In March, MKM Management Services accountant and KEN mode drummer Shane Matthewson stopped by the office to enlighten us in the ways of tax and accounting for a packed DIY Series workshop, Dollars and Sense: Tax and Accounting for the Music Business. Here’s a handful of quick takeaways…
Track all revenue and expense in their “gross amounts”
Some artists and music businesses make the mistake of counting up the change they have in their pockets at the end of the night, or worse at the end of the tour. That amount is considered your “net” income, i.e. your revenue less any expenses. For a number of reasons, you’ll want to track all of your transactions in their gross amounts. Money in, from ticket sales, merch sales, synch licenses, or anything else is considered revenue. Any money spent to cover the cost of anything related to earning that income is an expense.
There are a number of reasons to track transactions at this level of detail. It is standard for tax purposes and good accounting practice, but most importantly it allows you to analyze your business and help discover areas of improvement. Being able to quickly and easily isolate income and expenses related to certain tours, or shows is invaluable in finding out where your money is going. This will help you make informed decisions that can affect budgeting and business plans as you move forward.
There are numerous types of accounting software available for small business that range from inexpensive and accessible, to pricey and complex (geared towards accountants). You don’t have to spend a ton of dough on software though, a spread sheet that keeps track of dates, amounts, tax paid, and any notes will do the trick.
For the sake of this article we’ll consider the two different accounting methods of recording transactions: cash and accrual. Put simply, cash accounting records a transaction when money is exchanged, whereas accrual accounting records a transaction when the economic event takes place – i.e. when an expense becomes “payable” and a when revenue becomes “receivable”. Accrual accounting is the only acceptable method of accounting for the music business in the eyes of the CRA (Canadian Revenue Agency), in fact only a select few types of businesses are allowed to use the cash method. What does this mean for you? It means that you have to record a transaction when it occurs, not necessarily when payment is exchanged.
This can be a bit of a tricky concept, so we’ll attempt to illustrate with some examples:
Example 1) On December 30 a band plays a show, the fee for the performance is $500. The payment for their performance, however, gets mailed the following week and doesn’t actually arrive until January 9. Because accrual accounting requires you to record the transaction when the economic event occurred (the performance has occurred, and money is now owed to the band) and not when the cash is received, the date you would record this revenue transaction on would be on December 30 not January 9.
Example 2) A music business receives a bill from their accountant for $100. It’s for a consultation they had on November 30. Because the Company is short on cash, the accountant’s invoice isn’t paid until a cheque is mailed on February 5 of the following year.. Because the accountant’s invoice for services performed is ‘payable’ on the date that the invoice was issued, the expense transaction should be recorded on November 30, not February 5, the date that cash was exchanged.
This same concept applies to using credit cards, getting loans, making large purchases where there are deferred payments, and many other transactions where the cash exchange happens at a different point than the actual event.
If you have made greater than $30,000 in taxable sales in the previous four quarters, (which includes foreign ‘zero rated’ sales), you have to register for and start charging GST (Goods and Services Tax). You will have to keep track of how much GST you charge on sales and also how much GST you pay for business expenses, which are referred to as GST Input Tax Credits (ITC). At the end of each filing period you’ll subtract your ITC’s from the amount of GST you’ve collected and either remit the difference, or receive a refund (if ITC’s are greater than GST collected).
Example for a music business that files GST annually:
Between January 1, 2015 and December 31, 2015, Band XYZ has charged a total of $5,000 in GST on a combination of performances, merchandise sales, and other business activities in Canada. During the same period they paid a total of $3,500 in GST on business expenses. When they file their GST at the end of the year they have to remit the difference of: $5,000 - $3,500 which is $1,500.
Receipts and invoices for everything
Receipts and invoices are required as proof of all transactions, so save all of them! Here are a few tips about invoices and receipts that will help keep your books in good order:
- Don’t forget to get hired musicians to invoice you for the amount that they are paid. The invoice will serve as proof of the expense.
- Credit card statements are not sufficient to prove an expense was paid. You’ll need to keep the receipt as well and while we’re talking about expenses on your credit card, make sure to keep BOTH of the receipts in cases where the credit card confirmation isn’t on your primary receipt (restaurants typically). One receipt will usually itemize the expense, and the other is proof that the payment went through on your credit card. Also, it’s important to hold onto whatever receipt has the vendor GST number on it if you are claiming GST Input Tax Credits.
- You need to hold onto your receipts for a minimum of seven years, which is a fairly long time. Most receipts are printed cheaply, or more increasingly on thermal paper which fades fairly quickly. The responsibility is on you to maintain the integrity of those records, so a good habit to get into is scanning and printing copies of all of your receipts that could be prone to fading over time. Manitoba Music has a copier and scanner where you can do all of that and more.
To wrap it all up, keeping good accounting records can seem daunting at first, but really comes down to developing some good habits today and committing to them. By doing this you’ll avoid the overwhelming mountains of receipts that can pile up on your desk and you’ll open up the opportunity to analyze the trends and data in your business and potentially make some money saving business decisions based on what you see. Also, don’t forget that your best asset when it comes to tackling taxes and accounting is your accountant. Weigh the options of making them a part of your business team, either by working with them closely throughout the year, or just calling them up at tax time. They’re in the business of helping keep your books to an industry standard, advising your financial decisions, and hopefully even saving you a few bucks.