According To MN State Auditors, Success In The Music Biz Means Signing With A Major Label; Not Touring

from the and-if-you're-not-raking-it-in,-you're-not-interested-in-being-successful dept

Have you ever wondered how a tax auditor defines artistic success? Neither have I. In fact, it's probably one of the great unanswered questions, largely due to its status as one of the great unasked questions.

[The only thing I can think of that comes close to this intersection of red tape and artistic expression took place in 1990, when the members of the electronic/experimental rock band Legendary Pink Dots were denied visas to tour the US due to "lack of artistic merit." Apparently, the customs official was not familiar with the obscure rockers, despite a release schedule (32 albums, 52 live albums and compilations) that would choke The Fall.]

Now, we have an answer and it's every bit as awful and ignorant as any collision between a state's revenue service and an indie artist could conceivably be. This story starts out with the artists (married couple Venus DeMars and Lynette Reini-Grandell) being informed that their Minnesota state tax returns for 2009-2011 were being audited.

No one wants to be in this situation, but most people who find themselves facing an auditor are rarely subjected to unsolicited opinions and advice on how to run their businesses/careers better, along with countless flabbergasting statements about their industry in general.

“We’ve had several meetings with the auditor since November, and at the last one he said a preliminary determination had been made that we were hobbyists, not artists, and therefore could not write off our expenses,” said Venus, a visual artist, songwriter, bandleader and performer. “This has been unbelievably demoralizing. He basically is saying that if we really knew what we were doing, we should have been more profitable by now, and should have known to give up.
Charming. Apparently, Venus and her partner aren't successful enough to write off expenses. I guess that's a privilege left to artists with real careers and real expenses to write off. The auditors made the claim that any deductions for touring expenses were nothing more than the couple trying to write off personal vacations. Why would they draw this conclusion? Because they understand nothing about touring.
They also really don’t like that I tour. They say I tour way too much and that really, my name is already out there enough, after all this time in the business, there is now no need to do any promotional touring. I have this statement in writing. I attempted to show them, and tell them that this was the industry standard, approved, well-documented, way to build one’s fan base, to expand on it, to inspire interest in one’s work because of the direct contact one has with an audience. They replied that there’s no reason to return to the same cities and venues, and that I’m wrong, that I’m really touring only for pleasure and recreational reasons.
After "all this time in the business," the Rolling Stones are still touring. Perhaps they should stop. After all, their name is "already out there enough." Touring is the expectation when you're a musician. It can be a lifetime experience for some. Hopefully, these artists aren't a.) Minnesotans or b.) writing off touring expenses. (Nothing says "vacation" like a panel van full of equipment, band members and BO making a 6-hour run across the state on less than 2 hours of sleep. Relaxing!)

So, according to reps from the Minnesota revenue service, Venus DeMars hasn't achieved enough success to justify listing "artist" as an occupation, but is too successful to gain anything by touring. As an ideal, "success" is a pretty vague term. How do tax collectors define success in the music biz?
The tax guy said that by this point in my career I needed to be signed by a major label, that I should have been signed to a major label by now, that I needed to be signed to a major label to establish myself. [He said that] there was no evidence that I was actively sending my records to major record labels, so therefore I must not be interested in profit, and not running a for-profit business.
How delightfully old school. You can't spell success without the letters EMI (or UMG). While some musicians may not feel they've "made it" until they've signed away their rights to their creations signed with a major label, it's been a long time since the two terms were inseparable.

What we seem to have is someone (or someones) who don't understand the realities of the music business setting arbitrary ground rules on what constitutes a career in the music field, or at least what defines a career in terms of acceptable tax writeoffs. Touring is unimportant but a major label contract is everything. The auditors also made the claim that because DeMars allowed her music to be used on a public radio network (NPR), it meant she was uninterested in turning a profit.

Her partner, Lynette Reini-Grandell, didn't dodge the entire state vs. art "debate," either. The state's reps also questioned her business acumen as a writer.
The tone of all these proceedings have been completely anti-art. There has been an emphasis on creating a product, advertising it for sale, and then selling it. That’s not how it works on the creative end of literature. Writers need to spend a long time writing, getting feedback, moving up the levels of critique, and then they participate in the publishing industry by sending things out to publishers. One tries for the prominent ones first, gets rejected many, many times, and eventually finds a press and an audience.

Writers do not write a few lines and then advertise they have a poem for sale, making sure that the poem sells at a break-even point of what it cost monetarily to produce it. But this is what the Minnesota Department of Revenue insists I should be doing. It sickens me to have to participate in this because I know it is deeply wrong.
At this point, the state is telling the couple they owe over $100,000 in back taxes, an amount that may include a clawback of issued grants. This assessment seems to be based on the auditors' assertion that the couple simply isn't trying hard enough to make money. Based on what the state's representatives have said, not making enough money is the same as dodging taxes. But, even if you take the hardline and agree with the auditors' that the couples' livelihoods aren't sustainable without significant government assistance, you're still left with some unbelievably bad assumptions by the auditors and even worse career advice, all delivered in a thoroughly condescending manner. If the state is looking to recover these taxes, it needs to apply a more intelligent baseline than "stop touring and sign with a major label."



