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For artists, the three inescapables in life are death, taxes and rejection. This column has already discussed rejection, and I'm not touching death, but with April 15 looming, let's talk taxes. Not that I have the appropriate initials to address the topic authoritatively--as in CPA or IRS--but I have plenty of OMG and WTF. Here's what I think is important. I hope you'll add to the conversation:
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1. Keep good records. I don't understand that everything-in-the-shoebox method. Someone has to sort those receipts, and if it's not you, you're gonna pay for someone else's time to do it. Have you switched to an electronic system like Quicken? Do you like it? I'm still using ledger paper for money in and money out, and in a notebook at the end of each day I enter expenses in the appropriate category I've created: art supplies, books, business services, mileage, office supplies, telecommunication, and many others. Then I tote up my figures at the end of each month, so that at the end of the year I add up 12 figures for each category. My system is "Slow-en" but it works for me..
2. Get help. Do you freelance? Have a part-time gig with witholding taxes? Work a 9-to-5 and also make art? Do you pay a mortgage and maintenance? Do you have kids? Are you paying off an education loan? Do you own rental property? Do you have deductions for art supplies and activities? Do you work in different states? When you're filing a salad of W-2s, 1099s, Schedule A, Schedule C and more, the last thing you want to do is go it alone. Plus, tax laws change from year to year, so following last year's forms may not be to your advantage. I have used the same tax person on 19th Street for 20 years. She knows my history and, more important, she understands the particular needs of self-employed people. I pay her $600 for the job, but I'm guessing she saves me 10 times that, to say nothing of the agita of trying to figure out those forms. If I get audited, not only do I have well-organized records, I'll have a knowledgeable and experienced professional to represent me. (Seasonal tax preparers like H & R Block may be good for some folks, but I do not believe they have the expertise we need.)
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3. Don't cheat. Small businesses and freelancers raise all kinds of red flags because we don't fit into conventional IRS parameters, unlike the millions of folks who have one w-2 and file a short form. And you should know that the Feds are going after the small businessperson. (You'd think they'd go after the big corporations, where they might get some serious money. But no. The corporations have phalanxes of attorneys, so they go after us for chump change.)
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The good news is that pretty much everything we do is legally tax deductible; we just have to put it in the correct box and have a receipt or diary entry to back it up.
. Do you visit New York City (or another big gallery city) from time to time to see the galleries and museums? Deductible--airfare, hotel, food, museum entries, taxis or subway fare, everything; it's a business trip
. Do you travel frequently to deliver artwork and attend your openings? All the associated travel expenses are deductible
. Do you use your vehicle for business? Keep track of the miles traveled for business; a good percentage of your auto expenses may be deductible
. Do you have copies of your slides and art CDs in a safe deposit box? Deductible
. Career consultation? Deductible
. Computer assistance? Deductible
. Framing? Fed Ex? Maintaining your website? Entry fees? Deductible, deductible, deductible, deductible
. Telephone? Cable? They should be deductible at least in part
. Your studio? Deductible, of course
. The studio in your home? A percentage of your building expenses are deductible, but the space must be used solely and regularly for art business
. Your health insurance if you're paying for it yourself? De-frickin-ductible
. Your tax prep? Deductible for the following year
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There's much more, including equipment that has to be amortized over five years. Naturally there are particulars for all of this. You have to show a profit every five years or your business will be classified as a "hobby" with no deductible benefits, but an experienced tax pro may know of exceptions, especially as most business are suffering in the recession.
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Now, over to you. What are your thoughts, observations, advice to colleagues who are struggling with too many numbers and, probably, not enough cash?
18 comments:
I use an excel-type product, a free version of a similar app called Calc. I made a few spreadsheets that chart money spent on supplies, mileage, postage, etc... another for products produced (so I can get an accurate figure of what any particular piece has cost in materials) and then one that tracts where a piece is at any given time. It works well and come the first of the year I have everything I need right there.
Hi Joanne,
I've used Quicken for years, and enter income/expenses at the end of each month. It's so simple. Then I turn the summaries over to my accountant at tax time. I think - but you would want to check to be sure - that it is no longer necessary to show a profit if you are able to show consistent professional activity.
Now this topic takes the wind out of the sails! However, we are small businesses, and therefore, it is a good topic. I spend $1750 a year on GREAT tax prep work. It is worth every penny because tax code is continually in flux and there are are many ways to reduce the amount of taxable income I would never know about. I just sucks to have to pay taxes when we know what it is going towards!
