Posted on August 24, 2018July 26, 2018 by Jan Roberg

Tax Tips for Artists

If you’re selling your art, you need to think about taxes. Taxes are different for hobbies than for businesses. It’s important to know what you have.

Are you a Hobby or a Business?

If you’re reading this post, you’ve probably made some money on your art. Maybe you sold a few paintings. At what point, does your hobby become a business? Taxwise, you need to decide which is better for you. Another consideration is: What does the IRS think?

Hobby Income Taxes Hobby income is taxed at your regular income tax rate. It goes on line 21 of your 1040 tax return. Now in the past, you might have been able to deduct some of your hobby expenses on your Schedule A of your tax return, but beginning this year (2018) that option is no longer available. So if your federal income tax rate is 22%, then your tax on that $5,000 will be $1,100. (5000 x .22 = 1100)

Business Income Taxes Business income is taxed at your regular tax rate plus the self-employment rate. The self-employment rate is 15.3%. So, if you’re in the 22% tax bracket, the tax rate on your business income would be 37.3%. That means that the $5,000 you made as hobby income would now be taxed $1,865. Which sounds awful at first blush.

But the advantage to being taxed as a business is that you get to write off your business expenses directly against your income. Let’s say you had $3,000.00 in business expenses, then your tax would only be $746.

($5,000 income – $3,000 expenses = $2,000 net income to tax)

($2,000 taxable income x 37.3 percent tax rate = $746 in taxes)

Artists often have a lot of business expenses, so being able to claim your art income as a business can be a good thing. This is especially true if you have a business loss. You can use your self -employed business loss to offset other income – like wages you receive from another job – on your tax return. (Be sure to read about the Qualified usiness Income Deduction “QBI” further on though because there’s more to business taxes than just this.)

1099MISC If you receive a 1099 MISC that shows income in box 7, the IRS will automatically count you as being self-employed – even if you have another job somewhere else. If you teach an art class or win a prize you may receive a 1099.

The 1099 also proves you have income if you need proof of income to obtain an earned income tax credit. You don’t have to mail your 1099s in with your tax return, but you’ll want to hold on to them. They can come in very handy.

What will be different about your tax return now that you’re a professional artist instead of a hobbyist?

You won’t need to incorporate or file a special business return. Most people will just include their art business information on Schedule C which becomes part of your 1040 tax return. It will show your business income and expenses. Form Schedule SE will show your self-employment tax owed. You will need to file the long form when filing the Schedule C – no more 1040 EZ.

Common Tax Deductions for most Small Businesses

Advertising

Home Office expense

Mileage

Supplies, etc.

Common Tax Deductions for Artists

Art supplies

Membership Dues

Classes and Workshops

Show Fees

Software fees

Studio

A word about making Estimated Tax Payments

If your art business is successful, you’re going to be making money. And if you make money – you have to pay taxes. If you’re going to have a tax balance due of more than $1000.00 federal, you should start making estimated tax payments. . A good rule of thumb – if you make over $6,000.00 after deducting your expenses then you should make estimated payments

Your two best Tax Deductions

Mileage and Home Office (Studio). These deductions are great because they are expenses that you already are paying for anyway.

Mileage

If you want to claim mileage, you must keep a mileage log. For every business audit I have ever worked on – the IRS requested the mileage log. The IRS wants to know how many total miles you put on the car, not just your business miles. This is the most forgotten about issue but it’s really helpful to know.

Home Office (Studio)

You don’t need a desk and a computer for your home office. It could be a storage space for your art, the place where you paint or the room you throw pots in. It doesn’t have to be a separate room in your house, it can be a section of a larger room. It can also be very small.

The most important reason for claiming a home office is so that you can claim your mileage to your shows. The important issue is “regular and exclusive”. Maybe you paint in your kitchen – that’s fine but you can’t claim your kitchen as a home office because you cook dinner there. You have to use the space exclusively for your art business in order to deduct it. So, if you paint in your kitchen, you need another space to maybe store your art that you can claim as your “exclusive” working space.

Issues of selling Art in multiple states/cities

When you do a show in the City of St. Louis, the City expects you to pay city sales tax. If you sell in Illinois, then you’re expected to pay Illinois sales tax as well. Generally, if you’re selling all over the country, you’re expected to file state returns in those states. Often, if you’re at an art show, the event coordinator will instruct you about collecting sales tax for that event. If you sell art online – if you sell out of state, you generally do not have to collect sales tax. If you sell in state you do. But be careful! The Supreme Court recently ruled in South Dakota v. Wayfair that you don’t have to actually have a physical presence in a state to be required to collect sales tax. This court case will have a far reaching effect of sales taxes across the country so you’re going to want to keep your eyes open and be aware of changes in sales tax laws in any states you sell in.

