Arts Professional Story: Martin Kamenski, Rockstar CPA

Artists typically find themselves dreading April. It's not because of the rain, or even the impending lack of air conditioning. It's because they face the task of filing the tax return they've inevitably put off until the last minute, and they have no where to turn. The typical tax preparer has a difficult time understanding the unique nature of an artist's life—and more importantly, the artist's business.And who wants to be judged when you're making a good faith effort to pay the government, just because you haven't kept the best records? After all, nobody really told you what to do in the first place. The most important thing to remember about being a professional artist is that you are your best resource. The time you put into understanding this stuff will pay off in scores.

So what is the big picture here? There is a simple framework to understand that, once mastered, will carry you for your entire career. I'll break it down into three steps:

What Kind of Business Am I?
Or are you even a business? The IRS makes a big distinction between hobbies and businesses that is based on a number of factors: other sources of income, how knowledgeable you are about the activity, and how profitable you are. For a great conversational article about the “hobby test,” click here. The biggest distinction between hobbies and businesses is in the treatment of losses. Hobby expenses are only deductible to the extent of income, meaning the hobby will never have a loss. For example, let's look at an actor who has $5,000 of income from performing, $6,000 of related business expenses, and $20,000 on a W2 from his other job. If treated as a business, the $1,000 loss from his business offsets $1,000 of income from his other job, leaving him with $19,000 of taxable income. If acting is a hobby for him, only $5,000 of those expenses is allowed and there is no loss recorded.

The majority of artists that are legitimate businesses are self-employed, meaning their income and expenses are reported on Schedule C of their individual income tax return. This is the easiest form of business to operate, since all you have to do to get started is think to yourself, “I'm a business now.” Unless their annual tax liability requires estimated payments throughout the year, they will typically make one payment in April. To see whether you should be making estimated payments, test yourself here.

For artists who find themselves relatively profitable, deciding among the many legal forms of business – like partnership, corporation, S-corporation, LLC, or others – can be difficult. While there is plenty of information out there about the benefits and drawbacks to each form, like here, this is a time to seriously consider talking to a professional. I have seen too many clients jump into the wrong structure and it takes more time and money to unwind what you've started than it would to have made the right decision the first time.

Do I Really Have to Keep Receipts for Everything?
Well, no. I suppose not. But you'd be doing yourself a huge favor to do so. Some people keep receipts because that's how they construct their financial history for the year. I'm going to give you better options in the next section, but receipts still fill an important role. The only reason you should keep receipts is in the event that the IRS questions some of your expenses. With a reasonably organized system for keeping receipts, you should be able to weather this storm without any trouble. If you decide not to keep them, you'll probably end up looking through bank statements, credit card statements, and calling up the places where you spent money to ask if they can vouch for your expense. Not worth it.
How organized does it need to be? Not very. Just enough that you can find the right one in a reasonable amount of time. In most cases I recommend getting an accordion file folder from an office store with twelve slots. Dump all your receipts for the whole month in the first slot and then move on to the next one. Now if I ask you for a receipt for the guitar strings you bought in April, all you have to do is dig through 1/12th of your stuff. Not too bad. And it didn't take that much energy to start with.

So How Do I Track Everything Else?
Keeping track of your income and expenses throughout the year is important, not only because it will keep your accountant happy, but also because you need to prove that you take this seriously enough to avoid classification as a hobby. I've dealt with a lot of different systems over the years, but I think people generally fall into one of three categories. Pick your favorite and get started today.

Apprentice
If you're just getting started, you may not have the volume of transactions to justify a more serious system. For you, all you need is a spreadsheet that can track things by category of expense and add it up. Luckily for you, you can download it from the Services page of rockstarcpa.com. Every day, every week, or every month you will sit down and update your sheet. That's all it takes.

Artist
If you have enough transactions that doing them monthly isn't often enough, you are probably better served by utilizing a program that was made to track your business. Although there are a lot of options out there, QuickBooks has always been the industry standard for its intuitiveness and multi-grade platform (you can get a version that's no more complicated than you need). Again, luckily for you, you can download a copy of the basic version for free only by clicking on this link. The best part is that when you outgrow the basic version, there's a seamless transition to the next level.

Master
If you are no longer self-employed, and you've incorporated or set up another form of business, you have to deal with tracking business assets, payroll taxes, and a slew of new issues. At this point, it's time to step up to a full-blown version of QuickBooks. Mac users will be pleased to know that the often-ignored QB for Mac has received a major facelift in the 2009 edition—and for reading this article, I'll share a discount on any version you want through this link.

And that's really all it takes to get started. Get to know and understand what kind of business you are, get in the habit of saving your receipts (and hopefully never looking at them again), and start tracking your income and expenses on a regular basis. It really doesn't take a “business mind” to handle this stuff, just a little effort on a regular basis. You'll be miles ahead of your friends, and odds are, you'll end up with a smaller tax bill to boot. By taking yourself seriously, you're preventing others from taking advantage of you. Let's show them that creative accounting means more than Enron and Anderson.

Martin Kamenski is a certified public accountant who has worked with artists and independent business owners for seven years in Chicago, New York, and Los Angeles. He graduated from Marquette University with bachelors degrees in Accounting and Theater Arts, and a masters degree in Accounting. His firm, Rockstar CPA, is dedicated to working with artists and creative professionals of all calibers.