Most tax tips get circulated at the beginning of the year when most people are actually doing their taxes. As smart as that is, most people (if you’re like me) are so exhausted by the whole process at that point, that the last thing they want to do is read another article on the subject. That is why I am posting this in the middle of the summer. This late posting is also doe to the fact that I just finished filing my taxes and had such a painful experience that I wish to share my learnings and tricks so that my fellow musicians don’t suffer as I did.
Firstly, one bit of advice I can share is to visit an accountant for a 1 hour personal consultation just to make sure you understand as much of this convoluted process as possible. That will run you $200-300.
Hopefully all you musicians know that as a musician, you are essentially running a small business (see my post on “Your Band is a Busniess…but what kind?“). This means that you can write off all sorts of expenses that effectively reduce your net income and the amount of tax you have to pay. If you have a day job and just claim the amounts on your T4 slip without claiming to be a business, you could be paying way more tax than needed. As a musician, if you live and breathe your career, you can write off almost anything. You should take a listen to this podcast on Accounting (Running Time – 21:03). for Musicians from the CIRAA website. You’ll need to register for a free account to access the audio file.
Keeping all your receipts is a pain in the but. But you must keep them in order to prove that you purchased given items. It is also worthwhile noting that credit card statements do not count as receipts and will not serve to prove your purchase claims. Keeping your receipts so that you can write off your purchases is not all that beneficial in some peoples’ minds, but read this example and decide for yourself:
Let’s say you buy a computer for $1000. At the end of the year, let’s also say that you have earned enough money to be taxed at 18%. If you made $1000 of taxable income that year, you will owe the government $180 (18% of $1000). Tax sucks. Now, if you claim to be a small business, you could use that $1000 you paid for your computer as a write off and reduce your income to $0. Now you owe the government 18% of $0…or nothing!
If that example alone didn’t make you want to run and find all your receipts, try this: What if you made enough money to be taxed at 40% and you had bought a sound system, guitar, amp, and many other items totaling $10,000 in expenses. Claiming those expenses could save you $4000. Worth it now?
Keeping track of receipts can be difficult but you must keep them so that you can prove your expenses in case of an audit. I use a program called iBank for helping me with this process. It is a Mac application and also has an iPhone app. When I purchase something that I can write off, I immediately write on the receipt what category it falls under, then I enter the transaction into my iPhone’s iBank app. Once I get home, I take that receipt and stick it face-up on my receipt spike. Doing this will keep all my receipts in reverse chronological order and in the reverse order as the appear in my financial software. At the end of the year, I will remove each receipt form the spike and stack them face-up, according to category. That will result in me having all my receipts in categorized piles each in chronological order. Then I’ll just have to go down the list in each iBank category to check that all receipts are accounted for, then enter the numbers that iBandk generates for me (by adding up all transactions in each category) into my tax software of choice – currently www.ufile.ca – and I’ll be done! Painless. iBank is simple enough to use once you get going and even comes with report templates specifically for income tax which will easily suite your needs with a little tweaking.
I’m convinced that this system will build value in my life by saving time and effort. If you’re willing to give it a try, please write in and tell everyone how it’s working for you. If you have another solution for easier tax filing, please post also.
Here are the tools you’ll need to get started:
Here are some other great resources if there are more tax questions fogging up your mind:
- CRA Business Expenses: http://www.cra-arc.gc.ca/tx/bsnss/tpcs/slprtnr/bsnssxpnss/menu-eng.html
- Some items you purchase won’t be considered “expenses” and can’t be written off 100% in the first year you own them. These items fall in the category of Capital Cost Allowance. For more info on this category and the various percentages that specific items can be depreciated at per year, visit: http://www.taxtips.ca/smallbusiness/ccarates.htm
- Use this guide if you are a self-employed business person or a professional. It will help you calculate the business or professional income you will report on your income tax return.
Business and professional income: http://www.cra-arc.gc.ca/E/pub/tg/t4002/README.html
- Are you a sole proprietor, partnership, or corporation? See my post “Your Band is a Busniess…but what kind?“