Forming an LLC and tax deductions question

[Paulie]

As the year winds down I'm considering formalizing Yo Paulie Music as an LLC. Since I just started this journey back in March, if I incorporate before the end of the year can I deduct all of my YPM music expenses during the calendar year, or do you have to first form the LLC before expense deductions can be taken? I've spent a good chunk on software, listings and travel, hoping I can include them.

[Paulie]

Forgot one thing... The IRS requires a profit motive and expects to see profits in three of the first five years. Given how long it can take to get placements and then payment, my goal is to break even after 36 months. I would hope after my initial year expenses that I could post some sort of profit in year two or three (it would be great to make more than I spend I listing fees.

Has anyone gone down this path?

[Len911]

If you operate single member LLC, then the IRS will treat your business as a sole proprietorship (unless you elect to be a corporation) – meaning that the LLC itself does not pay taxes. Instead, you report all profits and losses of the LLC on your personal income tax return on (Schedule C) and file it with your 1040 tax return.

Because it is reported on your personal income tax, it should include the whole year.

[Casey H]

Not my area of expertise at all (ask an accountant!) but AFAIK you do not have to form an LLC to deduct your music expenses.

Casey

[hummingbird]

I'm not from the States, but here I claim my profit & loss as a self-employed person, you might check into that.

[CBOHN]

You don't need to be an LLC to deduct expenses. They are included on a Schedule C Profit/Loss worksheet. I believe an LLC has advantages if you have employees or when dealing in legal fallout with a bad contract.

[Len911]

I'd definitely speak with an accountant. As a sole proprietor or LLC you'll need to file estimated taxes and pay self employment tax. The SE tax is 12.3%.

A deduction only means that you don't pay income taxes on your expenses. You don't subtract your expenses from the taxes you owe. Income minus expenses equal taxable income.

The only way you can really "abuse" the system is if you have a hobby and you saved the taxes on what you would have bought anyway, though after a while the IRS gets suspicious if you never make a profit.

If you buy something just for the purpose of a "write-off", maybe something you would never use, it's a little silly because you only save the taxes. If it was $1,000 and you were in the 20% tax bracket, you would still be paying $800 for it.

I suppose theoretically if you were in the 12.3% tax bracket, if there is such a thing, or 15%, you wouldn't have any advantage tax-wise. Not to mention the standard deduction.

I'm just saying that you may have a choice. It may be that you can claim the "profit" as income that isn't subject to the SE tax? Unlike some who don't have a choice. And a lot depends on the amount of the expenses and income that determines whether an LLC is worthwhile or not.

[Casey H]

The key thing is if you don't make profit within a few years, or at least show that it's looks like a real business with some tangible income, they can view it as a hobby and flag you for audit. (From a NON-ACCOUNTANT)

I wouldn't run out and form an LLC right now. And yup, best to consult with a real accountant.

Casey

[hummingbird]

Yep it is true you should be seen to be making money after a start up period of two or three years. Basically it's Gross Self employed income Less Self employed expenses (legit, with receipts) = Profit or Loss. If Profit, the Profit amt is added to the rest of your income and you pay tax on it. If Loss, you do not pay tax on this particular income. I agree, probably best to speak to an accountant!

[mojobone]

IIRC, an LLC can also be an advantage in bankruptcy, but really, it varies from state to state and between state and federal, depending on what court you're in; you really need to talk to a local professional or two.


If your margins are really thin, you can actually choose which years are profitable and base the decision on each given year's tax situation, since it changes every year. An example, in a profitable year, I'll probably tend to pay for new instruments out of pocket, so in the event the business folds, they're still mine to use, cuz they're not assets, and they're not included with the websites and the publishing. In a typical down year, the business buys lots of software and samples.

There's a limit on personal property if your biz goes teats up, so you can't be extravagant, here; no 60's Stratocasters are gonna fly, if you get audited, but generally, if you're forced to sell stuff, and your job title is musician, you get to keep your tools. The modern IRS wants to see you prosper, so they can get their cut.

This year was unprofitable for me, because I had a windfall; my late mother left me some cash, 78% of which had to be spent to avoid a higher bracket, not that I don't adore supporting the planet's largest defense budget.