Wednesday, September 19, 2018

Mom Wants Tax Loss From Daughter's Recording

Many moms have encouraged their pop star daughters' success
Dear Rich: I'm a CPA and I can’t find much information on how a parent of a minor should structure a business with their child. My daughter is a 16-year-old singer/songwriter and she is recording her first EP. Obviously, I am paying for everything. I can’t decide whether an LLC is best and if I did that how would I do the ownership. I’d love to get the tax loss on my tax return.
Your daughter's lucky to have a savvy mom who recognizes the importance of managing her music finances. If the money you spend on your daughter's business exceeds your daughter's income for the year, your business incurs a loss. There are a few ways to address your losses:
Sole proprietor (You own the business). [Pros: Easy to create and manage. Cons: No limitation on liability, only suitable for a single owner.] Claiming the loss as a sole proprietor as a "Schedule C" business requires the least paperwork. You create a business to promote your daughter's music and as sole owner, you file a Schedule C with your Form 1040. That allows you to deduct your music business losses against regular income. There are some caveats, as you probably know, the main one being the 3-out-of-5 year rule. You may want to sign an agreement with your daughter compensating you when she begins making money from music performances or recording.
General partnership (You and your daughter own the business). [Pros: Easy to create and manage. Cons: No limitation on liability, each partner is liable for other partner's actions.] If you want to own the business with your daughter, you can form a general partnership. You don't have to register your partnership with the state and you don't need a written partnership agreement although it is helpful for documenting the percentage of ownership. A partnership does not pay taxes, but it must complete and file a tax return (Form 1065, called an “informational return”) and each partner also receives a Schedule K-1, which contains the relevant profit or loss information. Based on the information in the K-1 form, the partners declare the loss (or profit) on their individual 1040 tax returns using a Schedule E. Like a sole proprietorship, you can deduct the partnership loss against regular income.
LLC (You -- or you and your daughter -- own the business). [Pros: Limits personal liability. Cons: Must register with the state; fees required for formation (and in most states, owners must pay annual maintenance fees).] An LLC reduces personal liability, a factor which may not be of great importance at this point in your daughter's career. Tax forms for an LLC are prepared in the same way as they are for a sole proprietorship (as in the case of a 1-person LLC) or partnership (in the case of an LLC with two or more members). Because of the expenses of forming an LLC, we'd suggest waiting until your daughter has achieved some measure of success with downloads or bookings.