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    That One Guy (profile), May 1st, 2013 @ 5:44am

    So, regarding the auditors...

    Complete and utter idiots, or people looking for kickbacks/'referral' rewards for getting musicians and writers to sell away the rights to their creations to companies? At this point it's hard to tell which possibility could make them look worse.

     

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    BentFranklin (profile), May 1st, 2013 @ 7:13am

    This news has the unmistakable stank of Prince. I'm sure he's behind it somehow, because he's a real artist.

     

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    pegr, May 1st, 2013 @ 7:52am

    Not the whole story

    The auditor's subjective statements are inappropriate, of course, but we are not getting the whole story.

    When is an activity a hobby or a business? That's an equation, not an opinion. What does the law say about the amount of money made over time versus deductions? You are either within the law or not.

    Rather than make (seemingly reasonable) public appeals, show the numbers. If the numbers support your position, tell the auditor to go pound salt.

     

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    Anonymous Coward, May 1st, 2013 @ 7:52am

    who's to say that this hasn't been instigated by a major label because the people turned contracts down and a big portion of jealousy has been injected?

     

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    Atheist Prophet, May 1st, 2013 @ 7:53am

    The same goverment who thinks jesus in a jar of piss is art is somehow qualified to judge these guys as garbage? LOL

     

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    Anonymous Coward, May 1st, 2013 @ 8:01am

    Re: Not the whole story

    She made a profit in one of the years audited.

     

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    Anonymous Coward, May 1st, 2013 @ 8:03am

    Re: Not the whole story

    Also from what I understand, LOSING money happens. The idea they work another job on the side to support themselves doesn't qualify it as a hobby, especialy doing major things like touring.

    What they seem to be doing is dismissing these things and classifying them as something else in order to claim it's not a business.

    Touring? No, you're going on a "vacation", no matter what documentation you have to back up your assertion. Interested in earning a profit? No, since you haven't signed with a record label and have not shown interest in signing with a record label you cannot be interested in earning money.

    Etc.

     

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  8. This comment has been flagged by the community. Click here to show it
     
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    out_of_the_blue, May 1st, 2013 @ 8:07am

    Income taxes should be zero below $10M.

    With 100% confiscation above. We need to AGAIN, as originally done, set the revenoors against the proper targets: The Rich. Let someone who fudges at the $10M level deal with 'splaining away guilt. It's EASY, be popular, and above all is right morally because at over $10M a year, no one can possibly claim that they work for a living.

    And by the way, the Grace Commission in the first Reagan administration PROVED that NOT A CENT of income taxes actually goes to pay for gov't: it's all simply transferred from poor to rich. But with the myths of "capitalism" taught in Ivy League schools, everyone goes on as if The Rich are productive and burdened.

    Gov't is ALWAYS draconian so it's either working people or The Rich who are going to be targeted by the tyranny. The class struggle hasn't ended, and it never will. Of course, The Rich get in control of gov't -- and use it to funnel yet more income from poor to themselves -- so it's not easily done. Point is that the 99% need to (again) regard The Rich as the real enemy, not their tool: gov't.

     

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    Trails (profile), May 1st, 2013 @ 8:14am

    Re: Income taxes should be zero below $10M.

    Ok, do roswell next!

     

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    Anonymous Coward, May 1st, 2013 @ 8:17am

    Minneapolis has several music and recording schools, and a strong business culture. It is not surprising that this kind of thinking would come out of that area.

    I am very happy I no longer live in that city.

     

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    Anonymous Coward, May 1st, 2013 @ 8:20am

    This stinks. It smells of someone who doesn't like these people running to the government to complain.
    I don't think we've heard everything there is to this story yet.

     

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    Rikuo (profile), May 1st, 2013 @ 8:21am

    Re: Income taxes should be zero below $10M.

    Okay then. So your tax ideas are implemented. Guess what's going to happen? The rich will just cap any income they get in the US at $9,999,999 and anything else will be paid to them into off-shore bank accounts, with the monies being funneled there by foreign branches of their corporation.

     

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    Anonymous Coward, May 1st, 2013 @ 8:23am

    It's hilarious that you peopls think bands make money touring. Except for the already huge stars, touring is nothing but a break-even proposition at best; done as a promotional exercise. The food, gas expense and sleep sucks, you're away from family and friends, and you don't come home with any more money than you would have if you'd stayed home and worked shitty odd jobs.
    Reality, welcome to it.

     

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    Vidiot (profile), May 1st, 2013 @ 8:41am

    Think "Fargo"

    I'm reading all those auditor comments aloud using Frances McDormand's wonderful Minnesotan accent from "Fargo"... and that makes them all sound perfectly sensible.

     

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    Ron, May 1st, 2013 @ 8:42am

    Re:

    Go get a regular job then you whiny bastard. Try and live like the rest of do. You will not find any sympathy here!! Or you can go sign with a label.

