A friend of mine, an FOH mixer, just had a nasty dustup with the IRS, so although I hate to narrowcast, the column this month is aimed at self-employed FOH mixers. It’s too easy to lose sight of tax issues in the everyday grind of touring or marketing yourself, but the consequences of pay-ing attention are both financially and emotionally draining. It’s March, so there’s still time to review some of the key changes to the federal tax code for the 2007 filing.
File, File, File!
First and foremost: Do file. The penalties for not filing a federal tax return can potentially outweigh whatever taxes you might have owed. That’s particularly true when it’s been a bad year in terms of income; it’s been known to happen that some people think that if they didn’t make enough to owe taxes, that they don’t need to file. Dead wrong.
Secondly, use an accountant. If you’re self-employed, you’ve got a lot of opportunities for deductions related to your business. The tax code is in-credibly complex and it takes a trained accountant to find all of the ones that will work for your circumstances. The best way to find one is through referral from a friend or colleague. Ask how long he or she has worked with the accountant, too — the longer, the better — and ask if they’ve been through an audit and how well the accountant handled it.
Tax regulations for 2007 have a number of changes relevant to freelancers in pro audio. For starters, the mileage deduction rises to 48.5 cents from 44.5 cents in 2006. If you’re using your own vehicle — owned or leased — for business, keep track of the mileage using a vehicle mileage log, available at any office supply store. The savings can be significant: If you log 15,000 business-related miles in a year — peanuts to some road war-riors — this year’s deduction will be $727.50; if you’re in the 25% tax bracket, that’s $182 back in your pocket. If the vehicle is also your personal vehicle, the business miles you log as a percentage of the total number of miles is also applicable to expenses like repairs and maintenance.
Charitable Technology
The disposable nature of digital audio technology can make for some deduction opportunities — how many computers and older signal processors have you got lying around the house? — But you have to follow the rules. Most school systems are happy to get donated computers, laptops or desktops for their students. The growth of technology in houses of worship has also created a demand for donated audio gear. However, in all such cases, you’ll need to get a receipt for the donation, and in the case of an item with an estimated value of $500 or more, you’ll need a qualified ap-praisal. That’s not terribly difficult to acquire — many pro audio dealers will do it on letterhead. What’s changed for 2007, though, is that donated items must now be in “good condition” — a typically vague bureaucratic characterization. The definition is to prevent people from “donating” use-less items and claiming them as deductions, but vague is never a good relationship word with the IRS. Get both an appraisal and receipt from the giftee that the item was in working condition at the time of the donation.
Good News, Bad News
You have nothing if you don’t have your health, and while getting health insurance coverage for the self-employed remains problematic, deducting its cost, at least, is getting a bit easier. Health Savings Accounts (HSA) allow freelancers to put away money specifically designated to pay for medical and pharmacy costs before taxes. For the 2007 tax year, the limit has been increased to $2,850 for individuals and $5,650 for families.
The HSA has coverage limitations: You can’t have any other coverage available — insurance from a spouse’s employer, for instance — and the plan has to meet what’s called a high-deductible health plan (HDHP) criteria, an annual deductible of $5,500. But again, hypothetically, if you’re in a 25 percent bracket and had to spend all $2,850 in a year, that’s over $712 you would not have to pay in taxes.
An additional benefit is found in the fact that any of the HSA deposit that you don’t lay out for medical care that year rolls over into the next, year after year. If you stay healthy, it’s like having a second IRA or SEP account. The individual contribution limits for 2007 are the same as the year before — up to $4,000 if you’re under age 49 and up to $5,000 if you’re over 50 — but those limits will begin increasing in increments of $500 per year starting in 2008. In fact, much of the tax-deferred numbers involved with Federal taxes, such as IRAs and 401(k) contributions (which have a $15,000 limit this year), will be indexed to inflation starting next year.
Any income you can shelter in vehicles such as tax-deferred accounts of HSAs gives you back the percentage of the tax bracket you’re in. Further-more, the money in these accounts can be put into a variety of other vehicles, from safe interest-bearing money market accounts and CDs to riskier, though potentially more rewarding, mutual funds and other stock-based accounts. Granted, it’s not easily accessible money — early withdrawals will precipitate both the taxes that would have been due plus a 10 percent penalty. However, under certain circumstances, some retirement accounts (I hate the term “retirement.” No one’s ever going to truly retire anymore — they’ll just work less, and hopefully not as a greeter at Wal-Mart) can be tapped for a down payment on a primary residence. But this is all part of taking a longer-range view of your career.
The bad news, aside from the fact that we have to pay taxes at all, is that the self-employment tax — the maximum amount of net earnings subject to the social security part — for tax years beginning in 2007 has increased to $97,500. All net earnings of at least $400 are subject to the Medicare part of the tax, and there remains no limit on the amount of wages subject to the Medicare tax.
And one of the best deductions remains in place for 2007: the ability to deduct equipment purchases fully in the year you buy them and put them into use. It’s called the Section 179 deduction and can be applied to any material items you purchase specifically for business use, so you not only deduct the cost of the computer and the software, but the desk and chair you use it at.
Would I rather be talking about interesting business trends in the live sound industry? You bet. But the more money you can save on taxes and stay out of the sniper sights of the IRA auditors, the longer you’ll be around reading FOH.
Contact Dan at ddaley@fohonline.com
