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Get A Grip On Your Finances!
by Bernard Baur

Most acts, signed or unsigned, gauge success by whether or not they can make a living playing music. That’s not easy under the best of circumstances. But if you handle your money properly you can gain a certain measure of freedom and control over your career. Nonetheless, way too many artists are notorious for squandering their earnings and not planning for the future. The following Music Connection feature has been devised to help all musicians get a grip on their finances –– IMMEDIATELY.

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GET PROFESSIONAL ADVICE

Now with tax season over, more than a few acts we spoke to are reassessing their goals and probably wondering how they can do better in the coming year. Maybe your expenses dug too deep, or you’re just not making the financial progress you want, or perhaps the taxman bit too hard.

The Los Angeles-based quintet UndercoverGirls thought they’d done everything correctly. In fact, at first glance, their actions appear to be right on the money. Keyboardist Julie Dolan relates, “As an all-girl cover band, we made money right from the start, and the gigs kept coming.” As a result, about six months after their formation, the band thought it would be prudent to open a bank account and form a partnership. “We did everything we were supposed to,” Dolan insists. “Venues generally pay by check and send out 1099 forms. So we registered a ‘Fictitious Business Name,’ opened a business account, got a Federal ID Number and had a lawyer draft a partnership agreement.”

“I figured that the band helped me in many ways. But it just didn’t feel fair to share [the money] equally, since I did most of the work.” —Mary Born Singer/Songwriter

All seemed in good order –– until the Undercover Girls met with their respective accountants to file their 2004 tax returns. “My accountant yelled at me,” lead singer Jessica Pennington recalls. “We were told that we had to file a partnership return (cost: about $1,000) and amend our personal returns.” It got so complicated, the Girls ended up needing tax extensions to sort it out.

The main problem, according to Dolan, involved expenses. “Since we sell albums [with cover songs],” she explains, “we have to pay publishers for use of the songs –– that’s a group expense. But our personal expenses [gear, equipment and clothing] were now considered partnership expenses. It would have been better,” she sighs, “if one band member got paid and shared it with the rest of us.”

Indeed, Gene Cohen, a CPA with a celebrity clientele in film and music, indicates that bands are sometimes better off without a partnership. Cohen states that, “Under a partnership, every member is equally responsible for all the liabilities and debts.”

Cohen agrees with Dolan that there may be good reasons for the band to remain individuals. “It really depends on each person’s tax situation,” he says, “and how much money the group makes. Consulting an accountant before they made these decisions could have prevented the problems they’re facing now.”

However, any artist who delves into the business side of music knows that there are other forms of organizations, such as S-corporations or limited liability companies. How about those? At least those limit your liability, and that’s especially important when you’re touring.

According to CPA Cohen, however, each entity has setup costs and a minimum tax base set by law (about $800 to $2,000/yr.) over and above normal operating expenses. Additionally, he notes, “Corporations have a double tax issue, and California LLCs

(Limited Liability Companies) have a “Gross Receipt” tax based on revenue, NOT income.”

Because of those tax implications, some acts and managers believe that if you register your business entity in another state, you can avoid those consequences. “Not so,” says Cohen. “Let me put that fallacy to rest. Wherever you earn money is where you pay tax. It doesn’t matter whether you registered in Nevada or Denver or California.” In fact, Glenn Frank, a CPA whose client base includes high-profile musicians, producers and entertainment professionals, confirms, “Regardless of where you filed, if you performed in California you’ll be subject to a minimum $800 franchise tax.”

Another area that causes confusion involves equipment purchases. Frank clarifies, “Instruments and gear can be depreciated over time, or deducted in whole the first year. But, “he notes, “to get an immediate write-off, you must report net income for that year.” Generally a quicker write-off has advantages. As such, Frank points out, “If you anticipate being in a higher tax bracket (i.e. making more money) the following year, it may be smart to purchase that vintage Les Paul next year when it will give you a better tax benefit.”

The moral is that you should get advice (from an accountant as well as an attorney) before you commit to any business arrangement. What seems like a good idea at the time could turn out to cause you grief, and cost more than you anticipated.