     

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    Chris ODonnell (profile), May 1st, 2013 @ 8:48am

    Common in the horse world

    This sort of dispute is common in the horse world. You buy a farm, spend thousands each month feeding and caring for your horses, then try to write off your hobby by claiming you are a horse trainer or breeder. The IRS has clamped down. I don't know if there are hard standards, but I do know you can get the stink-eye from the IRS if they are not convinced you are making an honest effort to turn a profit with your horse business.

    And I can't say I disagree entirely. Why should the taxpayer subsidize your business if in effect the only thing keeping you in business is the tax benefit?

    Which reminds me of the joke, how do end up a millionaire in the horse business? Start with 2 million.

     

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    Anonymous Coward, May 1st, 2013 @ 8:51am

    Not the whole story

    The auditor's subjective statements are inappropriate, of course, but we are not getting the whole story.

    When is an activity a hobby or a business? That's an equation, not an opinion. What does the law say about the amount of money made over time versus deductions? You are either within the law or not.

    Rather than make (seemingly reasonable) public appeals, show the numbers. If the numbers support your position, tell the auditor to go pound salt.


    Good point, there needs to be numbers or the story is empty. There was one number: $100,000 in back taxes. Usually one needs a denominator, though.

    But even with more information, it's not cut-and-dried. In fact it's totally ambiguous. This is not just a problem for artists, but a basic conceptual problem in taxation. Are you taxing profit or revenue? The aim is to tax the former, but the latter is what's trackable.

    Distinguishing expenses from consumption involves a huge subjective component, not just an equation. Intentions count at every step, once you have a loss or high costs. The tax auditor judges of fitness to purpose and it's no surprise that in the end it's dominated by cultural prejudices.

     

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    iambinarymind (profile), May 1st, 2013 @ 8:54am

    Reality Reminder...

    "Taxation" is a fancy euphemism for theft.

    Wearing fancy outfits, having fancy badges, and calling one's self the "government" does not make one's act of theft moral and good.

    The initiation of force (or threat thereof in the case of "taxation") is immoral. Plain and simple.

    I prefer consensual relationships and voluntary exchange.

    Try voluntaryism instead.

     

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  19.  
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    David, May 1st, 2013 @ 8:54am

    Needs more skepticism

    I'm skeptical of the story this couple is selling. I'm somewhat familiar with hobby business rules at a federal level (5 years in public accounting), and I've seen first hand how far a tax payer can push the rules before running into trouble.

     

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    Nicholas Weaver (profile), May 1st, 2013 @ 8:56am

    Re: Re: Not the whole story

    Profit in 1 year does not a business make. The IRS has a policy:

    The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses. (Citation).

    It generally sounds like the state auditor phrased things rather poorly, but someone who has been doing an activity and showing a loss for 9 years out of 10 is trying to write off their hobby on a schedule C, rather than a legitimate business.

    Overall, a good general rule: Don't show a loss on your schedule C, especially on a repeated basis.

     

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  21.  
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    CC, May 1st, 2013 @ 9:03am

    We're not getting the whole story here. It's all about numbers, not musical talent. If you lose money or break even year after year on a business, then it's simply not a business. It is, in accounting terms, a hobby.

    Let's say I'm trying to start my own photography business on the side. I start writing all kinds of everyday things off on my taxes because they're related to my "business." If my business doesn't go anywhere, at what point am I just cheating on my taxes? That's the central issue at play here.

    Imagine if I spent a year touring Europe, taking pictures of everything in sight, and then wrote off all of my expenses—travel, meals, equipment, data. Then imagine that my pictures don't sell. Was it really a business trip, or was it pleasure under the guise of business? For everyone who legitimately tried to make money on this kind of trip, there are a hundred who just want to dodge paying their taxes. A line has to be drawn somewhere.

    "There has been an emphasis on creating a product, advertising it for sale, and then selling it. That’s not how it works on the creative end of literature." Actually, that's exactly how it works if it's a business. No one is saying that you can't keep doing these things. No one is saying that you can't get better and turn it into a business. They're just saying that you can't keep dodging your tax obligations year after year.

    From a tax perspective, how is a person who tours professionally (and makes no money) different from a person who travels every weekend for motorcycle rallies? Why does one get to write off their expenses while the other doesn't?

    It has nothing to do with malicious intent on the part of the taxman. It has nothing to do with punishing failure on the part of the musicians to make it big. It has everything to do with drawing a line between expenditures that are incentivized within the tax code and expenditures that are not. If you don't like it, then lobby to simplify the tax code.

    You get years of wiggle room to get your "business" going while writing off your expenses. At some point, you have to start paying your taxes—one way or another.

     

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    Anonymous Coward, May 1st, 2013 @ 9:03am

    Re: Income taxes should be zero below $10M.

    good job blue

     

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    wscaddie56, May 1st, 2013 @ 9:04am

    Re: Re: Re: Not the whole story

    Semi regular reader here, this article is not up to this website's standard. The above are the rules for being classified as a business, if you disagree with the rules then get them changed, don't complain about MN Revenue properly applying current law.
    Disappointing techdirt.