I am a freelance graphic designer who is also an artist. I agree with you that having a good system of organizing income and expenses is essential to getting taxes done with as little stress as possible (paying them is something else...)
For years I've used Turbo Tax which walks me through everything and explains what I don't understand. If I've missed something, it's probably something small and would likely be a wash compared to paying someone hundreds of dollars to do my taxes (who might have caught it).
Your system is admirable, Joanne. If it works for you, then it's doing what you want it to do. I actually work as a bookkeeper on the side and have been using the system my tax professional recommended. I have been using her services for nearly 20 years and know she has saved me a lot. She suggested that I throw all receipts into a shoebox (I use a basket) because that's what she does. At tax time I extend the dining room table, sort everything into piles, then I add up each pile, total the expenses and fill in her tax booklet consulting the prior year's taxes. It works just fine. Having some kind of system that keeps track of your expenses and that works is the main point. Not feeling stressed and/or reminded of taxes all year long is a secondary goal.
Talk about your financial mosaic. We've got some different systems here! Nancy's right: whatever works.
I travel a lot, and I don't always have receipts, but I do have a line entry for every expense. Viewed in the contect of other line entries and related receipts, there's a financial narrative that not only makes sense to me--it will make sense in an audit, should such an onerous event occur.
Has anyone ever been audited? What's it like?
"De-frickin-ductible"
Joanne, now YOU have a way with words!
I just finished adding up my receipt piles (and sadly I don't do it regularly during the preceding year the way I should to keep it from being overwhelming). It does drive one to creating new words to describe the special delights of tax time.
I fall into the category of throwing all my receipts in a drawer and sorting through those and the credit card/debit statements at the end of the year. Well, in April. Um, actually in August, since we usually end up filing an extension:) Anyway, I note each expense in a ledger, I keep thinking I should do get all that on Quicken or something but am hesitant about having even MORE to do on the computer.
I also deduct all the music I buy from iTunes. Our accountant says since the only place I listen to it is in the studio, then it is deductible. I love our accountant;)
Joanne, Great work. Since I just got back from my tax appointment, I'm breathing again, so I'll comment here.
First of all, for many of the reasons you mention (small business, office in the home, quirky not-run-of-the-mill type expenses, etc.) I wouldn't dream of doing my own taxes. Not only that, but the annual changes in tax law make it such a moving target, I would be sure to miss something critical. This is one area where I am more than willing to pay a professional. I have been using the same accountant for almost 30 years. He specializes in entertainers (actors, showbiz etc), but he's also savvy about artists and understands the red flags we might be subject to. Some of his actor clients have W-2s from 20 different states, but are only making 20K a year. So he's used to weirdness. I'm not sure an H&R Block type place would be on the ball with the special needs of an art practice, but I could be wrong.
As for the bookkeeping, I'm in between your method and Nancy Natale/Tracy's. I dump the shoebox & sort receipts at the end of the year. But I do use Quicken (in a Slow-en) sort of way. I don't expect it to balance things, I just use it to flag them and add them up so I can pull reports. Certain categories, I will just create a separate spreadsheet in Excel.
This year though, I'm planning do a sort & reckon at least quarterly, so I can keep on top of my estimates a little more closely. We are not talking about a lot of money here. It is laughably small, but it still has to be explained and justified to the IRS (on their terms).
Sorry to hog the space, but, yes, my sister (also an artist) was audited about 5 years ago and believe me, I don't know which level of hell it is, but it's way down there. The one thing I learned from watching her agony was: Do Not Attempt To Represent Yourself. That said, you will still be in hell trying to justify all the bits of this and that that will be questioned. If you let your tax person take care of the "confrontation" there is a chance you might even come out ahead.
It's not so much the amounts you may be liable for, it the nickle and diming and justifying and arguing these petty points that will drive you over the edge. I will take a huge chunk of your time and you will be dealing with people who you barely recognize as human.
So, in a nutshell:
1) Scrupulous record-keeping
2) Don't try to cheat
3) The diary of daily activities will support most claims if push comes to shove.
I read somewhere that Andy Warhol used obsessively to keep a little notebook in which he jotted down the cost of every expense (cabfare, bag of chips, etc) that he incurred in the course of each day. I'm sure it served him well at tax time.
Joanne,
I was happy to read that we share the same low tech but up to the minute method to keep track of tax deductible expenses. I love numbers and doing this sort of record keeping is actually fun for me!