You will need a retail sales license in order to collect sales tax in Missouri. It costs $25 for the bond and is returnable after a few years. You can apply for the license at https://dors.mo.gov/tax/coreg/index.jsp

This is really important. If you collect sales tax – you must remit it to the taxing agency. You can’t keep it. That sounds like a no-brainer, but people have been audited for that. You don’t want that!

Should you become an LLC? Generally, artists tend to be “individuals”. An LLC is a limited liability company. The idea is that your liability – meaning if someone wants to sue you – is limited. If you decide to become a Limited Liability Company anyway there are rules you must follow.

Get a Federal EIN number.
Set up a bank account for the LLC.
Run all of your business income and expenses through that bank account.
If you don’t do all those steps, you’ve “pierced the veil” of the LLC and you’re just wasting your time and money.

“Piercing the veil” means that someone could still sue you personally even though you have an LLC. If you’re not going to bother with the separate bank account and getting a separate EIN number, you’re not protected by your LLC.

Identity Theft Unfortunately, identity theft is the number one tax crime these days. As a sole proprietor of your art business, you may be asked to complete paperwork requiring your tax ID number. That’s usually your social security number. You can protect your social security number by getting an Employer Identification Number for yourself from the IRS. It’s free and it’s easy. Just go to www.irs.gov. It takes about 5 minutes to do.

DBA Doing Business As You might have a business name that you want people to use, like “Wanda’s Watercolors”. You can file paperwork for “doing business as” with the Secretary of State’s office. It only costs $7.00. That way you can receive and deposit checks under your business name.

Helpful Links:

Starting an LLC or filing a fictitous name registration – Secretary of State office: http://www.sos.mo.gov/business/corporations/startBusiness.asp

Registering your business for a sales tax ID number with the MO Department of Revenue: https://dors.mo.gov/tax/coreg/index.jsp

Apply for an employer identification number with the IRS:

https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online

Volunteer Lawyers Accountants Association – VLAA provides free services/assistancewww.vlaa.org

QBI – What you need to know about your business income for 2018 – 2025

As a small business owner, for 2018 there is something called the Qualified Business Income Deduction. QBI for short. QBI is a 20% deduction off of your business income from your taxable income. It’s really pretty awesome.

Simply speaking – remember that example above where you have $5,000 of income, but after expenses you only had $2,000 of taxable income? Well, with the QBI deduction, you still pay your self-employment tax on the full $2,000 – so that’s 15.3% = $306.

But then, you get to deduct 20% from the $2,000 before you pay the regular tax. In this example you’d take 2000 – 400 = 1600, then take 1600 times 22% and you get $352. So, really, instead of paying $746 like in the earlier example, you’ll only pay $658 – a savings of $88.

That doesn’t seem like much, but if your art business had a net income of $50,000, at the 22% tax bracket you’d be saving $2,200! The QBI can be a really important tool for you.

But not everyone can qualify for the QBI deduction. For an automatic QBI deduction – meaning – you don’t have to jump through any hoops to qualify, a single person would have to have income below $157,500. A married personal would need to be below $315,000.

You might be thinking – I’m just starting in the business, I’m not Jasper Johns. I don’t make anywhere near those numbers with my art. But I’m talking about your total income. So if you’ve got a day job, or a spouse with a high income, your QBI deduction could be lost.

But there are strategies for QBI if your income exceeds those limitations. That’s where it makes sense to talk with your accountant about what’s best for your situation.

With the new Tax Law, should I Incorporate?

For most people, I would say there’s no reason to. Unlike an LLC – which still allows you to file your tax on your personal return, a corporation is a completely separate entity with a separate tax return, a separate tax rate, and separate and very strict rules. There was a lot of buzz on the internet about forming corporations with the new tax rate, but the final bill, especially with the QBI deduction, pretty much evened the playing field for the business taxes. If you’re thinking about incorporating, be sure to sit down with your accountant and run all the numbers side by side before making any drastic decisions.

Posted on June 24, 2011May 31, 2016 by Jan Roberg

Tax Tips for Artists: Things You Need to Know!

Photo by Preston Kemp on Flickr.com

It’s audit season and I just got back from meeting with the IRS. So far this season, I’ve worked with two different artists and they both were contacted about the same thing: Cost of Goods Sold.

If you go to the IRS website and research what they’re looking for, you’re not going to find much information. I did find an old IRS audit guideline for artists from back in the 90’s, but that didn’t address Cost of Goods Sold for artists either.