     

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    John Fenderson (profile), May 1st, 2013 @ 9:16am

    Definition of success

    This is a little tangential, but this story is yet another example of one of my pet peeves: assuming that there is a simplistic answer to "what is success". To me, success is achieving your goals. And yet, when people declare whether others are successful or not, they almost invariably use money as the benchmark. This drives me nuts.

    If your goal is to maximize income, then yet, that is how you measure success. But for most people, that is not the goal at all. Rather, it's something more ephemeral, such as doing work that is rewarding, or living a happy life, or gaining a sense of accomplishment.

    But I digress.

    What I want to know is do MN's tax laws differ that much from the feds or other states? Because typically, whether you're a "hobby" or a "business" depends on whether or not you're showing a profit. The IRS guidelines are as follows (taken from irs.gov):

    Does the time and effort put into the activity indicate an intention to make a profit?

    Does the taxpayer depend on income from the activity?

    If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

    Has the taxpayer changed methods of operation to improve profitability?

    Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?

    Has the taxpayer made a profit in similar activities in the past?

    Does the activity make a profit in some years?

    Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?


    Note that there's nothing in there about specifically how to conduct your business. Is Minnesota so different?

     

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    Rikuo (profile), May 1st, 2013 @ 9:17am

    Re:

    I think you skipped the part where the tax-man says they're touring too much (rather than too little) and the fact he said that by now they needed to be signed to a major label.

     

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  26.  
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    jupiterkansas (profile), May 1st, 2013 @ 9:18am

    Re:

    Do you realize that happened 25 years ago? I think it's time to let it go.

     

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    John Thacker, May 1st, 2013 @ 9:18am

    Re:

    From a tax perspective, how is a person who tours professionally (and makes no money) different from a person who travels every weekend for motorcycle rallies? Why does one get to write off their expenses while the other doesn't?


    As you know, because one of them expects to regularly make a profit (and does-- if you don't, then the IRS will eventually investigate you even if you claim you're trying to), and have that taxed. The deductions are a tradeoff for having the profits taxed (which in this case, since they're an S corp, taxed on their personal tax returns). If you're doing something that won't make a profit, and thus generate taxes in some form (personal, shareholder, corporate), then the IRS doesn't have an incentive to let you deduct it. Else people would just deduct any old thing (as many try to do currently.)

     

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    John Fenderson (profile), May 1st, 2013 @ 9:19am

    Re:

    That's funny, I personally know three bands that earn a profit purely from touring. These are small, regional bands, certainly not headliners. They're not making millions, but they are making a living.

     

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    Anonymous Coward, May 1st, 2013 @ 9:23am

    I see a business opportunity here, those "amateurs" probably need an easy way to create LLC's left and right so they can put all their expenses in one basket.

     

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    Anonymous Coward, May 1st, 2013 @ 9:24am

    By the way LLC's are the proxies of the business world, if the government is trying to block your path, use those proxies.

     

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  31.  
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    John Thacker, May 1st, 2013 @ 9:27am

    Re:

    Actually, this happens all the time, because people everywhere try to pass off their hobbies as businesses, so that they can deduct from their taxes money spent doing something that they love. The government, however, only allows deductions on activities that are meant to lead to profits, that will then be taxed. In a small business S corp like here, that means taxed on the owners' personal tax returns.

     

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  32.  
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    Anonymous Coward, May 1st, 2013 @ 9:28am

    Re:

    But I think jesus in a jar of piss is WONDERFUL art. Then again, I think just about anything that's sacrilegious is wonderful art: the nastier, the more insulting, the more degrading, the better.

    Not everyone agrees, of course. That's why it's art.

     

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  33.  
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    John Thacker, May 1st, 2013 @ 9:33am

    Re: Re:

    No. The auditors are saying "you're not making a profit, and you've made a loss in 9 of the last 10 years, and a tremendous loss over the entire time you've been doing this. What you're doing doesn't make it a business, but a hobby; if you want to call it a business, you had better change your business strategy." That's the key part.

    If they actually made money, then they'd be fine, whether they were making a profit from touring or signing with a label. But they're losing money almost every year, and it seems like they'll never make money and have no expectation of making money if they continue their current behavior. If they persist in continuing in money-losing behavior that they should know is money losing, then it starts to look like a hobby that they want to subsidize by deducting money from their taxes (that they pay on their "real jobs,") instead of a business.

     

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    John Thacker, May 1st, 2013 @ 9:37am

    Re: Definition of success

    Has the taxpayer changed methods of operation to improve profitability?


    That's specifically about how to conduct your business, and that's what the MN auditors are asking. They've been touring for 10 years, they've consistently lost money. The auditors are asking them if they've tried to change their method of operation in order to make a profit, by signing with a record label, reducing their number of tours, anything.

    They're getting indignant at being asked to change their method of operation in order to try to make a profit.

    Bad idea, because they're sending out all sorts of red flags to the auditors that they're not trying to make a profit, which ends up screaming hobby. The government only gives deductions in anticipation of being able to tax the profits.

