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
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.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."
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.
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Filed Under: minnesota, tax, venus demars
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So, regarding the auditors...
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Not 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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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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Disappointing techdirt.
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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.
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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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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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Re: Not the whole story
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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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. 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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Re: Re: Not the whole story
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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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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Seems a more sensible system to me.
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Not everyone agrees, of course. That's why it's art.
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Yes. It's art. And yes, it's business.
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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Income taxes should be zero below $10M.
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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I am very happy I no longer live in that city.
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I don't think we've heard everything there is to this story yet.
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Reality, welcome to it.
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That's $200,000 and even though the expenses may come out to $150,000, it's a decent living.
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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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Think "Fargo"
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Re: Think "Fargo"
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Common in the horse world
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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Re: Common in the horse world
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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The dirty little secret...
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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Re: Common in the horse world
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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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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.
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Reality Reminder...
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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Re: Reality Reminder...
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Needs more skepticism
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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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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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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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Definition of success
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):
Note that there's nothing in there about specifically how to conduct your business. Is Minnesota so different?
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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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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.
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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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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Been there, seen this
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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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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Recording Contracts
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NSFW!!
----- WARNING, NSFW!!!!!!! -----
:-) Guess I'll follow this up later from home...
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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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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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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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