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!

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

scott@goodlifewealth.com

The Saver’s Tax Credit

Since most employers today no longer provide defined benefit pension plans for their employees, the burden of retirement saving has shifted to the employee. Not surprisingly, saving for retirement is a pretty low priority for the many Americans who are focused on how they are going to pay this month’s bills.

Self Employed? Discover the SEP-IRA.

The SEP-IRA is a terrific accumulation tool for workers who are self-employed, have a family business, or who have earnings as a 1099 Independent Contractor. SEP stands for Simplified Employee Pension, but the account functions similar to a Traditional IRA. Money is contributed on a pre-tax basis, and then withdrawals in retirement are taxable. Distributions taken before age 59 1/2 may be subject to a 10% penalty.

Four Student Loan Forgiveness Programs

The size of student loans has grown tremendously in recent years. Many college graduates are finishing school with $100,000 or more in debt, especially those who pursue graduate degrees. It is becoming a substantial problem, one which is impacting a whole generation’s ability to become wealthy. Perhaps for the first time in American history, our young people face a tougher road to prosperity than their parents did.

How Some Investors Saved 50% More

While some people view risk as synonymous with opportunity, the majority of us don’t enjoy the roller coaster ride of investing.  Our natural proclivity for risk-avoidance can, unfortunately, become a deterrent in deciding how much we save. Without having specific goals, investors often default to a relatively low contribution rate to retirement accounts and other investment vehicles.  They commit only how much they feel comfortable investing, rather than looking at how much they actually need to be saving in order to fund their retirement or other financial goals.

5 Techniques for Goal Achievement

Goal Setting is a key step to the financial planning process, and helping clients achieve goals is the value I provide.  Everyone would like to be wealthy, but that is not a goal.  To me, it only becomes a goal when we can state a clear, tangible objective.  So, if you’d like to retire, we’d calculate how to make that happen and develop a specific goal like “accumulate $2.1 million dollars by 2026.”  That long-term goal gives us a timeline and dictates what we need to do each year and month to make your goal a reality.  We can observe if you are on track and make adjustments as needed in the years ahead.  The key step though is translating an ambiguous desire into a goal which is measurable.

The AFM Pension Plan: What Every Musician Needs to Know

If you’re a professional musician in the US, you likely received your annual statement from the American Federation of Musicians Employers’ Pension Plan in the past several weeks. The main purpose of the mailing is to verify your Covered Earnings from the past year. Professional musicians often have basic questions about the AFM Pension, in part, because the annual statement doesn’t tell you very much about your personal situation other than your reported earnings and the amount your employer(s) contributed to the pension fund.