[Fmpro] Tax question

[Brad Heck]

Mark and Mr/Mrs X

In this case, I believe the IRS to be correct.  The costs of creating a master
recording should have been capitalized beginning in the year of creation.  The
actual costs of writing the song (research, seminars, hard booze(joke), hookers (not a joke) and all of
that should have been deducted in the years they were incurred.  This leaves the
actual performance royalty with no where to go.  To worsen the impact, only an
individual can create a copyright, not a corporation or any other entity.  This throws
the royalty onto Schedule C on the writers personal tax return no matter the business
structure.  The same thing occurs with members of Board's of Directors all the way up
to the Trump Organization.  Yes even they pay self employment tax.  This bring up another
sticky one.  YES songwriter royalties are subject to self employment tax IF you created
the copyright.  If you purchased, licensed, or otherwise acquired the copyright, it
is not subject to self employment tax.

My advice, pay the piper this time and create a corporate structure to give options in these cases,
and always keep a clean and neat set of books with analysis in the last month of your
fiscal year.  Also do NOT be shy about taking losses in the early years of your career.
Keep a calendar and jot down all the time you spend on writing and seminars, reading
this list, yaking on the phone and everything you do concerning songwriting.  The key
to taking the early losses is to PROVE profit motive.  Auditors can't hear but they
can read.  Always be building your case.

HECK


Hi All -
 
Here's a nice happy post that is sure to cheer everyone up!
 
I've been asked by a list member who doesn't want to reveal their name to
see if anyone has any info/advice on a specific composer related IRS issue.
Normally we don't do "anonymous" postings but I thought given the
sensitivity of this matter it would be OK so I told the list member I'd post
this.
 
The list member is currently being audited by the IRS. At issue are ASCAP
royalties. The IRS has taken the position that a composer may not deduct
business expenses from ASCAP royalty income UNLESS the expenses are directly
related to the production of the specific music that the royalty is paying
on.
 
In other words, assume you write a piece of music in 2004. In 2007 you
receive an ASCAP royalty for performances of that music. The IRS is now
saying that business expenses may not be deducted against that royalty
income in 2009 since the production of the music was done in 2004.  The only
exception seems to be if the business activity in 2007 you want to deduct
can be directly traced to a specific activity that specifically markets the
2004 music, such as production of a CD, etc. But the IRS is telling this
FMPRO list member that if the deduction cannot be directly tied (with
documentary evidence) to the original work, the royalty is a "service" and
ordinary deductions like ongoing studio expenses may not be taken against
it.
 
Needless to say, the implications for composers and songwriters are huge.
 
Any thoughts or advice for our list member colleague?
 
Best,
 
Mark Northam