 2021.

Please feel free to email me with your questions or if you are looking for a financial planner. I am accepting new clients. While I am prohibited from providing individual advice to non-clients, I may be able to help with general questions or discuss your topics in a future post. A great resource is also the FAQ section on the AFM-EPF website. As new information becomes available, I will be sure to update here at Finance For Musicians.

Taxes Going Up? Here’s What Musicians Can Do

My clients are completing their 2018 tax returns and it is a mixed bag. Many musicians who used to itemize their deductions, especially married couples, are now taking the standard deduction for the first time in decades. Some are seeing their taxes go down while others, myself included, are paying thousands more for 2018 than we did for 2017.

Generally, if you had a significant amount of itemized deductions, many of those deductions were reduced or eliminated under the Tax Cuts and Jobs Act. This should be no surprise to my readers, because I’ve been warning you about this since November 2017 when the law was just being proposed in Congress. For musicians who are W-2 employees, the loss of Miscellaneous Itemized Deductions meant losing the ability to deduct your instruments, supplies, mileage, home office, union dues, concert clothes, and other expenses.

What also came as a surprise to many musicians was that their employers significantly reduced their tax withholding from their paycheck. Payroll software has several weaknesses – it doesn’t know what deductions you may have or what other income you or your spouse earns. The software just sees a lower marginal tax rate and automatically withholds less. If your employer under-withheld, you can ask HR to reduce your exemptions to zero and if you are married, you can also ask them to withhold at the higher single rate. If your spouse earns a similar amount as you, withholding at the single rate is likely more accurate.

How can you lower your tax bill for 2019? First, try to increase your 403(b) or 401(k) contributions, if you are eligible for a retirement plan through your employer. So many people are only contributing the amount that their company will match, often four to six percent. Others are contributing 10%, which is slightly better. But your goal should be to max out both your and your spouse’s 403(b) or 401(k) if you can. For 2019, that has been increased to $19,000, or if you are age 50 or over, $25,000. Build wealth, fund your retirement, become financially independent sooner, all while reducing your current tax bill. That’s why we try to max out our accounts every year.

I suggested other ways to reduce your taxes last February, to give everyone a head start on their 2018 taxes. See: Reduce Your Taxes Without Itemizing.

If you have both 1099 and W-2 Income and are wondering if you can just shift all your expenses to your Schedule C, the answer is no. If you have expenses and equipment which is used both for your 1099 and W-2 work, please read: What Should Free-lancers Do with Both W-2 and 1099 Income and Expenses.

For musicians who are W-2 employees, many of you who used to take a home office deduction found that this was eliminated in 2018, to your great frustration. So today, I’d like to give an update on two ways to get a deduction for your other major expense, your car.

First, if you are a self-employed musician, including a 1099 independent contractor, you might consider having a dedicated vehicle for your music business, especially if your work requires frequently driving to places other than your “primary office”. You have a choice of taking the IRS standard mileage rate (58 cents per mile for 2019) OR you can use your actual costs, including gas, repairs/maintenance, depreciation, insurance, etc. Since the standard rate is so much easier to calculate, most people use the standard rate. But, you are allowed to calculate both and use whichever is higher.

If you are self-employed and your car is getting old, instead of getting a new car and using it for both personal and business miles, consider getting an SUV, Van, or Truck for your business and keeping your old car for personal use. If you have a business vehicle with a GVWR over 6000 pounds, and use it 100% for business, you may be able to deduct the full purchase price upfront as a Section 179 deduction. This saves you from having to depreciate the vehicle over time. Then, you should deduct all of your actual costs going forward. Under the new tax law, you can now use the section 179 deduction for used vehicles, in addition to new vehicles. Read more: Bonus Depreciation for Self-Employed Musicians.

If you aren’t self-employed but are in the market for a new vehicle, I wanted to give you an update on the $7,500 tax credit for electric and plug-in hybrid vehicles. A tax credit is not a deduction to your income, but a dollar for dollar reduction of your taxes owed. This credit can reduce your taxes to zero, but is non-refundable if your tax bill was less than $7,500 before the credit.