     

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  35.  
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    Anonymous Coward, May 1st, 2013 @ 9:37am

    Re: Not the whole story

    I'm an Enrolled Agent (protector of taxpayers from IRS) and I see a great number of clients that continue to do business when it would be better for them to stop. The whole point of the hobby/business question is one of pure numbers. To be an ongoing concern (true business), you have to have a profit motive and realize that if you constantly losing money then you would be better off financially if you stopped doing your business. Currently the law says that to be considered a business (in anything other than certain types of breeding) you must have a profit two out of the last five years.
    What the auditor was trying to state (in-eloquently) was that a hobbyist IS allowed to write off their expenses, but ONLY to the extent of their income. If you look at it objectively, they might not be a business for tax purposes. They are doing it because they love music and the tax code is not about subsidizing a person to do what they love. Income tax is based solely on income and the expenses required to produce that income.

    But yeah, based on that account, that auditor was a real jerk....

     

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    Me!!!, May 1st, 2013 @ 9:40am

    Re: Common in the horse world

    Which reminds me of the joke, how do end up a millionaire in the horse business? Start with 2 million.


    Ha! Funnily enough and apropos to this story, I'm familiar with that quote as being being about the music business.

     

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    cosmicrat (profile), May 1st, 2013 @ 9:42am

    Been there, seen this

    Some close friends of mine were in a band that broke up largely because of disputes with the IRS. Way to go revenuers, you made the world a sadder place all over a couple thousand dollars.

    It's also clearly true that the IRS gives preference to large businesses. An energy company can write off billions in investments and tools and equipment each year, but I can't deduct expenses for personal tools I'm required to provide because I'm too small.

     

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    Me!!!, May 1st, 2013 @ 9:47am

    Re: Re: Not the whole story

    What the auditor was trying to state (in-eloquently) was that a hobbyist IS allowed to write off their expenses, but ONLY to the extent of their income. If you look at it objectively, they might not be a business for tax purposes.


    I'm really dense when it comes to tax stuff so I'm not sure I'm following. Are you saying that a hobbyist can write off expenses if their hobby brings in money? As if it were a second job, perhaps?

    Let's say I made $1000 dollars last year selling mp3 downloads, and that I spent $600 to produce those mp3s. I could write off the $600 and only pay taxes on the remaining $400?

    And one other thing isn't clear to me in the story; the artists were writing off expenses in order to avoid paying income tax on the money earned from their 'day jobs,' correct?

     

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    wec, May 1st, 2013 @ 9:50am

    I have a question. If they owe $100,000 in state back taxes for three years, how much did they make. You know how much you have to earn to pay $33,000 a year in federal taxes? I assume that MN state taxes aren't quite that high.

     

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  40.  
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    Anonymous Coward, May 1st, 2013 @ 9:56am

    "I’ve spent a lot on my career, I’ve financed it with credit cards"

    Oof. This is not a good sign.

    "I contacted the Taxpayer Rights Advocate and once she looked me up in their database, she pretty much told me to give up."

    Yikes.

    "A songwriter can only get royalties if they’re associated with a registered publisher, which I have been (with ASCAP) since 1996."

    "I really felt as if Venus might still have problems, but my case was totally solid. I’d made a profit as a poet in one of the three years they were auditing"

    So you've been in "business" since at least 1996... and ONE of you turns a profit ONCE, due to a grant?

    Sorry. You can't call that a business.

     

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  41.  
    identicon
    Anonymous Coward, May 1st, 2013 @ 10:04am

    Re: Re: Re: Not the whole story

    Your example is correct. And about writing off expenses to avoid paying tax on their day jobs is sorta correct. Income tax is combination of all income: Wages, Interest/Dividends, Business (profit or loss), Retirement Income, Sales of Capital Assets etc... Lets say you have $10,000 in wages, but $5,000 in loss from your business. That makes your taxable income $5,000 (10k-5k). If it was a business (for tax purposes) that had $10k in income but $15k in expenses, that 5k loss would get to offset your other income, meaning you wouldn't pay income tax on some of your other income. If it was a hobby, that extra $5k would get suspended, and used at another time when you had more income than expenses. But you would effectively not pay tax on any money earned from "the hobby". This is an over simplification of the process, but its pretty close.

     

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  42.  
    identicon
    Anonymous Coward, May 1st, 2013 @ 10:23am

    Re: Re: Re: Not the whole story

    "Are you saying that a hobbyist can write off expenses if their hobby brings in money?"

    Right. I'm not the tax guy, but that works in general. If you make $1000 on your mp3 downloads and spend $600, you can deduct that $600 from the $1000. But if you spend $1000 and make $600, you can only deduct the $1000 if you are doing this as a business and not a hobby. Otherwise you can only deduct $600 of it. And if, year after year, you spend more than you make... you aren't really doing this as a business.

    Of course, this is Minnesota law, so there's some small possibility that they do things differently. I doubt it, though.

    "the artists were writing off expenses in order to avoid paying income tax on the money earned from their 'day jobs,' correct?"

