You’re an artist, so you don’t have to worry about some of the constraints that come with running a business. Or do you? Unfortunately, concentrating solely on the process of creating your art is not always possible.
When tax time rolls around, you will probably wish you’d put some simple business and accounting rules into practice. "I don’t abide by artists being different," says Mary Fahey, a certified public accountant in Skokie, Illinois, who consults with several arts organizations including the Chicago Artists Coalition and individual artists. "I see them as regular business people. They’ve just got to get the right mindset."
The right mindset starts with doing things properly at the beginning of the year. Doug Burack, an accountant with Lutz & Carr, a New York City-based accounting firm, says artists should start by keeping track of their expenses. He suggests making a notation on every receipt you receive for your purchases so that you remember what the receipt was for. Burack also suggests keeping a diary or calendar book that contains pages specifically for expenses.
"A lot of times people spend money that they don’t keep records of," he says. "Then at the end of the year, they just guess at it. Whether it be travel, such as bus or train to go to a meeting, or going into a store and buying art supplies with cash rather than a check, it’s important to jot those things down and then do a summary every month. It becomes easier to do your taxes at the end of the year."
"Just jot my expenses down?" you say. "Is there a tax law that allows me to do that?" According to Fahey and Burack, there is. The IRS allows you to write an amount in your date book in the place of a receipt as long as the amount is under $25. Fahey suggests doing the same with a travel log if you do a good deal of work-related traveling.
Another aspect of good record keeping involves keeping track of what you were paid for your work and how you were paid. Say you’re an artist selling your work at an exhibit, a fair or in a gallery. It’s important to have a receipt book that specifies each item sold and the sale amount. "I don’t have a problem with artists being paid in cash, by check or by credit card," Fahey says. "The most important thing is to record the sale so that they can have records for later."
For many artists, later comes sooner than expected. Especially if the artist has to file each quarter. Any artist who doesn’t earn weekly or monthly wages where taxes are taken out of their pay falls under that category. When you meet with an accountant, come prepared with your income calculated as well as a calculation of your expenses. This will expedite the process of finding out how much you can expect to pay in taxes for that quarter and possibly upcoming quarters. Artists can also pay estimated taxes on a quarterly basis and pay the balance by April 15.
Writing Off Your Expenses
Remember that knowing what you can write off, and calculating your expenses accordingly, are touchy topics. The law allows a business or an individual to deduct all "ordinary and necessary" items to run a business. Those items could include anything from your phone bill, supplies, and tuition for courses to writing off work space (only the portion that’s exclusively used for business), entrance fees to work-related functions or sending faxes. The bottom line is that all write-offs must be related to your art and you must have notations and/or receipts to prove that they are. If you’re ever audited, the IRS will request proof. To get a clear understanding as to what you can write off, take a look at the Schedule C form in your individual tax return for a category list.
More Reasons To Keep Receipts
In addition to being a necessary aspect of filing your taxes, receipts can help to show that you’re maintaining a business. For visual artists, Fahey suggests making bank deposits after adding up sales receipts from work you’ve sold at a show. "You have to document your work and your sales to show you’re trying to make a profit," Fahey explains. "Having good bank records, as well as receipts helps you do that. You need to show the IRS that your business is profitable."
Showing profit and proving that you are actually in "business" is a frequent issue for many artists. Burack notes that artists should be aware of an IRS code called a "hobby loss." The government, he says, believes that if an artist is losing money year after year, then it is possible that the artist is not actually in business. "Hobbies are something you spend your spendable money on," Burack explains. "So if you’re losing money, then maybe art is your hobby and you can’t deduct the loss. So it’s important, if you are a professional artist who is not yet successful, to prove that you are truly doing this as a business. And one of the things that makes that provable is keeping receipts and good records."
One thing to note is that "businesses," by law, are required to reorganize or cease operation if they show a financial loss for seven consecutive years.
Ernst & Young Tax Guide, $15.95 – Annual guide details process for record keeping and doing taxes.
Artists Bookkeeping Book, Chicago Artists’ Coalition, 11 East Hubbard Street, 7th floor, Chicago, IL 60611. Book includes record keeping procedures and explains tax deductions for artists. Also includes 10 pages of sample record keeping journals.
Do-It-Yourself Quick Fix Tax Kit, by Barbara Sieck Taylor. Two-part kit is updated annually and includes a "General Tax Guide" which lists various taxes that effect artists who sell their work, and a "Schedule C Kit" which is particularly for visual artists who are the sole owners of their art business. For more information, write to AKAS II, P.O. Box 734, Scottsdale, AZ 85252-0734.
Business and Legal Forms for Fine Artists, Allworth Press $16.95. Written by Tad Crawford, this 128-page book provides samples and instructions for 15 forms and contracts for fine artists. For more information, contact Volunteer Lawyers for the Arts, 1 East 53rd Street, New York, NY 10022 or call (212) 319-2787 extension 9.
Business and Legal Forms for Graphic Designers, Allworth Press, $19.95. This 208 page book provides samples and instructions for 33 forms and contracts for graphic designers. For more information, contact Volunteer Lawyers for the Arts.
Business and Legal Forms for Illustrators, Allworth Press, $15.95. This 160 page book provides samples and instructions for 17 forms and contracts for illustrators. For more information, contact Volunteer Lawyers for the Arts.
Business and Legal Forms for Photographers, Allworth Press, $24.95. This 208 page book provides samples and instructions for 22 forms and contracts for illustrators.