The full $7,500 tax credit is available on the first 200,000 qualifying vehicles each manufacturer sells. The first two companies to exceed 200,000 vehicles are Tesla and General Motors. If you were hoping to get the full tax credit, I’d look at other companies. Depending on the size of the vehicle battery, some vehicles have a credit of less than $7,500. For complete details of eligible new models, see the IRS Website: Electric Drive Motor Vehicle Credit.

For GM, the credit drops from $7,500 to $3,750 on April 1, then to $1,875 on October 1, and then to zero on April 1, 2020. Tesla hit the 200,000 vehicle mark one quarter earlier. The tax credit for a Tesla purchase is $3,750 right now, falling to $1,875 on July 1, 2019, and then to zero on January 1, 2020.

The Tax Credit is only available on a brand new vehicle, however, used prices for electric vehicles usually reflect the $7,500 credit. So, if you wanted a Chevy Bolt or Volt, or a Tesla, you might want to look at used models now that the tax credit has been phased down.

My goal is to help you keep more of your money so you can invest and grow your wealth. Although the new tax law simplified returns for many musicians, it did not cut taxes for everyone across the board. If you’re wondering if you’ve missed some ways to save on taxes for the year ahead, send me an email and we can discuss what we do for our clients to help. 

Musicians over 65: Start your Pension Before it is Reduced

This week, the trustees of the Musicians’ multi-employer pension, the AFM-EPF, announced that the fund “will likely enter ‘Critical and Declining’ Status in 2019”. A musician friend, who recently turned 65, asked me if there was anything we could do.

If the plan enters Critical and Declining status, it means that the fund is going to run out of money in 20 years or less and the plan is unable to fulfill the benefits they had planned to provide to participants. (I wrote about Critical and Declining status nearly two years ago on this site.)

Once in Critical and Declining status, the plan trustees can petition the Treasury department to allow them to cut benefits to participants to save the plan and create a more sustainable payout structure. The AFM has announced that they have already appointed a retired member to serve as the participant representative for this process, so I believe that it is inevitable that cuts will be proposed once the plan enters Critical and Declining status. In fact, if I was a trustee, I think it would be irresponsible to ignore the plan’s underfunded status and NOT consider changes to ensure its survival.

The maximum amount they can cut is to 110% of the guarantee under the Pension Benefit Guarantee Corporation. The PBGC is the Federal agency responsible for protecting pension participants. Their formula is based on the number of years of service. For a retiree with 30 years of participation in a multi-employer pension plan, the maximum benefit offered from the PBGC is $1,072.50 per month.

For the AFM-EPF, we have not seen a proposal of what kind of cuts might be proposed. However, we do know that the worst case scenario for a 30-year participant would be 110% of the PBGC guarantee, or $1,179.75 a month. So, if the AFM-EPF had promised you $2,000 a month after 30 years, it could be cut to no lower than $1,179.75. If you have fewer years than 30, this minimum threshold would be lower, and if you have more than 30 years, it would be higher. (I explain the PBGC formula here.)

If you are at least 80 years old, they cannot reduce your pension benefit at all. If you are 75-79, they can reduce your benefit on a sliding scale. And for everyone under 75, we could all be subject to the same level of benefit cuts. (Again, we do not know how the AFM-EPF will propose to reduce benefits, I am listing the worst case scenario here, of the maximum allowable cuts. The cuts do need to be sufficient to save the plan, so I expect proposals of significant reductions.)

Now, back to my 65-year old friend. He is still working, playing at the top of his game, and is an active participant in the pension plan. When can you start the Pension? Full retirement age is 65 for the AFM-EPF. Once you are 65, however, you can apply for your benefits, even if you are still working.
If you are genuinely retired before 65, you can apply for early (and reduced) benefits.

If you believe, as I do, that your benefits are inevitably going to be cut, perhaps to as little as $1,179 a month, you might as well start taking your much higher benefit today and start saving that money. This is something every 65 year old musician should consider for their individual situation. Run the numbers and compare your promised benefit and what your benefit could be at 110% of the PBGC guarantee.