    Pretty much, yeah. Part of it is that the government wants to disallow some of the expenses entirely. For example, the travel expenses. The government is saying that since this isn't a business, those were vacations; and therefore they are not deductible AT ALL. So there goes everything they spent on hotels, vehicles, food, etc., while on the road. That's how you get to a figure like $100K in 3 years.

    Heck, you might even get a bizarre situation where they would have MADE money from the music if not for the travel expenses. Meaning they would ALSO have to pay taxes on any income from their "hobby", even though the "hobby" would have LOST money if you included the disallowed expenses.

     

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  43.  
    identicon
    Anonymous Coward, May 1st, 2013 @ 10:27am

    Re:

    The story isn't very clear on a number of points. The $100,000 number over three years of state tax with penalties and interest is HUGE. MN's top tax bracket is 7.85%. If it really is $100,000 in tax, penalties and interest, you could be looking at over $1,000,000 in income added back.
    When a state agency finds a change in income, they send that information back to the IRS and then its supposed to adjust the Federal Income tax. Lets just use easy numbers: 25% of $1,000,000 is another $250,000 in federal tax. That doesn't include interest and penalties.

     

    reply to this | link to this | view in thread ]

  44.  
    icon
    Nicholas Weaver (profile), May 1st, 2013 @ 10:28am

    Re: Re: Not the whole story

    Also, for that ONE year, her taxes are more likely to be kosher. Even if its a hobby, but a hobby that makes money, you can write off the hobby's (legitimate, documented) expenses against the hobby's income. The problem arises from the schedule C loss in all the other years.

     

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  45.  
    identicon
    gnudist, May 1st, 2013 @ 10:44am

    Re: Re:

    Come on now, let's not let facts get in the way of techdirt-bashing

     

    reply to this | link to this | view in thread ]

  46.  
    icon
    Jay (profile), May 1st, 2013 @ 10:47am

    Re: Reality Reminder...

    There are far better ways to promote small businesses than saying government is the problem...

     

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  47.  
    identicon
    Anonymous Coward, May 1st, 2013 @ 10:50am

    Recording Contracts

    Whatever the merit of the auditor's claim that those being audited aren't running a business, to claim a lack of a recording contract is at all significant is beyond ridiculous. Recording artists make up a small percentage of all professional musicians. Being a professional musician is not contingent on getting a record deal.

     

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  48.  
    identicon
    JEDIDIAH, May 1st, 2013 @ 10:53am

    The dirty little secret...

    > Why should the taxpayer subsidize your business if in effect the only thing keeping you in business is the tax benefit?

    You think you've managed something insightful with that but in truth, your faux interest in reforming the tax code would impact more than just "mere hobbyists" and would never be tolerated.

    If "employees" knew how biased the system is, they would be rioting like Parisians.

     

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  49.  
    icon
    AzureSky (profile), May 1st, 2013 @ 11:03am

    Re: Re: Re: Not the whole story

    so a large portion of the countries biggest businesses claiming tax losses due to piracy and such are all kosher, but when a small guy/gal does it for their business its not acceptable?

    seems a bit hypocritical to me.

    but thats the american way honestly, if you got the money you can claim to be loosing millions a year and use made up/fuzzy numbers and the IRS wont even batt an eye......

    look at the mafiaa, they claim that "piracy"(copyright infringement) is costing them more money then there is in the world each year....and the never get taken to the rug on it.

    hell,http://www.techdirt.com/articles/20110912/13500315912/hollywood-accounting-darth-vader-not- getting-paid-because-return-jedi-still-isnt-profitable.shtml

    http://www.techdirt.com/articles/201 20531/07313919143/darth-vader-is-most-successful-star-wars-character-ever-still-no-return-jedi-resid uals-actor.shtml

    thats an example of a movie thats made the studio a ton of money but that they claim has made no profit.

    my stand is, people should pay their fair taxes, but they also shouldnt be required to sign away their souls to be considered a legitimate business.

     

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  50.  
    identicon
    Anonymous Coward, May 1st, 2013 @ 11:09am

    Re: Re: Re: Not the whole story

    Not a US citizen, but don't losses from business ventures ONLY apply to profits in future years from that same venture? You can't just take the losses and apply it to your personal income tax. At least that's how it is here from what I remember.

     

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  51.  
    icon
    John Fenderson (profile), May 1st, 2013 @ 11:41am

    Re: Re: Definition of success

    That's specifically about how to conduct your business, and that's what the MN auditors are asking


    But it's not what they're asking, really. What they're asking is if the group tried a specific tactic. What they should have been asking is if the group was exploring any modifications to their business plan, not whether they tried a particular one.

    They're getting indignant at being asked to change their method of operation in order to try to make a profit.


    I can't speak for them, of course but if I were in their shoes, I'd be indignant at the insistence that I must enter into a usurious and very probably disadvantageous relationship with questionable companies in order to be considered a business.

    If they had said "you need to explore modifications to your business plan", that would be fair. They said "you must sign with a major label." That's out of bounds.

