- Meals and entertainment for bands organized as a sole proprietorship or single member LLC get reported on a schedule C and are an easy target. For an artist that tours full time, this number can get quite large in relation to net income. Included on this line are per diems paid to sidemen and crew, entertainment meals and expense, and the maximum per diem rate the owner can deduct per city. Most taxpayers don’t keep adequate substantiation for these expenses.
- Losses on a schedule C, especially for a band leader with substantial W-2 income, are a flag. To IRS, this combination looks like a hobby.
- IRS will be after cash intensive businesses, and it thinks that all musicians handle lots of cash. You are required to keep books on your business, and that includes gigs and tips paid in cash. If you don’t report any cash income, IRS will estimate it for you in an audit – on the high side.
- 100% use of a car, van or truck is a flag, even if you really think you use it 100% for business. Keep a log and write down your business trips, as well as those personal trips to the grocery store or your kid’s soccer game – at least you tried to keep a mileage log – and 95% still gets you a big deduction.
- Using the phrase “Management Fees” as one of the items on the other expense line of a schedule C is a flag. Name it what it is – booking agency commission, artist management fee, etc.
- A CPA with many years of experience in the music business knows these flags, and many more.
Although filers with less than $200,000 gross income have an audit rate of less than 1% (.88%), the following are audit flags that will still increase your chances for an audit: