Disclaimer: You should not consider this article tax advice nor should you consider the lists this article contains to be comprehensive. The Internal Revenue Code is over 70,000 pages long and deductions depend on the circumstances including if the deduction is BOTH ordinary and necessary for your type of business. What is deductible in one business may not be deductible in another. In addition, there are many deduction “myths” out there. If you are not 100% certain about a deduction, it is best to consult with a tax advisor.
Death and taxes, as the saying goes, are the only two guarantees in life. Because tax season is more often than not one of those times fraught with heartache, disbelief, turmoil and pain, it’s difficult to see the bright side of the situation. Taxes are hard enough to figure out when you’re an employee, but when you are self-employed as the majority of artists are, it’s even more complicated and potentially nightmarish. If only the U.S. would adopt Mexico’s model of having artists pay their taxes with artworks. To our chagrin, however, the IRS still only takes checks.
But paying taxes as an artist shouldn’t be such a dreaded occasion as Jackie Battenfield says in her book The Artist’s Guide, “Paying taxes from my creative earnings is a triumph, not a burden…Instead of trying to fly under the radar of the IRS by resisting the inevitability of taxes, I see them as one more line item on the budget.” And as Oliver Wendell Holmes, Jr. says, “I like to pay taxes. With them, I buy civilization.” If you’re still upset at having to pay taxes, try thinking of all those government agencies that support and promote the arts: National Endowment for the Arts, Public Broadcasting, local state and city governments that have public art programs. That money may just come back to you one day in the form of a grant or commission.
If you’re going to be a career artist, you need to take the business side of your practice as seriously as you do the artistic side. Battenfield says, “Declaring your art income, from the beginning of your career, is an important message to yourself of your intention to make this profession work for you.” Meaning: you must pay taxes or deal with some serious and uncomfortable consequences.
In order to only pay your fair share in taxes and not “tip” the IRS, you will need to maintain accurate records of both your art-related expenses (supplies, studio rent, equipment, etc.) and income (sales, commissions, licensing fees and other wages). Battenfield recommends you keep accurate records from the beginning, before you’ve sold a single work. There are numerous programs and methods out there to track your finances from a simple Xcel spread sheet to a more sophisticated software tool like Quickbooks. Tad Crawford in his Legal Guide for the Visual Arts suggests setting up separate banking accounts for art-related and personal expenses. Battenfield, for example, sets up multiple business accounts: checking, saving, tax savings, cash purchases and receivables. Just as you’ve done with your art practice, you’ll want to set up a system that works for you. Many banks have fee free accounts for low volume clients. You should always try to keep your fees as low as possible.
Make sure you save your paperwork for at least the seven years the IRS has to audit you, although current recommendations are to keep the information forever if you can convert it to a digital format. You’ll need to make sure your records include:
4. Other supporting data such as checks, bills, receipts, etc.
5. Categories for types of expenses and income
As a self-employed artist, you will receive separate 1099s for independent contract work/sales valued over $600 from galleries, dealers and art consultants by February 28th. “Don’t assume,” Battenfield says, “that if you haven’t received a 1099 by the time you file your taxes in April that you are home free and don’t have to report that income.” She highly recommends that you compare received 1099s to your own records; if there’s an error, make sure it gets corrected immediately especially if a 1099 is issued for $90,000 when the actual piece was only $9,000. You are required to report all income, even if the amount of the sale was under $600.00 and even if you were paid in cash. Not reporting every dollar of income could be classified as income tax fraud and the IRS statute of limitations does not apply. That means that the IRS could audit back further than seven years and you would be expected to provide the documentation.
Being a self-employed artist allows you to deduct expenses directly related to your business on your taxes such as:
· Art materials and supply directly related to art for sale or sold. Inventory items are subject to special rules.
· Employee wages including employer taxes paid and benefits.
· Contract labor. Need a hand moving that sculpture? It’s deductible. Be aware that you are required to report payments for services in excess of $600 to the IRS. Best to have all helpers complete a W-9 before beginning work.
· Interest on business loans (it’s best not to mix the use of loan proceeds between business and personal. If you keep the lines clear, you will get the deduction).
· Business travel. Again, if you combine personal and business travel, special rules apply.
· Office supplies.
· Storage units if 100% business use.
· Internet service.
· Web hosting and domain names for a business website.
· Work space and utilities for that space*.
· Office equipment needed to conduct business.
· Certain books and professional journals directly related to the production of art and maintaining your knowledge.
· Business-related repairs
· Business-related promotional expenses (meals and entertainment need to be tracked separately and have very specific guidelines)
· Business-related professional memberships. Country club dues and the like are never deductible.
· Business-related postage.
· Premiums for art insurance and/or liability insurance.
· Commissions of agents.
· Business-related legal and accounting fees
· certain types of education to maintain your educational level. Education acquired to enter into your business or a new career is not deductible
· Percentage of your individually paid health insurance – likely all of the health insurance could be deductible but there are exceptions. If you have an employer and they provide health insurance, you can’t deduct it because it is likely already a pre-tax benefit. You cannot take a deduction for health insurance in excess of your business net income.