    By the way, I have no idea if this group is a hobby or a business. But the actions of the revenue agent raise some HUGE red flags. If I were them, and I was serious about my business, I would be contemplating moving to a different state.

     

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  52.  
    icon
    btr1701 (profile), May 1st, 2013 @ 11:53am

    Re: Think "Fargo"

    "So that would be yer accomplice there in the woodchipper, yah?"

     

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  53.  
    icon
    Chuck Norris' Enemy (deceased) (profile), May 1st, 2013 @ 12:09pm

    Re: Re: Re: Not the whole story

    Yes, that is how I understand Federal Tax rules (I had to fill it out this year for my wife's side business she started, think she ended up with $3 profit after expenses). It may be different for the state of MN but usually the state rules are similar to Fed tax rules for the most part. Of course, all the comments from the auditor are unnecessary but if the criteria aren't met then the couple should be dealt the punishment due.

     

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  54.  
    identicon
    wallow-T, May 1st, 2013 @ 12:25pm

    NSFW!!

    I decided to look up taxpayer Venus De Mars on the Google, to see if I could glean extra insight on the business/hobby situation.

    ----- WARNING, NSFW!!!!!!! -----

    :-) Guess I'll follow this up later from home...

     

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  55.  
    identicon
    PRMan, May 1st, 2013 @ 12:34pm

    Re: Re: Re: Re: Not the whole story

    Nope. The IRS says that you can write off losses on a Schedule C for your hobby/personal business. But only for 3 years out of 5 (or you have to make money 3 years out of 5, don't remember and I am not your tax attorney). The reason for this is to encourage small business development, and apparently it works very well.

    If you don't make money 9 years out of 10, they are eventually coming after you (and even here it's Minnesota, not the IRS who is coming after them). Allegedly, the IRS will send you a voluntary compliance letter first before auditing if they think you are out of line on your Schedule C.

    Nobody could actually survive losing money 10 years in a row. What this means in the case of the band in question is that they are likely taking all their losses on Schedule C but getting all their profits in cash touring and claiming very little of that as income on their taxes.

    It's unfortunate that the auditor seems to be ignoring their side of the story and telling them how they should be making money. He should just stick to the law: "You lost money 9 out of 10 years so it's not a legitimate business. The state defines that as a hobby and you are not allowed to claim these losses."

     

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  56.  
    identicon
    PRMan, May 1st, 2013 @ 12:40pm

    Re: Re:

    Fine, but don't use my taxes to make it. Use your own money to advance your freedom of speech.

     

    reply to this | link to this | view in thread ]

  57.  
    identicon
    PRMan, May 1st, 2013 @ 12:43pm

    Re: Re:

    Exactly. I know some small Christian bands that can make $2000-$2500 per concert, and may do 100 of those a year.

    That's $200,000 and even though the expenses may come out to $150,000, it's a decent living.

     

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  58.  
    identicon
    Anonymous Coward, May 1st, 2013 @ 12:49pm

    Re: Re: Re: Re: Not the whole story

    I stopped reading tim cushing articles. This misdirection and raging against the machine without thinking any critical thinking skill applied is about all he knows.

     

    reply to this | link to this | view in thread ]

  59.  
    identicon
    Me!!!, May 1st, 2013 @ 1:18pm

    Re: Re: Re:

    $50,000 leftover to split between the band? For a five piece that would be $10K a person, or for a trio around $16.5K apiece. It would depend on where they reside, but that's hardly a decent living if you ask me.

     

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  60. This comment has been flagged by the community. Click here to show it
     
    identicon
    Anonymous Coward, May 1st, 2013 @ 1:37pm

    Re: Re:

    Typical level of empathy from the techdirt pirate douchebags.

     

    reply to this | link to this | view in thread ]

  61.  
    identicon
    Anonymous Coward, May 1st, 2013 @ 1:38pm

    Re: Re: Re: Re:

    Come on now, let's not let facts get in the way for the techdirt pirates.

     

    reply to this | link to this | view in thread ]

  62.  
    icon
    jupiterkansas (profile), May 1st, 2013 @ 1:59pm

    Re: Re: Re:

    They can use my taxes instead. Is that alright? You can use your taxes to build bombs.

     

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  63.  
    identicon
    Anonymous Coward, May 1st, 2013 @ 2:06pm

    Re: Re: Re:

    please keep up your hate dave, we're watching you all the time.

     

    reply to this | link to this | view in thread ]

  64.  
    identicon
    Anonymous, May 1st, 2013 @ 2:35pm

    "After 'all this time in the business', the Rolling Stones are still touring". See, they didn't let lack of artistic merit stop them.

     

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  65.  
    identicon
    Chancius, May 1st, 2013 @ 2:53pm

    It seems to me that both sides are wrong in this situation. I am and have been a musician who tours and I can tell you it can be very difficult. I also own my own very small business, so I know what it's like dealing with taxes. They were most likely not claiming all or enough of the income garnered through their music and touring because they didn't want to be taxed entirely on it. I understand, a lot of different people do whatever they can not to let Uncle Sam dip into their pockets. They should have been smarter about it though and just claimed more to keep the IRS off their backs. That's not to say that waiting to audit someone and allowing what you claim they owe you accumulate to such a ridiculous amount of money is just wrong, too.

