Musicians – U.S. Tax International Income

In 2013, the music industry is poised for a comeback,

“…annual music sales in the U.S. to hover at $5.5billion over the next 3 years as declining physical sales are replaced by digital… that’s a relief for an industry that was in free fall for the past decade.” (see: Bloomberg Business Week, Feb 7, 2013, Sony Music CEO Doug Morris is Streaming Big)

According to Morris, “There’s big money coming in from videos… Terrestrial (i.e. satellite) radio stations didn’t pay record companies to play their songs (yet) but that will change as these stations increase their presence online where copyright laws favor the labels”

Morris: “What hasn’t changed is you need a hit. What has changed? We distribute and sell music differently…”

Recorded music is sold by CD, Album/track download, streaming (subscription). CDs and digital downloads growth rates (First 8 Years)

1) CD Sales 1982-1990 $0 – $5.95billion

2) Digital Sales 2003-2011 – $0 – 3.43billion

3) Computer/Digital Delivery 2003-20011
Subscriptions $0 – $0.24billion
Track Downloads $0 – $1.49billion
Album Downloads $0 – $1.09billion

As musicians generate billions of dollars in a new sources of revenue their “personal issues” affect their “new-found prosperity” as best explained by Bruce Springsteen, (LA Times 2/11/13) Musicians: “We are bad with our money. We spend it too freely, and on too many stupid things. We drink it away. We do drugs. We love too many and the wrong people. We are the wrong people.”

Musicians who are U.S. income tax residents are subject to U.S. income tax on their world-wide music income. A musician is a U.S. income tax resident if he/she is:

1. A U.S. citizen;

2. A U.S. resident alien (i.e. they have a “green card”);

3. A U.S. tax resident under the “substantial presence test” (i.e. they are in the U.S. for 183 days in the current tax year, or 122 days per year for the three tax years, including the current tax year and two prior tax years.

A U.S. musician’s international income may include:

1. Income from recordings (digital downloads, CDs, vinyl);

2. Income from concerts (i.e. touring, public concerts, clubs, arenas);

3. Income from “streaming music” (i.e. streams typically earn small fractions of a cent for the artist, which may vary depending on who owns the master recordings).

Income from streaming music includes music from audio tracks and videos.

In 2012, according to Sound Scan, Taylor Swift was #1 with 216 million streams, Nicki Minaj was #2 with 210 million streams, and Rihanna was #3 with 204 million streams.

4. Publishing income (paid to the copyright owner of the music/song);

5. Merchandising income;

6. Product endorsements;

7. Song placements in movies and TV shows;

8. Ring Tones; and

9. Website subscriptions.

Recording sales revenue is calculated using an average price of $10 per album and $1.14 cents per digital track, as more tracks are now being offered at $1.29 per download, rather than the $.99 price that initially was the iTunes standard.

Musicians who are United States income tax residents must report and pay U.S. income tax on all income from their music whether earned in the U.S. or outside of the U.S. For international income earned outside of the U.S., it is subject to tax upon receipt (not when the funds are repatriated to the U.S.).

For musicians’ investment income, in tax year 2013, U.S./California (where many reside) may pay up to 51.7% income tax on “U.S. Source Passive Income,” or they may pay $0 tax with sophisticated tax planning (please see my article, “U.S. Tax Planning for Passive Investments”).

U.S. Tax Planning for musicians “foreign source income” (i.e. international income) may reduce U.S. taxation on “U.S. exports” of tangible personal property for “musicians’ products” which include:

1) Recorded music sales
2) Merchandising (Artist name and likeness)
3) Synchronization Rights for “Recorded Music” (U.S. recorded music used for foreign film/tv)

In my 2/11/13 newsletter, my colleague Ryan Losi (Piascik & Associate) prepared an article on tax planning for U.S. exports (which may include “musician products”). By use of an Interest Charge – Domestic International Sales Corporation, a U.S. taxpayer (individual) receives multiple tax benefits on U.S. “product” exports:

1) Indefinite, annual income tax deferral on up to $10million per year in export income (subject to a nominal annual interest charge (e.g. 2%).
2) “Tax Arbitrage” – i.e. convert U.S. export income from ordinary income (39.6%) to the preferential tax rate of qualified dividend income (20%) (approximately 20% annual income tax savings).
3) Reduced Cost of Capital (Tax-free Financing) via reinvestment of “tax-deferred” annual income back into the U.S. business (i.e. the annual tax deferred income becomes a financing source).

Musicians make large sums of money from their music. Making the money is not the same as keeping the money. Musicians require tax planning on both their “music income” and their “investment income” (with asset protection to shield their money from 3rd party creditors/litigants). Sophisticated tax planning & asset protection for musicians will yield a greater net-after tax return on both their income from music and related investment income, and let them “keep the money”

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