OPERATE LIKE A BUSINESS

Even when you do things right, sometimes the government just won’t leave you alone. Gilli Moon is not only an established independent artist, she’s also a successful entrepreneur. Moon has toured the world, formed a label and production company (Warrior Girl Music), created a non-profit organization (Songsalive!), and authored a book (I Am A Professional Artist). In fact, she has diversified her talents into a multi-media empire with an assortment of revenue streams.

“When someone gets a windfall, like signing a big record deal, a state of euphoria is normal. But you should realize that it will pass, and you should definitely not make any decisions during that time. You need to take a calm and balanced approach.” —James Gottfurcht psychologist

“You have to diversify to survive,” Moon maintains. “Back in the day, artists thought they would be discovered, signed to a label, tour and sell records. Well, everyone knows it’s not like that anymore. Nowadays, you have to do most of it yourself.”

In some ways, Moon’s perspective is like that of many of her fellow artists. ”If I didn’t make music and put it out there,” she declares, “I would die.”

But in other ways, Gilli Moon is unique. Extremely driven, this performer manages to spin a lot of plates. “You don’t have to be a starving artist,” she contends. “You just have to recognize opportunities when they arise.”

Asked how she keeps it all together, Moon declares, “I’m very organized. I keep detailed records and use Quicken every day, inputting everything and reconciling it to the penny.”

What some might call obsessive behavior actually saved Moon from serious trouble. After her first year in business, she was audited. “I was earning income from various sources and had a lot of deductions, so they red-flagged me.” CPA Frank maintains, “That’s very common. The IRS has strict guidelines on what you can deduct as a performing artist.” Moon’s fastidious nature, however, saved the day. Instead of being slapped with fines –– or worse –– she got to build on her dream.

“What she did was textbook perfect,” accountant Cohen affirms. “And it’s an area where a lot of creative types fail. They usually don’t keep such diligent records.” Furthermore, Cohen points out, “This scenario occurs most often when an artist takes business deductions, but never shows a profit. The IRS presumes you’re not really in business if there are no profits reported three out of five years.”

The way around that presumption is to show the Feds that you operate like a business. “You have to prove that you intend to make a profit –– that you’re pursuing a career to make money,” Cohen advises. “You don’t have to be successful, but you do have to act like a business –– keep books and records and open a business account. If you don’t do those basics, you’ll run up against the Hobby vs.Work Rule, and your deductions may be denied.”

BEFORE YOU ACT

Some artists have all the luck, but still experience regrets. Singer/songwriter Mary Born won an EMI songwriting contest a few years ago and got a $50,000 publishing deal. “But I split it with my guitarist because he’d entered my song in the contest,” Born relates. “I should have simply given him a finder’s fee, but I was excited and acted impulsively.”

Born lived off of her share for about a year or so, and then formed a band called Coal. The group managed to create a bidding war that got them a $150,000 advance from Elektra Records and an additional offer for a $100,000 publishing deal. The problem, according to Born, is that though she was the chief songwriter she still decided to split the band’s proceeds four ways. “I figured that the band helped me in many ways,” she admits. “But it just didn’t feel fair to share [the money] equally, since I did most of the work.”

Of course, before anyone saw a dollar, attorney’s fees and taxes had to be paid. “That cut our income down quite a bit,” Born reveals, “but we were happy and looking to the future.” Then the proverbial poop hit the fan. After changing counsel, the band’s first attorney sued Born for five percent of her first 10 albums. ”He lost,” she says, “but it cost me over $10,000 to fight the suit.”

On top of that, Coal’s A&R rep went into rehab and every act she handled was subsequently dropped from the label. The band’s album was never released. To make matters worse, their potentially lucrative publishing deal was conditioned upon the release of the album, so the act didn’t get all of that money, either. “You know,” Born sighs, “it’s easy to make tons of mistakes in the music biz if you don’t understand it.”

Mary Born later worked at management companies, talent agencies and record labels to learn all she could about the music industry. “I interned, worked for slave wages, and educated myself. I learned how to read contracts and made as many connections as possible.”

Today, like Gilli Moon, Mary Born takes a diverse approach. “I work in a lot of areas,” she confides. “I do sessions as a singer and a player, I write songs for placements in films and for radio jingles. It’s like cross-training,” she explainss. And, oh yeah –– now she’s a solo artist.