Usually, I would not recommend taking benefits at 65 if you are still working for two reasons. First, your benefit would continue to increase very nicely for each year you keep working past 65. Second, if you start benefits while you are still working you could end up in a higher tax bracket and see a significant portion of your pension payment be clawed back by the IRS. (Pension payments are treated as ordinary income for tax purposes.)

However, if you have a chance to receive $3,000 a month for a year or two before the pension cuts your benefit to $2,000 or $1,500 or some unknown amount, maybe it makes sense to start right away and sock that money away. Again, we don’t know what the cuts will be or how quickly they will be proposed, approved, and implemented. According to the FAQs on the AFM-EPF site:

“If the Plan becomes critical and declining and benefit reductions are necessary to prevent the Plan’s insolvency, nothing happens immediately. The reductions would have to be designed on an equitable basis. They would also be subject to an extensive government application process, which includes appointing a retiree receiving Plan benefits to advocate for the interests of retirees, beneficiaries, and vested participants who are no longer working but haven’t begun to take benefits. Finally, even if the application were approved by the government, participants would be able to vote on any plan to reduce benefits (although, given the size of our Plan, a vote against benefit reductions could be overturned, or modified reductions could still be imposed by the government).” 

If you are over 65, but still working, consider if you want to start your benefit today. You can download the application and instructions here.

If a reduction in the AFM Pension is going to have a significant impact on your retirement, consider delaying the start of your Social Security benefits. For each year you delay past age 66 (to a maximum of 70), your Social Security benefit increases by 8%. If you compare starting Social Security at 62 versus age 70, you would see a 76% increase in monthly benefits by waiting until 70, plus any Cost of Living Adjustments. If you are concerned about longevity, holding off on Social Security is a smart move.

I would also note for planning purposes that the benefit reductions are limited by the PBGC formula, which is based on years of participation, whereas the AFM formula is based on contributions and the multiplier for those contributions. If you are under 65 and can continue to add years of participation, even by part-time or free-lance gigs, that will only serve to increase the PBGC guarantee for you personally, which could give you a higher “post-cut” benefit, even if you don’t accrue significant new plan contributions for those years.

And for younger musicians, it is never too early to start funding an Individual Retirement Account (IRA) or participating in your employer’s 403(b) or 401(k) plan. Don’t put all your eggs in the pension basket.

If you have a pension question, feel free to give me a call or send me an email. While I cannot provide individual advice to non-clients, I am happy to share what I know about the plan and your options.

New IRS Rule Spoils SEP-IRA for Musicians

The SEP-IRA has been a key retirement tool for self-employed and 1099 musicians, but its value just got unexpectedly reduced last month, buried in the details of a 249-page release of new IRS regulations. I’m afraid that many self-employed musicians who read this may want to fund a different type of retirement account or may decide to stop their SEP contributions altogether going forward. If you’re a W-2 musician, this doesn’t apply to you, and if you are strictly a W-2, you weren’t eligible for a SEP anyways.

The new regulations don’t directly change a SEP contribution – it’s still a tax deductible contribution. Self-employed musicians are also eligible for a new 20% tax deduction, called the Qualified Business Income or QBI deduction, officially IRC Section 199A. The QBI Deduction is new for 2018 as a result of the Tax Cuts and Jobs Act put into law in December 2017. 

The QBI Deduction is available to pass-through entities, including S-corporations, LLCs, and sole proprietors. You do not have to be incorporated, anyone with self-employment income (including 1099 “independent contractor”) is eligible. For “Specified Service Businesses”, including performing artists such as musicians, the QBI deduction is phased out if your income is above $157,500 (single) or $315,000 (married) for 2018.

(I’ve written about the QBI Deduction for musicians previously on my site HERE, as well as for the International Musician.)

What was a surprise announcement in the January 2019 regulations, some 13 months after Congress signed the new law, is that all self-employed people have to subtract any “employer paid retirement contributions” from their Qualified Business Income. It was previously thought this would only apply to S-corporations. This was not mentioned or hinted at in the legislation or in the regulations the IRS published in August. In fact, many tax software programs are having to be rewritten because of the January announcement. The SEP-IRA, even for a sole proprietor, is considered a type of employer-sponsored retirement plan, even though the employer and the employee are the same person.

