It may be reassuring to some and downright comical to others, but the fun-lovingfolks at the IRS aren’t too picky when it comes to how the income is generated. Illegal in-
come is also subject to tax. So, if you’re lousy at marketing your act and find yourself
needing to supplement your income by becoming a moonlighting jewel thief, you’d better
keep accurate records. Notorious gangster Al Capone wasn’t convicted of any of his obvi-
ous crimes. He was sent up the river for tax evasion.
If you work and tour internationally, you’ll need to report any income from outside
the States. The exception to this is that some income may be excluded if you live and
work outside the United States for most of the year. Check with your accountant to ensure
you’re reporting correctly.
In the “except as otherwise provided” arena, there are a few tax breaks. Although
they may get you with other taxes, gifts and inheritances are excluded from taxable in-
come. Likewise, tax-free withdrawals aren’t counted as income, and neither is return of
capital. For example, if you take a loan against a business or personal asset, say, your
home studio equipment, the loan proceeds aren’t classified as income. Return of capital is
simply recouping your money when you sell an asset. For instance, let’s say you invest in
a friend’s business by purchasing $2,000 worth of stock. He’s successful, and you later
sell your shares for $3,000. Only the gain of $1,000 is subject to tax. The $2,000 is your
return of capital.
The legal structure you choose for your business also impacts how it’s taxed. Sole
proprietors file a personal income tax form along with a Schedule C and Schedule SE,
also called the Self-Employment Tax, which details their business income and expenses.