I was audited about 20 years ago and the IRS ended up owing me $50. They have never darkened my door step again -- and please don't tell my accountant about any of the fees you or your readers pay. He charges me $300 -- and is totally qualified to handle an artist's special needs. Must be a Florida low cost of living thing.
Hey Joanne and MM regulars --
Two artists + three assistants sending work to over 50 different places around the country makes for lots of transactions. I used to type every receipt into Quicken manually, but figured "there must be a better way!" in this electronic age. So two years ago I switched banks to one that would interface with Quicken. Now I just periodically download all transactions directly into Quicken via my bank's website. No more typing, no more squinting to find the frickin' date on faded receipts. Ahhhhhh!
I keep receipts in an alphabetical accordian folder to ease finding things in case of an audit. (Remember to empty the file Jan 1!)
Come tax time I just print out a detailed category report from Quicken and hand it to our tax guy. He loves it.
We run our art business as a corporation, which eliminates the hassle of 1099's. Income can be split between reasonable wages (taxed more) and shareholders' dividends (taxed less) in fat years.
Schools will give donation receipts for surplus materials given to school art programs.
If you work in your home, keep all utilities receipts and deduct a reasonable percentage for business purposes. (I'm not a tax professional, check with yours before acting on any of these ideas.)
Joanne you mentioned deducting food expenses on business trips -- seems I recall our tax guy finger wagging about that. Are you sure meals are deductible? Oh, here's the answer: "Generally, you can deduct all of your travel expenses if your trip was entirely business-related. These expenses include the travel costs of getting to and from your business destination and any business-related expenses at your business destination, including tips, cab fare, and other "life on the road" expenses such as dry cleaning. Meals are the only exception. You can deduct only 50 percent of your meals while traveling." from http://www.business.gov/finance/taxes/business-income/tax-deductions.html
Signed, MM fan (anonymous due to subject matter)
Anon,
You have opened a whole new vista with incorporation! I've always wondered what it would be like to pay myself a salary . . .
Re food: You can only deduct a percentage, that's correct (and that's why people need to discuss all of this with their tax professional). Alternatively, there's the food per diem, which changes depending on the city in which you're eating--your per diem is higher in Los Angeles, for instance, lower in Dubuque. There may also be an allowable percentage with this system, too. But a percentage is better than nothing, as travel expenses, even when deductible, add up.
And thanks, All, for sharing soething of your accounting methods and systems.
422 Tax Deductions for Businesses and Self Employed Individuals
One of the best little books, updated yearly, for the artist who is doing their own taxes.
I have used both Quickbooks and Quicken. I find Quickbooks has better invoices to input sales and send receipts to clients and galleries. When input at the time of the sale it can help me see how I am doing in different venues compared to other years. Plus keep track of my monthly income.
What is nice about Quicken is the electronic access to bank accounts and credit card statements. By using one credit card for business it will download all the expenses quickly even putting reoccurring expenses into categories. (ie the same art supply store.) This now takes minutes. The service is $9 a month.
I have not checked into a new version of Quickbooks to see if they now have the electronic banking my version does not.
At the end of the year the profit and loss statement itemizes all your income and expense just bring the P&L to the accountant with any 1099s and mortgage statements.
Still not fun but less time consuming.
I have an envelop in my pocketbook that I put all my receipts in. I label the month then put them in a shoe box at the end of the month just in case.
Sorry to be anon but the other anon made me paranoid
Joanne: Another winning post. I am a QuickBooks and bookkeeper devotee. After years of doing it myself, I splurged on hiring a bookkeeper. Because I have a lot of online sales, she helps me keep track of those. Also, because she works every week, it keeps me on task to stay up to date with everything. Not everyone needs an ongoing bookkeeper. I also have a CPA who does year-end corporate and personal taxes. Again, I don't think I could do it without QuickBooks.
I file my receipts by month after I enter them in QuickBooks--using a 13-slot accordion folder. This has worked for me for years.
I admire your diligence in recordkeeping, Joanne. I spent all day yesterday just getting my checkbook up to date and now have to finish expenses for my two businesses. 2010 has got to be better, ducks-in-a-row-wise.
If you're an independent businessperson of any stripe, a competent, reputable accountant is worth her or his weight in gold and helps boost your IRS cred. I'm lucky enough to have found one who specializes in working with artists-and she likes us!
You are proof that you just have to find a method...any method that works for you...and stick with it. For some, fancy computer programs are the way to go, for others a simple pencil and a ledger do the job.
There are so many options available! You just have to find the right one for you and your business.
Great article, thanks for sharing!
Holly
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