What expense category is Music Licensing Fees?

Creating the right atmosphere is essential for any restaurant or public venue, and music is a key ingredient. However, playing copyrighted music in a commercial establishment requires paying licensing fees to Performance Rights Organizations (PROs) like ASCAP, BMI, and SESAC. 

These fees, often paid as an annual subscription, compensate songwriters and publishers for the public performance of their work.

For restaurant owners and their accountants, it is crucial to understand that these legally required fees are a fully deductible business expense. This guide will clarify how to categorize music licensing fees according to IRS rules to ensure your business remains compliant while creating the perfect ambiance for your guests.

Music Licensing Fees Category

The fees you pay to music licensing organizations are an ordinary and necessary business expense. These costs are best categorized as Royalties.

While not a dedicated line item on the Schedule C, IRS Publication 535 discusses the treatment of royalties paid for the use of intellectual property, such as copyrights. Since music licensing fees are payments for the right to use copyrighted music, they are a form of royalty expense and are reported under Other expenses.

Important Considerations While Classifying Music Licensing Fees

The key to handling these costs correctly is to recognize them as a required fee for the use of an intangible asset (the music).

A Required Royalty Payment

These fees are not optional. Under U.S. copyright law, any business that plays copyrighted music for the public must have a license from the appropriate PROs. The fees paid are royalties for the performance rights of the music.

Distinction from Other Entertainment Costs

It is important to distinguish between these licensing fees and other types of entertainment expenses.

• Music Licensing Fees (Deductible): The cost to legally play recorded music in your establishment.
• Live Entertainment (Potentially Non-Deductible): As noted in IRS Publication 463, costs for activities considered entertainment, amusement, or recreation are generally not deductible. The cost of hiring a live band, for example, is a non-deductible entertainment expense, while the fee to ASCAP or BMI is a deductible royalty.

Tax Implications and Recordkeeping

To deduct your music licensing fees, you must report them correctly and maintain proper documentation.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040), music licensing fees are reported under Part II, Line 27a, Other expenses, with a clear description like Music Licensing Fees or Royalties.

What Records to Keep

You must have documentary evidence to substantiate your expenses. Your records for music licensing should include:

• The licensing agreement with each PRO (ASCAP, BMI, SESAC, etc.).
• Annual or periodic invoices from these organizations.
• Proof of payment, such as canceled checks or credit card statements.

How Fyle Can Automate Tracking for Music Licensing Fees

Fyle helps you manage and document your recurring licensing fees, ensuring every payment is captured and coded correctly for tax time.

• Centralize Licensing Invoices: Forward or attach your PRO's annual invoices directly to Fyle for automatic and accurate data capture.
• Automate Recurring Payments: Fyle’s real-time credit card feeds can instantly capture annual renewal fees paid on a business card.
• Create a Clear Audit Trail: Fyle keeps the licensing agreement, invoices, and proof of payment together in one easily accessible digital record.
• Automate Your Accounting: Sync the categorized royalty expense directly to the correct GL account in QuickBooks, Xero, NetSuite, or Sage Intacct.