Lowering Taxes with Business Expenses
In my first years as a music teacher, I didn’t know anything about taxes. I knew I had to pay them, but I didn’t know that if I was smart about tracking my business expenses during the year I could minimize my tax bill.
It wasn’t until I filed taxes for the first time that I even understood what I should be tracking!
I had receipts from the obvious things (like music and teaching supplies), but after filing taxes the first time, I realized that a ton of stuff I wasn’t tracking was also deductible (like my cell phone and mileage)!
Unfortunately, since I didn’t have records for many of those other expenses I couldn’t claim those tax deductions that year. I only made that mistake once! I got much smarter about my expense tracking the next year.
Maybe you’re expecting to have to pay taxes on teaching income in the future. Or maybe you got hit with a huge tax bill this year and want to be proactive in lowering it for next year.
Whatever the case, you’ll want to familiarize yourself with some of the most common tax-deductible music studio business expenses.
How Expense Tracking Helps Lower Taxes
First, why does it matter?
There are all sorts of business and personal financial reasons for having a good handle on your business expenses, but today I’m going to talk specifically about why it matters for tax purposes.
Here’s a really basic explanation: when you pay self-employment taxes, you are not taxed on all of your income.
Nope, you only pay taxes on your NET INCOME.
Net income = Total Income – Business Expenses
If you don’t have records of all those business expenses, you can’t deduct them from your total income and you end up paying more in taxes than you need to.
Nobody wants that! Keeping good records throughout the year means you pay less in taxes next year. Win!
According to the IRS, an expense must be “both ordinary and necessary” to be considered a business expense.
Also from the IRS: “An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business.” The IRS website also points out that the expense doesn’t have to be “indispensable” to running your business; it just has to contribute.
Common Music Studio Expenses
So that’s the general explanation of what’s deductible. Now for some examples. Music studio expenses can take many forms, but mine usually fall into these categories:
If you pay rent on a studio space, this is a pretty obvious deduction. You can also deduct the associated utilities.
If you teach from your home, you might qualify for the home office deduction. (A portion of your utilities may also be included here.)
To qualify for the home office deduction, the space you are claiming must meet two basic requirements. The home office must be used:
- Regularly and exclusively for business.
- Be the principal place of your business.
So, if you teach from your living room, which is open to the family during non-teaching hours, you may not qualify. However, if your studio holds a permanent, exclusive space in your home, you should definitely look into this deduction.
Even if you don’t qualify for the home office deduction, you may be able to deduct at least a portion of your Internet, home/cell phone bills, etc. if you use those things to conduct business activities.
To take this deduction, calculate what percentage of these services you use for business and deduct just that portion.
If you carry any kind of professional liability insurance on your teaching business (which I highly recommend!), that insurance premium is a tax-deductible business expense.
If you have additional riders on your homeowner’s or renter’s insurance to cover your business activity or your instruments, a portion of those premiums may be deductible.
Self-employed health insurance, may also be a significant deductible expense. (Note: When calculating taxes, these premiums are taken out separately from the business expenses, after self-employment taxes, but they still help your bottom line.)
If you pay credit card processing fees or PayPal transaction fees for tuition payments, these expenses are deductible!
Furniture and Equipment
Buying a new couch for your studio waiting area? If you can prove that it’s for business (and not for Netflix-binging) it’s probably tax-deductible!
The same goes for other studio furnishings, instruments, and office equipment (like computers and printers).
(Note: Some of these larger “capital expenses” may need to be depreciated over time. This means that instead of claiming the expense all at once, it gets spread out over several years. Talk to an accountant if you’re planning to or have made any of these purchases.)
This is where I feel like I’m winning by being self-employed. Even if I wasn’t a piano teacher, I would still have a piano at home and I would still pay for tunings a couple of times each year.
Since I use the piano for teaching, though, every one of those tunings is tax-deductible.
It’s almost like getting a coupon for every tuning. 😊
Have you paid anyone for services that support your business? This could be a substitute teacher, an accountant, a graphic designer, the audio engineer who recorded your last recital, etc.. Those payments can be deducted.
Generally speaking, any time you have a meal or coffee with a colleague and talk shop, or grab lunch while you’re at a conference, you can write off 50% of that meal.
As with any tax deduction, you should keep careful records. Your records for meals should indicate who you were meeting and a note about how the meeting pertained to business.
Do you rent recital space? Purchase refreshments? Spend money on tablecloths and décor? Print invitations or programs? All of these expenses are deductible!
Hold a summer camp? Curriculum and supplies can be deducted, too!
Software + Subscriptions
With so many digital resources available these days, this category can include a lot: accounting or studio management software, graphic design software (like the Adobe Creative or Canva), sheet music subscriptions or clubs, etc.
Save the receipts from any paid online advertising or marketing-related printing services (think: business cards, fliers, brochures, yard signs, t-shirts!).
Car + Mileage
If you’re a traveling teacher or you use your car to drive to conferences, meetings, music stores, office supply stores, etc., you can track and deduct that mileage. I wrote about tracking mileage in-depth in this blog post. Tolls and parking fees also count!
Office and Teaching Supplies
I kind of love that I have a line item on my taxes for stickers. Technically, it’s labeled “office supplies,” but the expense is mostly stickers and the occasional toner cartridge. How fun is that money spent on stickers can lower a tax bill? (#lisafrankkid)
This can also include printing expenses for games and activities you use during lessons, music you purchase for a studio library, and anything you use to keep your office/studio organized.
The most successful teachers I know take professional development seriously! This means investing in training and continuing education. Thankfully, if you can show that these expenses help you do your job better, they’re tax deductible!
Common expenses are membership dues for professional organizations (like Music Teachers’ National Association), admission to conferences, expenses for your own music lessons, and tuition for online trainings, webinars, and courses.
Attending a conference related to teaching music? You can write off airfare, bus tickets, car rental, airport parking, hotel expenses, a portion of your meals,…anything associated with the trip!
This is not an exhaustive list of business expenses.
My suggestion is to track EVERYTHING if you think there’s a chance it could count and then review the questionable expenses with your accountant at tax time. Over time you’ll learn the nuances of what is and is not deductible.
Don’t underestimate the impact tracking these expenses can have on your tax bill!
It might seem like a pain to document every little $3 purchase, but they do add up and you’ll be thankful in April. 😊
Disclaimer: I am not a tax preparer or an accountant. I speak from my personal experience and a weird desire to actually understand what’s going on when I file my tax return. This post is not mean to advise. Talk to an accountant for that!