WHAT IS THE HITS ACT?
What The HITS Act Does For Music
The HITS Act is a federal tax law that allows certain music projects to be treated like a real business instead of a hobby. It updated an existing tax rule so that music production can use the same kind of deduction structure that film and television have used for years.
In simple terms, when a song or project is created as part of a properly run business and documented correctly, some of the money spent making that music may qualify as a business expense for tax purposes. This can apply to things like studio time, production work, and related costs, depending on how the project is structured and when production begins.
For independent artists, producers, and labels, the HITS Act helps shift music creation away from personal spending and toward recognized business activity. The key is not popularity or success, but how the project is organized, documented, and executed.
Whether costs qualify is determined by the facts of the project and reviewed by a CPA. The law does not guarantee deductions, but it creates a framework that allows music to be treated like a legitimate business when done correctly.
What This Could Mean for Your Taxes
The HITS Act creates a pathway for certain music expenses to be treated as business expenses, instead of personal spending, when a project is set up and documented properly. This section is meant to give general examples, not guarantees, of how that framework can affect taxable income.
Many independent artists, producers, and the people who support them already spend money each year on recording, production, and release costs. When those activities are organized as a legitimate business project and production officially begins within the tax year, some of those costs may be eligible to reduce taxable income, subject to CPA review and the specific facts of the project.
Whether any expense qualifies depends on how the project is structured, when production begins, and how well the activity is documented. Results vary by individual or entity, and tax treatment is always determined by a qualified tax professional.
Who Should Use IRC §181?
IRC §181 can apply to anyone who spends real money creating music, not just major labels or large studios.
Big record labels often spend six figures on a single song once recording, mixing, mastering, visuals, and content are included. Independent artists usually work on much smaller budgets, sometimes only a few thousand dollars per release. The HITS Act does not require a massive budget. What matters is whether the project is treated like a real business activity and documented correctly.
Because of that, IRC §181 can be relevant for many people involved in independent music today, including:
-
Independent artists operating through an LLC or business entity
-
Producers paying out of pocket to create singles or EPs
-
People who step in as Executive Producers to fund a release
-
Independent labels supporting multiple small projects
-
Studios managing ongoing recording and production work
-
CPAs and advisors working with creative clients
-
Family members, partners, or friends who helped pay for studio time, beats, engineering, or video production
If you contributed money toward making a music project, even informally, those costs may be eligible for business treatment when the project is structured properly and meets the requirements of the law. Whether expenses qualify depends on how the activity is organized, when production begins, and how everything is documented, and should always be reviewed by a CPA.
How the HITS Act Works for Investors
The HITS Act is not limited to artists or record labels. In some cases, people who help fund a music project may also be able to treat their contribution as part of a business activity, when the project qualifies and is documented correctly.
This can include individuals who support independent music financially, such as private backers, Executive Producers, or family members who help cover production costs. The key factor is not who you are, but how the project is structured, documented, and executed.
When a qualifying music project is organized properly, participation may allow contributors to:
-
Treat eligible production costs as business expenses, subject to CPA review
-
Align contributions with the year production officially begins
-
Participate through an individual or business entity, depending on circumstances
-
Use formal agreements to clearly define roles, credits, and recoupment terms
-
Replace informal financial help with a documented commercial arrangement
The law does not guarantee deductions, and outcomes vary based on individual tax situations and project facts.
Why Documentation Is Required!
In the past, some taxpayers documented music expenses informally, sometimes as simple as handwritten notes or basic records. While the IRS may accept any records that are accurate and complete, informal documentation often reflects hobby-level organization, which can create uncertainty during tax review.
A structured production packet helps clearly establish a music project as a professional business activity. It organizes contracts, budgets, accounting records, and production evidence in a way that protects everyone involved and gives a CPA the clarity needed to evaluate eligibility and prepare filings with confidence.
In practice, documentation is what separates a hobby from a business in the eyes of the IRS. Proper structure does not guarantee a deduction, but it provides the foundation required for compliant tax treatment and professional oversight.
How to Claim Section 181 Step by Step
Section 181 does not use a special IRS form. Instead, the deduction is applied by a CPA as part of a tax return, based on the facts of the project and the supporting records. The purpose of a production packet is to organize those facts clearly, not to replace professional tax advice.
Below is a general overview of how qualifying projects are usually documented.
1. Establish when production begins
Production generally starts when real work begins on the project. This can include studio sessions, beat creation or purchase, or paid production labor. The timing of this activity is important for determining the applicable tax year.
2. Identify contributors and roles
Everyone involved in the project should be clearly identified, including artists, producers, engineers, musicians, and anyone providing financial support. Roles and payments should be defined so it’s clear who did what and why.
3. Track production costs separately
Costs related to making the music, such as studio time, production labor, beats, musicians, mixing, and mastering, should be tracked separately from marketing or promotional expenses. This separation helps a CPA evaluate how different expenses may be treated.
4. Maintain a basic production log
Simple records showing session dates, work completed, and project progress help demonstrate that the activity operated like a real production and not a casual hobby.
5. Keep invoices, receipts, and agreements
Invoices, receipts, and written agreements provide support for each expense and show the business purpose behind the spending. Clear records reduce confusion later.
6. Provide the documentation to your CPA
The completed packet is given to a CPA, who reviews the facts, applies the relevant tax rules, and determines whether and how Section 181 is reported on the tax return.
Good documentation does not guarantee a deduction, but it gives your CPA the information needed to evaluate eligibility and prepare filings with confidence. Organized records also make it easier to respond to questions if a return is ever reviewed.
License Summary, Legal Notice & Usage Terms
This documentation packet is designed to support one music project within a single tax year. Each project has its own production timeline, contributors, and budget, which is why documentation is organized on a project-by-project basis.
Keeping records separate for each project helps maintain clarity, supports proper accounting, and makes it easier for a CPA to review how expenses relate to a specific production. This organization does not create a deduction on its own, but it helps demonstrate that each project was operated as a distinct business activity.
The cost of preparing documentation is generally treated as a project-related business expense, subject to CPA review and applicable tax rules. To keep records clean and avoid confusion, each qualifying project should maintain its own packet rather than combining multiple productions into a single file.
Use of this packet does not guarantee tax treatment or deductions. Tax outcomes depend on the facts of the project, how it is executed, and the judgment of a qualified tax professional.
Turn Your Music Production Into a Real Business Activity
If you are already spending money to create music, the way that work is organized matters. Professional recording companies document their projects carefully so they can be reviewed, accounted for, and treated as legitimate business activity. Without clear records, even real production work can be viewed as informal or hobby-level.
IRC §181 provides a framework that can apply to qualifying music projects, but the IRS does not recognize a project based on creativity alone. Structure, documentation, and execution are what allow a CPA to evaluate whether a project should be treated as a business activity.
Many independent creators already spend enough on production to qualify under the law. The issue is not spending, but how that spending is documented and organized.
This packet is designed to help bring clarity to that process. It provides a structured way to organize production activity, contributors, and expenses so a project can be reviewed professionally and discussed with studios, advisors, or CPAs using clear records.
If you want your next release to be approached with the same discipline as a professional production, this is a practical place to start.
THREE-PACKET BUNDLE