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 on her Schedule C:
Danielle has come to you on December 12, 2019. She
understands that the IRS can deny losses generated by her performing business
if it determines the business is actually a hobb y. 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 as of December 12, 2019:
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?
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