New Tax Break Specifically For Music Makers
Let’s face it, it’s easier to make a living selling umbrellas than it is writing and producing music.
With declining numbers across the board, for so many years now, it would be real nice to hear about a tax break given specifically to people that create music. Well our wish has come true, it’s just that very few people know about it or know how to take advantage of it.
The Songwriter’s Capital Gains Equity Act became a law in 2006 and permits the sale of a music catalog to be treated as a capital gain and therefore taxed separately, and at a lower rate than ordinary income. For many years, people were investing in music catalogs much like they would in stocks – as a pure investment. (i.e. remember Michael Jackson buying the Beatle’s catalog?) And when you buy and sell an investment, you’re taxed at lower rates if you’ve had the music for over 1 year. Songwriters kicked up a fuss as it was unfair to provide this break solely to the publishers, so a few years back it was extended to writers as well. You might be thinking, that’s great, but I’m not sitting on a catalog to sell to an investor. Fortunately, there are other ways you can take advantage of this tax break.
Music for Film/ TV
Often when you are hired to write music for a film or television show, it’s under a Work For Hire Agreement. Regardless of whether it’s song, score or sound design, it means that you are transferring ownership of the publishing and master to them completely. If you write something new and original, that would fall in the bracket of ordinary income. But, if you hand over existing material, you are technically selling them a catalog of your music and that could potentially qualify for Capital Gains taxation. Saving an extra 20% might just make the difference on whether you take that job…
Many music libraries are what is referred to as “Buy Out Libraries”. They pay you an up-front fee for your music and then keep ownership. You of course always remain the writer and collect respective performance income (i.e. ASCAP, BMI, PRS, GEMA, etc.), but they now own the publishing and the master. In this case, if you sell a buy-out library more than one track at a time, that could be treated as Capital Gain income and not ordinary income. Keep in mind, this is not true of a company representing your music – they must purchase it outright. Many of the major publishers have buy-out catalogs.
Sale of a Catalog
Of course, if you simply sell your catalog to another entity you can also take the tax break as was intended. Examples would include selling to a publisher, investor, music catalog, post production facility, etc.
Music for Apps, Video Games, etc.
Companies that make software, video games, apps, toys and other physical products often need to own the music they use as they are selling a product. Again, this would follow the same rule – music sold to these entities that’s been previously written could qualify as well.
Pitfalls & Disclaimers
Royalties, original music, and licensed music are taxed as ordinary income. Meaning if someone pays you to write new material, that’s full price to Uncle Sam. So only use this break when you are selling more than one existing track at a time to another entity. People who work independently (as opposed to W-2 employees) have a higher likelihood of being audited. So it’s always a good idea to keep documentation of the transfer of copyright. Keep in mind that if there are costs associated with this music (recording costs, production costs, etc.) they would be deducted from your capital gain income and not rolled in with everything else.
Also, capital gains are taxed at different rates based on how long you’ve “owned” the music. It needs to be over 1 year for the better break (Long Term Capital Gain vs. Short Term Capital Gain), so when you are offering up tracks, try and push the ones that are a wee bit older. It’s a blurry line because if the idea initially existed in your head or on piano, it’s almost impossible to prove how long it’s been around. The more proof, the better. Bottom line, we musicians need all the help we can get. So thanks Uncle Sam!
Disclaimer: We are neither lawyers nor accountants. We recommend consulting your own legal and financial advisors.
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