It is now time
to make it unclear
to write off lines
that don’t make sense
On A Plain, Nirvana

Last time, we talked about possible business structures that could entitle a magician to take write-offs on his taxes. We also mentioned that you don’t even need to be a legal business in order to take advantage of those write-offs, thanks to a little-known tax provision dealing with what the IRS calls “hobby income.”

Hobby income is defined as “income from an activity not engaged in for profit.” In other words, you aren’t officially a “business,” but what you do for pleasure on the side happens to generate a certain amount of income. The IRS wants their share of that, of course, but they also allow you to claim any expenses that helped produce that income.

Once we understand that, we have brought business income and hobby income to more or less equal footing. Now we need to understand how the IRS allows us to deduct our business or hobby expenses. It would be terrific if we could subtract them from what we owe in taxes, and if our taxes were already zero, even receive them back as a refund. File that under “too good to be true.”

Instead, it works like this, at the simplest level: We add up all the dollars we earned and call it Gross Sales or Gross Income (and I’ve owned a few businesses where my sales and income were pretty gross!). We are then allowed to subtract what accountants call Direct Costs, producing Gross Profit (I’ll dispense with the “gross profit” joke). Direct Costs are for things that we actually turn around and sell, or that go into what we sell. When Jeff produces a DVD and sells it on his website, the blank discs, the labels, and the cases are all Direct Costs, as is the cost of duplicating the DVDs.

We further subtract any Indirect Costs or Expenses, by which we mean anything that was necessary to operate our business or hobby, but which didn’t really become part of the product or service we provided our customers. Here, the sky is just about the limit. The monthly fee Jeff pays for his website, the annual fee he pays for his domain name, the subscription to Genii Magazine, even his business cards, banking fees, and business-related lunches with the accountant are all deductible.

I was with Jeff once when he saw a great deal on decks of cards in bulk at Costco. Because card tricks are a major feature at Jeff’s shows, those cards are a legitimate, tax deductible Expense. When you look at it like that, everything you use in your shows can be a deduction, like tricks, costumes, posters, and even the Twinkies in Jeff’s famous Twinkie trick, Creamy.

Subtracting Expenses from Gross Profit results in what is termed Net Profit, also known as the Bottom Line. Expressed as a math equation, it would all look like this:

Gross Sales – Costs = Gross Profit

Gross Profit – Expenses = Net Profit

Net Profit is the part the IRS charges taxes on. If you have Sales of $80,000, but after Costs and Expenses you are left with a Net $34,000, you can see how that reduces your tax liability. So everything you can possibly claim as an Expense reduces what the IRS calls Taxable Income, which reduces the taxes you pay. That’s your goal.

Now, to do this optimally requires you to know ahead of time what kinds of things you can claim, and to keep records and receipts, because the IRS doesn’t allow you to claim deductions you can’t prove-and canceled checks aren’t enough.

Did you know you can deduct mileage to and from a gig? Do you have a room in your house you use exclusively for storing your magic supplies, or from where you operate your magic business? Do you have a dedicated phone number you use for your magic career, separate from your home or other personal numbers? All tax deductible!

But you have to have the records to get the write-off. It does you no good to hear from your accountant in March about deductions you should have been planning for last year. The receipts you threw away won’t help you get that deduction now. That is what I meant in my previous article when I said, “The difference between tax planning and tax preparation is December 31.” If you didn’t plan for those write-offs during the tax year, all that is left afterwards is to prepare your taxes and take your lumps.

One last thing. A business can actually take a loss-spending more in a given year than it generates in profit-and not only owe zero taxes, but actually deduct the losses against other income, or carry them forward or backward to other tax years. A hobby cannot. If you run your magic career as a hobby, you can only deduct expenses to the amount of gross income you produce.

Hope that helps!

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Taxes for Magicians, Part 1
by William Brough, MBA, PB

“Let me tell you how it will be;
there’s one for you, nineteen for me.”
Taxman, The Beatles

As Jeff’s accountant, I have been provided a window through which I glimpse, at least a little, what it’s like to be a magician. I have seen how he plans for a gig, how he takes his act apart and puts it back together. I have watched him come up with an idea for a trick, experiment with it, and polish it before unleashing it on an audience. And of course, I have experienced the delicious “How does he do that!” moment that all magicians are shooting for.

Most of this was not that surprising to me. I have a background in music, and I went through much the same process working on my skills, developing my set and looking for gigs. I am used to how musicians think, and how they act around the public and around each other. The surprise for me is that magicians are nothing like that. The world of magic is very insulated-a private community with its own language and a vault full of secrets; a community that actively works to exclude outsiders.

So what’s my point? My point is that I’m not “in the club.” I don’t just sit on the other side of where you stand when you’re on stage, I sit completely outside of your creative life. You want it that way. In many respects, we couldn’t be more different. But one thing we have in common, whatever else we don’t, is that this time every year we share an inescapable obligation to file an income tax return. All year long you try to leave me out of your world, then suddenly you remember you need me.

Now it’s my turn to be the guardian of secrets you don’t completely understand. Lucky for you I don’t hold a grudge.

Okay, first secret: What is the difference between tax planning and tax preparation?

December 31st.

For any given tax year, the time to plan is before December 31st. After that, it is too late to do anything but prepare your tax return and let the chips fall where they may. There is darned little the IRS lets you do in 2008 to change your tax liability for 2007. So I’ll assume, for better or for worse, that you are where you are as far as Tax Year 2007. If you haven’t taken steps to reduce taxes…oh, well.

So let’s talk instead about what you should be doing to get ready for Tax Year 2008.
To begin with, you need to understand how the IRS recognizes magicians as taxpayers, and how they allow you to claim deductions that can lower your taxes.

First of all-and you may want to sit down for this-the IRS makes no allowances for magicians as a class, at least not that I’ve been able to discover. There are no special “magician deductions.” But they do allow deductions for businesses, and it doesn’t matter what the purpose of the business is.

As a result, some magicians, like Jeff, actually form a separate business entity. Jeff has an LLC called Stone Cold Magic. Many more magicians operate as sole proprietors, which is also a business structure, but one that makes no legal distinction between your personal and professional identity.

As a sole proprietor, you might work under your own name, as in “Ladies and gentlemen, please welcome Jeff Stone.” Or you might have a DBA (literally, “Doing Business As”), which can be a business name or stage name. Jeff could have legally formed a Sole Proprietorship and also called it Stone Cold Magic. He would be Jeff Stone, dba Stone Cold Magic. Or he could have assumed a stage name, like The Great Jeffdini, and his legal, business name would be Jeff Stone, dba The Great Jeffdini. Either way, he would be entitled to deduct legitimate business expenses, just like he can as an LLC.

However, you don’t need to form a business in order to enjoy tax deductions from your magic career. A less well known provision of the tax code lets you claim the same kinds of deductions by reporting what the IRS calls “hobby income,” and you can claim any related expenses and write them off, just like a business can.

So the first lesson is that you don’t have to feel that, just because you haven’t jumped through the legal hurdles of forming a business entity, you are excluded from any tax benefits for working as a magician.

Next Time: Write-Offs, Right On!

Until Next Month…

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