What is the HITS Act?

You may have read recently about the passage of the HITS Act, and big flashy headlines about how musicians can now get a $150,000 tax credit for their music expenses on their tax return.

There’s a lot of misleading information out there, so stop and think before you spend any money. While this isn’t legal or tax advice (always speak to a licensed professional about such matters), here’s more information on the HITS Act and how it affects artists.

What is the HITS act?

The HITS Act is a piece of US legislation, recently passed, which allows up to $150,000 of music production expenses to be deducted in the same year those expenses are incurred.

What’s new about the HITS act?

Not much. The same expenses HITS allows deducting were already deductible as ordinary business expenses on an individual’s Schedule C, inside their US tax return.

The HITS changes only affect the timeline of how these deductions work. Prior to the HITS Act, business expenses above a certain dollar amount (typically over about $2,500) usually needed to be deducted gradually over a longer time period, anywhere from 3-15+ years. In accounting-speak, this is called depreciation.

Now that the HITS Act has passed, musicians have the option to deduct up to $150k of music production expenses all at once, in the same year they’re incurred.

So, the type of expenses you can deduct hasn’t changed as a result of the HITS act, only the timeline and manner in which you can deduct them.

What does the HITS act not do?

The HITS act does not:

1. Offer direct cash back from the government for your business expenses.

   1. In order to deduct $150,000 from your tax return, you’d have to spend $150,000 in expenses: most independent artists aren’t spending that much on making records.

2. Offer any special deductions on expenses that weren’t already present.

   1. Both before and after HITS, ordinary business expenses associated with making music are and were deductible on your US tax return.

   2. The only change HITS makes is that larger, multi-thousand dollar expenses associated with music production can be deducted all at once, in the same year they’re incurred. Previously, these large expenses would have been treated like capital expenditures, and were required to be depreciated over multiple years.

Watch out for scams: anyone telling you to spend your life savings making a record because you’ll “get it all back from the government” is selling you snake oil.

Who does the HITS act benefit?

There are some benefits for smaller creators here: if you spend $3,000 making a record, you can now use those expenses to lower your taxable income and pay less tax in the very same year. No more having to track depreciation of your large business expenditures inside of a complicated depreciation schedule in your tax return. That’s great! This simplifies the recordkeeping burden for small musicians a bit.

However, in my opinion this bill benefits midsize independent labels and larger artists over smaller independents. Most small independent artists can’t take full advantage of these changes, as they’re not spending $150,000 on their recording costs in a given year in the first place.

What’s the best way to be fiscally responsible as a small artist?

• Track your business expenses, business mileage, and maintain accurate financial records.

  • Many expenses that you’d normally incur while running any business (known as ordinary business expenses) are already tax deductible! Software to connect directly to your bank accounts and track your business expenses usually runs around $20/month, and solo artists running a simple music business can often do their own books themselves, in about 5 minutes a week.

• Maintain separate bank accounts for your business.

  • Separate your personal and business finances: use a dedicated checking and savings account only for your music business activities.

• Ask a licensed tax professional about any financial implications coming from changes to the tax code.

  • A licensed tax pro spends their entire career studying the tax code and understanding its implications, which can get complex. Always ask a pro about how changes to the tax code impact your individual situation. You’re looking for the acronym “EA”, which stands for Enrolled Agent. It’s the highest tax certification you can get, and qualifies you to represent taxpayers in tax court. You can find an Enrolled Agent tax expert in your area via the National Association of Enrolled Agents.

• Consider starting an LLC for your music business.

  • You don’t need an LLC to take advantage of tax deductions: even when working as a single person business, you’d be considered a “sole proprietor” for the purposes of the tax code, and you can still deduct all ordinary business expenses and mileage to minimize your tax burden.

  • An LLC can be useful as a liability shield, however: if you were to get sued in the future, placing your business assets under an LLC can limit your personal liability. This is not legal or tax advice; make sure to speak with a licensed attorney before deciding if starting an LLC for your music activities is appropriate for your individual situation.