· Non-commuting business mileage (i.e. trips to buy supplies, etc).
· Customer gifts up to $25 each person per year. Husbands and wives are considered one person for this rule.
· Business software.
· Merchant fees if you accept credit cards or electronic payments.
· Bank services charges for your separate business account.
· Depreciation on long-lived business assets (desks, computers, file cabinets). There are special rules, but if something costs over $500, you should check with your accountant as to the tax treatment.
*If your studio is in your home, you will only be able to deduct a portion based on the amount used for art-related purposes. For example, if your studio takes up 10% of your home, only 10% of your rent, utilities, insurance, etc. are deductible. If you choose this method, you may have recapture issues should you sell your home. Beginning in 2013, there is also a flat rate per square foot option which is free from the recapture rules.
**The first line into your home is NEVER deductible, even if it’s for your fax. The IRS deems that you would probably have that anyway. Additional lines may be deductible (fully or partially depending on business use). Your cell phone may be fully deductible if the use is primarily for business.
This is all relatively straight-forward if you primarily make a living through your art practice, but what if you have a day job? The IRS limits deductions from artists it deems hobbyists equal to their income, which means if you only sell $1,000 worth of art, you are limited to $1,000 in art-related deductions. Does that mean that all artists with a day job get categorized as hobbyists? What about artists who teach or otherwise work in a job that closely relates to their practice? The IRS has a test that presumes that in order to be a professional artist, you should be motivated to make a profit. A ruling in October 2014 involving painter, printmaker and tenured Hunter College professor Susan Crile determined that if you make little profit from selling your art, you can still be seen as a professional by the IRS. Even though only three years out of her more than four decade-long career as an artist were profitable, Judge Albert G. Lauber ruled she “had an actual and honest objective of making profit” and should therefore be considered a professional artist.
There are nine ways you can show profit motive according to Crawford’s Legal Guide without having to prove yourself in court:
1. Maintaining accurate records.
2. Expertise – having gallery exhibits, working with agents/dealers, winning prizes, gaining recognition in articles/books.
3. Time and effort expended in carrying on the activity.
4. Expectation that assets used in activity may appreciate in value, though this has not yet been applied to the arts.
5. Success in carrying on similar or dissimilar activities –previous critical or financial success in art despite a slack period, for example.
6. History of income or losses with respect to the activity, especially if income has increased or if increased income from non-art sources or a change of profession occurs.
7. The amount of occasional profits.
8. Financial status – if you are wealthy or have independent income, you are more likely to be deemed a hobbyist.
9. Elements of personal pleasure or recreation – Crawford says, “This has little application, since the pursuit of an art career is as painstaking and rigorous as any occupation.”
Once you start to show a profit, you’ll begin to pay quarterly taxes to the IRS and any other government agency that requires them. Battenfield suggests dividing what you owed the previous year by four quarterly payments on April 15, June 15, September 15 and January 15. She does this by creating a separate tax savings account in which she deposits twenty-five to thirty percent of each check. She says, “I don’t consider that money mine, and it is squirreled away, safe from monthly expenses.”
This tax season, try to see the glass half full: your creativity is not simply a hobby but a career and, besides that, you’re helping to keep civilization up and running.
Bonus: Sometimes learning what is deductible is as much a lesson in what is not deductible. Not all of these are business related.
The Minnesota Society of Certified Public Accountants recently surveyed its CPA members in public accounting on themost outrageous tax deductions clients tried to take on their tax returns. The resulting list shows that, more often than not, clients just don’t know which deductions are allowed.
We all like to look nice, especially for business purposes. But you’re expected to arrive to work fully clothed (looking nice is a bonus).
Underwear and Socks
Need we say more?
A Wedding to Remember
A client wanted to deduct part of his wedding costs because more than half the guests were business-related contacts.
Cat Food and Litter
Your cats may be used to keep mice out of the barn, but their bare necessities are not deductible. In general, pet expenses are not deductible.
Valleyfair Season Tickets
Unfortunately, amusement parks don’t qualify for a day care deduction.
One client wanted to depreciate the cost of a large boat because he used it occasionally for client entertainment. You better set sail on that idea. The same logic applies to vacation homes and other entertainment facilities. These will generally not be deductible.
Foot Powder for Smelly Feet
Not stinking up the office does not qualify as a tax write-off.
Baby Grand Piano
A client, who was a humanities professor, thought he could deduct a piano. Unless the professor was providing lessons as part of a small business, this was not an acceptable deduction. For artists, you may have to discuss this with your accountant if you give lessons. Some items may be fully deductible. Others may be partially deductible.
Misinterpretations of Charitable Donation
Unfortunately for one client, gambling losses didn’t qualify as a charitable donation to casinos or the Minnesota State Lottery. Giving gifts to your needy friends and family does not count either. To be deductible, the entity must have 501 ©(3) status with the IRS.
Keeping Yourself Rejuvenated
Botox, tanning, nails and the like do not qualify as acceptable deductions. If it is personal hygiene or cosmetic, it is not going to be deductible. If it is medical, these costs MAY be deductible on Schedule A.