It may be easiest to explain this with an example. Let’s say you make $60,000 as a self-employed musician and choose to contribute $10,000 to a SEP IRA. (In this example, I am assuming that your taxable income and your Qualified Business Income are the same, but in some cases, they will be different.) Now, instead of getting the 20% deduction on the $60,000 of Qualified Business Income, worth $12,000 off your income, you have to subtract your SEP contribution of $10,000 to reduce your QBI to $50,000. Now your QBI deduction will be $10,000, $2,000 less than if you had not made the SEP contribution.

Your SEP contribution reduced the value of your QBI deduction by $2,000, so instead of adding a $10,000 benefit, your SEP contribution only increased your deductions by $8,000. Another way of looking at this: if you are eligible for the QBI, you are only getting 80% of the value of a SEP Contribution, but 100% of your SEP contribution will be taxable when you withdraw it in the future.

And that’s a problem. The $10,000 you contributed to a SEP only provided an increase of $8,000 in deductions, but the full $10,000 will be taxable when you withdraw it later in retirement, plus the tax on any growth. Who wants to get an $8,000 deduction today and immediately have a $10,000 future tax liability? 

You might pay less in lifetime taxes by not making the SEP contribution, receiving 100% of the QBI deduction and then investing your $10,000 in a taxable account. The growth of the taxable account, by the way, could be treated as long term capital gains, which for most taxpayers is at a lower rate than the ordinary income rates applied to growth of your SEP (when withdrawn).

There are three additional solutions which you might consider rather than a funding SEP, given this new rule.

1. Traditional IRA. The Traditional IRA contribution will reduce your personal taxes, unlike a SEP, which is considered an employer sponsored plan. The SEP reduces the amount of your QBI deduction, but the Traditional IRA does not. However, there are two issues with the Traditional IRA:

  • The contribution limit is only $5,500 for 2018 ($6,500 over age 50). With a SEP, you could contribute as much as $55,000, ten times more than a Traditional IRA.
  • If you or your spouse are covered by any employer retirement plan, your eligibility to deduct a Traditional IRA contribution depends on being under income limits.  (Details here.)

If you are single and are not covered by any employer plan (or married and neither spouse is eligible for a company plan), then there are no income restrictions on a Traditional IRA. And if you were planning on contributing less than $5,500 to your SEP, just skip the SEP altogether and fund a Traditional IRA so you can receive the full QBI deduction.

If you are eligible for both a Traditional IRA and a SEP, I would always fund the IRA first to the maximum, and only then make a contribution to the SEP.

2. Roth 401(k). A Traditional 401(k) or Profit Sharing Plan, like a SEP, can also land you in the penalty box for the QBI as a self-employed person. However, if you set up an Individual 401(k) plan that allows for Roth 401(k) contributions, then you will receive the full QBI deduction, even if you put $18,500 into your Roth 401(k). 

Of course, you won’t get a tax deduction for the Roth contributions you make, but that account will grow tax-free going forward, which is a lot better than a taxable account. It’s a great option if you anticipate being in the same or similar tax bracket in retirement as you have today. The only problem is that unlike a Traditional IRA, you cannot establish a 401(k) today for the previous year (2018). 

But you can establish one for this year, and if you’d like to do so, I can help you with this. 

3. Spouse’s 401(k)/IRA. If you are self employed, but your spouse has a regular W-2 job, have your spouse increase their 401(k) contributions through their employer. That won’t ding your QBI Deduction and will reduce your joint taxable income dollar for dollar. If your spouse is eligible for a Traditional IRA – including a Spousal IRA if they do not have any earned income – that would also be preferable to having the self-employed spouse fund a SEP-IRA.

I do not want to suggest anything to discourage musicians from saving for retirement! But when one type of retirement account will reduce other tax deductions, I want to make sure that all my clients are informed to make the best choices for their situation. Feel free to email or call me if you’d like more information.

This article does not offer or imply individual tax advice; please consult your tax professional for information regarding your personal situation.