Chris Wyse also enjoyed every artist’s dream. He was in the Cult, and played with Tool, Scott Weiland, John Corabi and Ozzy. He formed a band, Owl, that became hot on the club circuit –– so hot, in fact, that he attracted an investor with deep pockets who set him up in a mansion in the Hollywood Hills. “It was the ultimate party house,” Wyse laughs. He drove a new Mercedes, hired an entourage and lived the life of a rock star before he was one. It lasted about 18 months –– until the investor pulled out.

Looking back, Wyse reflects, “I would never do that again. That life has its own pressure and the money could have been better spent.” He claims that if he had the opportunity to do it over, he would put the money into his music and product, rather than reveling in luxury. “You live and learn,” he says.

THE RIGHT MINDSET

No matter how talented or successful an artist is, money seems to cause more problems than it solves –– problems the artist did not anticipate. According to James Gottfurcht, a clinical psychologist and consultant who specializes in the psychology of money, “Sudden wealth can be a precursor to problems.” Gottfurcht maintains that money has its own set of responsibilities, especially if it’s a substantial amount. “There are more people to deal with, more things to take care of, and more anxiety in managing it all.”

Gottfurcht notes, “Those who have little experience managing money are less equipped to do so.” That probably defines quite a few artists. According to Gottfurcht’s Zen-like reasoning, “Financial maturity and wisdom go not to those who have the most, but to those who need the least.”

Well, that should be easy for all struggling artists. They usually manage to make do with very little. Of course, it’s never that simple. The psychologist explains, “When someone gets a windfall, like winning a lottery or signing a big record deal, a state of euphoria is normal. But you should realize that it will pass, and you should definitely not make any decisions during that time. You need to take a calm and balanced approach.”

That’s something most of the artists we talked to did not understand. They chose to go with the flow instead of setting their own course of action. One of the reasons for this, according to Gottfurcht, is that the artists were unprepared in a couple of ways. “You can be blindsided if you don’t plan for it,” he states. “Artists may give a lot of attention to the creative aspects of their careers, but may not think about what they’ll do if they succeed in a big way, other than how much they’ll enjoy the glamour and celebrity.”

THE $CENARIO

A lack of forethought about monetary success can lead to unrealistic expectations. Gottfurcht recommends, “Artists should be aware that along with the money there will be new issues and challenges to face.”

One method of preparation is to envision the scenario; not in a touchy-feely way, but rather as it relates to your goals. Gottfurcht uses actor Jim Carrey as an example. “Before Carrey became a star, he not only practiced his routines on a hill overlooking Hollywood, but he also wrote himself a post-dated check for $10 million. He thought about what he would do with that kind of money, how he would spend it and how he would live. He was preparing himself for success.”

When a lottery was instituted in England, the BBC educated the public by broadcasting a documentary about winners who blew it, and those who didn’t. “Being proactive in your preparation is important –– whether it’s envisioning career success or wealth,” Gottfurcht says. “You should also learn from others’ mistakes.”

Can money buy happiness if you’re well prepared and ready to handle all that goes with it? Gottfurcht’s prognosis is, “Money will increase happiness [minimally], and make you more comfortable financially. But,” he asserts, “it will not buy real security. Happiness cannot be purchased or come to you through external things. It’s an internal sensation, like love.

“True happiness,” he concludes, “comes from your state of mind, not your bank account.”

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Contacts For This Article

Artists:

The UndercoverGirls
Julie Dolan and
Jessica Pennington
www.undercovergirlsband.com

Mary Born
KBH Entertainment
818-501-4757
www.maryborn.com

Gilli Moon
www.gillimoon.com
www.songsalive.org

Owl
Chris Wyse
www.owltheband.net

Accountants:

Gene Cohen, CPA
Kucher & Cohen, LLP
818-999-9200
www.kucherandcohen.com

Glenn Frank, CPA
Weise & Associates
818-385-1933

Consultants:

James W. Gottfurcht, Ph.D.
Business and Money Coach
www.psychologyofmoney.com

 

 

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