Karaoke Forums

Tax season is coming! I have always been curious. Now that I am getting ready for tax time, I wondered how many in here capitalize their music (meaning you expense only a portion each year) and who expenses it right off.

I was thinking that there is now way you can expense it off - the amount must be capitalized because it would probably fall into intellectual property or as a license - both intangibles that require capitalizing the purchase and amortizing (depreciating) over the useful life of the music.

Just curious as to what everyone is doing and the logic, if possible.

Thanks.

As far as I can tell it can only be counted for tax purposes against karaoke earnings not all earnings (from other sources). Therefore it might be worth capitalizing if you have more expenses than earnings in a single year.

I think that I have the answer - after a great deal of research. The current tax code absolutely mandates that music is capitalized and amortized - amortized because it is an intangible good (the license). Therefore, it would be wrong in most cases to immediately expense off the cost of music.

However, future purchases may be expensed off if the amounts are not material. Example, if you purchase only a few new disks per year, it would be ok expensing this cost instead of capitalizing.

Does everyone know what the difference is and why it matters? Quick lesson:

A business makes money - called Revenues. From Revenues, a company deducts Expenses to arrive at its Net Profit. What constitutes an expense is something that the IRS has a lot to say about.

For instance, if you but a karaoke system and pay $10,000 in cash, the IRS makes you capitalize this expense over (say) 5 years. This means that you take the Cost, deduct salvage value, and divide it over the assets useful life. In this case, $10,000 cost, less $5,000 salvage value / 5 years = $1,000 expense per year, every year, for 5 years.

You can see how this is a big difference from taking a $10,000 expense deduction in the first year.

Karaoke music is something that the IRS might consider to be intellectual property - or intangible because the license is what makes the music valuable. Without the license, there is no value and they are nothing more than a bootleg. As a result, the IRS says that you must amortize intangible goods that have a lengthy useful life.

In financial accounting, you can impair a capital asset - or write it down to reflect a current fair market value. In fact, financial accounting mandates just that - when evidence comes to light that indicates that an asset may be impaired, they must test for impairment and write the asset down if it fails the test. This has been a problem for banks in the recession - they were reluctant to write down non performing assets and eventually took some pretty "big baths" - showing huge losses, in part, for their asset impairments.

Such could be the case for karaoke as well - although financial accounting and accounting for tax reporting varies in this area. However, we all know that about 90% of the monthly karaoke subscription releases are never heard after about 6 months of their release. Therefore, you could capitalize the purchase for the first year, and write the asset down in the second to reflect the fair market value - thus taking the expense deduction in the second year.

Or, another method is to consider the purchase of new music to be value adding "repairs/maintenance" to the current library. If this is the case, you consider the value you have added to the library and add this to the book value of the library and recalculate the yearly amortization deduction. Example: you have a karaoke library currently valued at $5,000. You purchase the monthly releases at $36. You could add $7 to the book value of the library and expense off $27.

These are only my opinion. I am not an accounting professional, not a tax professional, and these statements should not be relied upon to make any decisions. Consult with a real professional before using these methods.

As for me, I just add up my yearly expenses, and subtract that from my yearly profit. accoring to the tax form.

Since nearly all of my Karaoke Profits are invisible (IE no paper trail going to the IRS), I figure that the IRS is happy to get the money.

I have wondered about FICA/SS also, but since I have made minimal profit in the best years after expenses, and losses in others. I don't know the rules on that. I figure I have done the Income tax right with no complaints (so far) from the IRS.

If you are operating as a sole proprietor (meaning you did not incorporate your business), you pay your SSI taxes by way of the self employment tax. That is why it is so high because you are theoretically paying your portion as well as the employer portion.

My question for the SSI tax is do I get to deduct my expenses first? It seems like I should be able to, but then I am no tax expert.

On the post expenses profit I agree it should be 15% but I do not know about deducting expenses (can I???) or are expenses deductions only for IRS regular income taxes. If deductions of expenses can not be made then it would seem unfair to pretty much any small business that runs on a small profit margin on their sales after expenses.

This explanation assumes you operate as a sole proprietor - or you have not incorporated and are not a partner in your business.

Yes, you deduct your expenses and carry your profit to your 1040 using Schedule C. Then, you will have to complete Schedule SE. If you have this tax applicable, then you transfer two amounts to your 1040. First, one half of this tax is deducted from your income in the Adjusted Gross Income section. Then, the entire amount is applied to your tax liability under "Other Taxes".

Back to your Schedule C (Profit and Loss from a Business):

Be sure that you include things like cell phone, internet cards, etc in your deductions. The big one A LOT of people forget about is the home office deduction. I think this deduction was just over $2,000 last year. In a 25% tax bracket, that is $500 added to your refund or deducted from the taxes that you would otherwise owe.

I also DJ weddings and deduct about $200 for clothes a year that are ESSENTIAL to performing these duties.

I should clarify that the deduction was $2,000 for ME. It will vary based on how much space you used in your home, what your payments were, etc.

I use about 17% of my home for business purposes and our payments are about $900 per month, if that helps.