    I completely also feel for them because a large majority of the population (at least here in the good old USofA) don't really understand how much hard work it takes to be a working musician. There are tons of sacrifices that have to be made to be even the slightest bit successful and most people are completely out of touch with how the current music industry works. They just make assumptions that unless you fall into the category of the old system (which is completely different now) you're not really serious about your craft. Just because you listen to music every day and you watch music reality shows on television doesn't mean you have even one iota of what goes on in the industry to make success happen. No entity can go and make a broad assessment about how any business should work lumping them all into one category, especially based on inadequate and outdated knowledge about subject matter.

     

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  66.  
    icon
    That Anonymous Coward (profile), May 1st, 2013 @ 5:47pm

    Re: Common in the horse world

    IRS =! MN tax auditor.

     

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  67.  
    icon
    PaulT (profile), May 2nd, 2013 @ 2:51am

    Re: Re: Re: Re: Re: Not the whole story

    "I stopped reading tim cushing articles. "

    No you didn't, or at least you're admitting that you click to comment on them without reading them... Sounds dishonest to me either way.

     

    reply to this | link to this | view in thread ]

  68.  
    identicon
    Anonymous Coward, May 2nd, 2013 @ 4:33am

    actually, the auditor is largely correct. why?
    1. the tax rules say that hobby expenses can only be used to defray income from the hobby- NOT to defray regular income
    2. the tax rules say that, if the expenses are business expenses, you can use it to defray income that is not from the business.
    3. the tax rules say that a business has to be run with intent to make a profit
    4. The auditor believes that, since they haven't made money in 9 out of 10 previous years, they do not have a profit motive- this also explains the major label comment. (because if they were signed with a major label, it would indicate efforts to make a profit)
    5. the issue with touring- it's not touring as such that the auditor is criticizing. Apparently they tour the same places each time, while the promotional effect of the tours aren't enough to make the business money. The auditor is essentially asking why they don't tour in different places, since they apparently aren't earning enough money where they tour at the moment. Therefore, there is a different motive than profit, therefore it is a hobby.

     

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  69.  
    icon
    jsf (profile), May 2nd, 2013 @ 7:48am

    Re:

    There are plenty of smaller bands/musicians that make a living , or a significant portion of their living, from touring. I know of a few personally.

    Mostly they are regional or even local to a single metropolitan area. Which keeps the travel cost much lower.

    For example I know of musicians that make well over half their income playing somewhere in the Chicago area just about every Thursday, Friday and Saturday night of the year.

    Touring like this is a hell of a lot of work and is by no means easy, but there are people that do it that are not "big time" players.

     

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  70.  
    icon
    Uriel-238 (profile), May 3rd, 2013 @ 12:22am

    Yes. It's art. And yes, it's business.

    Jesus in a jar of piss is art, and that's the problem. Neither you, nor I nor someone in an agency is qualified to say what is art or not. It is by default.

    The audit procedure should not depend on the opinions of a tax clerk as to whether or not someone is a real artist or a real businessman in order to qualify for tax breaks. If the licenses are in order, if the numbers work out, they qualify.

    It's been demonstrated before, though that even the IRS cannot make sense of tax law.

     

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  71.  
    identicon
    John Thacker, May 3rd, 2013 @ 7:58am

    Re: Re: Re: Definition of success

    "If they had said "you need to explore modifications to your business plan", that would be fair. They said "you must sign with a major label." That's out of bounds."


    I think you're making assumptions based on one side of the story, not an actual transcript of what was said. It's also plausible that the auditors said, for example, "Why haven't you tried signing with a record label?" That's a statement that the auditors could say entirely meaning "Why haven't you tried modifying your business plan, for example in this way?" and yet the couple could interpret it as "you must sign with a major label." Differences in interpretation of what was said can change something from your "fair" to "out of bounds."

    In any case, MN wouldn't care what they were doing at all if they had any reasonable expectation of making money. But they don't; not after having a loss in 9 of 10 years, a huge loss over that period, and what seems like an unwillingness to change their behavior in order to try to lose less money.

     

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  72.  
    identicon
    John Thacker, May 3rd, 2013 @ 8:01am

    Re:

    They were most likely not claiming all or enough of the income garnered through their music and touring because they didn't want to be taxed entirely on it.


    If they're actually making a profit on their music, and they claimed an enormous loss in order to deduct that money against their day jobs, then they deserve everything that that tax authority throws at them. That would be blatant cheating, as opposed to this, which is understandable in behavior by people who think that they have a business but really have a hobby.

     

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  73.  
    identicon
    Anonymous Coward, May 5th, 2013 @ 10:35am

    Re: Re: Re: Re: Not the whole story

    In the UK HMRC would look at the expenses themselves and come to some decision as to whether they were legitimate expenses - whether you made a profit wouldn't enter into it.

    Seems a more sensible system to me.

     

    reply to this | link to this | view in thread ]


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