Danielle Anderson, your client and a cash method taxpayer, works full-time at a music store located in a mall. She assists the manager in buying decisions, serves customers on the sales floor, and plays music to draw in customers. On the weekends, she plays in various orchestras, working as an independent contractor. She does not work under a business name, maintain an office, or maintain a separate bank account for her performing activities. She always pays her bills as soon as possible, well before the bill due date. In prior years, she has taken every allowable deduction related to the performing activities. Prior year returns show the following taxable income on her Schedule C:
2011 ……………………… $(5,000)
2012 ……………………… 2,100
2013 ……………………… 3,000
2014 ……………………… (1,800)
Danielle has come to you on December 12, 2015. She understands that the IRS can deny losses generated by her performing business if it determines the business is actually a hobby. Because of the uncertainty of the entertainment industry, she will likely continue to generate profits in some years and losses in others. Still, she continues the activities with the intent to earn a profit.
Danielle routinely sends bills to orchestra clients at the end of the month for work she performed during the month. Most of her clients, including the Springville Orchestra, send payment within ten days of when they receive her bill.
The following is a summary of the financial position of the business for 2015 as of 12/12/2015:
Income received to date ……………………………………………… $9,000
General expenses paid to date ……………………………………….. 9,200
Other items:
Bill for refurbishing work on cello, due 1/2/2016 …………………… $ 300
Newspaper bill for monthly advertisement, due 1/14/2016 …………. 200
Printer bill for business cards, due 1/5/2016 ………………………… 500
Meals eaten while in transit to performance locations ………………. 150
Income for 12/3/2015 performance with the Springville Orchestra …. 1,000
What will you recommend to your client? What issues must you address? What actions will you take to ensure the most favorable tax outcome possible? What advice, if any, will you give your client for the future?