In a normal business, Cost of Goods Sold would be what you pay for the stuff you sell. For example: say you own a teddy bear store. You pay $5 for each bear and then you turn around and sell the bear for $10. You start the year with 100 bears in your inventory, you buy 500 more bears to sell, and you end the year with 50 bears in your inventory. Let’s do the math:

Beginning inventory: $500 (100 bears times $5 each)

Purchases: $2,500 (500 bears times $5 that you paid for each new bear)

Ending inventory: $ 250 (because you have 50 bears left times the $5)

Cost of Goods sold: $2,250 (this is the confusing one: you take the 500 and add the 2500—that’s all the bears that you’ve purchased to sell, right? That equals $3000. Then you subtract the ending inventory 250 (because you didn’t sell those) and you’re left with $2,250—that’s your Cost of Goods Sold.)

But if you’re an artist, you don’t have a bunch of identical $5 bears. How do you even begin to value your artwork? Here’s the thing—most artists should not be doing a Cost of Goods Sold report on their taxes. Let me repeat that: Most artists should NOT be doing a Cost of Goods Sold report on their taxes.

Think about your art. If each piece is a unique work, where the value of the piece is mostly due to your labor as opposed to the materials that you put into the work, then generally you’re fine just writing off your expenses as “expenses” rather than listing your materials as a Cost of Goods Sold.

So at what point do you “cross over” from just recording your expenses to actually keeping inventory? I asked that at the IRS the other day. “It’s really hard to say,” was the answer I got. Even for an IRS agent with years of experience, this was a tough question. If you’re mass producing works-for example you’ve produced a limited edition of numbered prints, well then that’s a case where you should be taking inventory. Still—your purchases are only the products that you sell. For example: you pay $2,000 to have 100 prints produced which you then hand number and sign. You sell 70 of the prints for $100 each.

Your Beginning inventory: $0 (up until now, all of your art was unique. You never did COGS before)

Purchases: $2000 (because that’s what you paid for them)

Ending inventory: $600 (You have 30 prints left and they cost you $20 each because 2000 divided by 100 equals 20.)

Cost of Goods Sold: $1400 (You started with $0, you added $2000 in purchases. To get the Cost of Goods Sold you subtract the ending inventory of $600 and you get $1400.)

Is this making sense? Art and Accounting don’t go together well, but you need to know this stuff. (And I’ve worked with enough artists by now to know that you’re way better at math than you let on.)

But what about the 70 prints I sold for $100 each? That goes in the front of your schedule C, $7000 under gross receipts on line 1.

Cost of Goods Sold will go on line 4.

You’ll take your Gross Receipts minus your Cost of Goods Sold to get your Gross Income. In this example, you’d take the $7,000 – $1,400 to get $5,600.

But once again, let me make this clear—as a professional artist, you shouldn’t be using Cost of Goods Sold unless you are producing a significant amount of work and you have a way of determining the cost and a way of counting the work. For example: A painter could count canvasses, but it would be almost impossible to count paint. Canvas could be a COGS but paint would be a regular expense. A potter might be able to count pounds of clay, but the tools and glazes might need to be a regular expense.

If you choose to count your inventory, it’s important to value items at what they cost and not what you are selling them for. Let’s go back to our example about the prints. You paid $20 apiece for them so your ending inventory of 30 prints is worth $600. If you value your inventory at what you want to sell the prints for ($100 apiece) then your ending inventory will be $3000—that’s more than you spent on the prints to begin with. If you did that on your tax return, your COGS would come out as negative $1000 and your income would go up to $8,000 instead of the $7000 that you actually made. Valuing your inventory at the “retail” price will really mess you up, so don’t do that.

Remember, as an artist your business situation is as unique as your art. Don’t let your packaged software intimidate you into using Cost of Goods Sold when you shouldn’t. If you’re thinking that you produce enough that you should be taking inventory, spend the money to get help from a professional so that you get started on the right track. It’s much cheaper than an audit.

Posted on June 22, 2011May 31, 2016 by Jan Roberg

Tax Tips for Artists: Why You Might Not Want to Donate Your Art

Photo by John Morgan on Flickr.com

If you’re an artist, you may have been asked to donate a piece of your artwork for a good cause. You might have also been told that it’s good PR for you, because people at the event will get a chance to see your work and bid on it. And of course you’ve been told that your donation is tax deductible.

While it’s true that your donation is deductible, it’s not nearly as deductible for you as it is for me. Come again? You heard me right—your art donation is not as deductible for you as it is for me. Let me give you an example: Let’s say you donate a painting that would normally sell for $500. If I bought that painting and donated it to a charity, I’d get to write off the full $500 on my tax return as a charitable deduction. If you donate that painting instead, you can only write off the cost of the materials that you used to create that painting—depending upon what materials you’re using, that’s maybe $50 to $100.

Additionally most artists are sole proprietors, their art income goes on a Schedule C on their regular 1040 tax return. Your charitable donation can’t be counted as a business expense, it must go on your Schedule A with your other personal itemized deductions. If you don’t already itemize your deductions on a Schedule A, that donated painting gives you no tax benefit whatsoever.

I’m not saying that you can never donate to charity, I like charities and I think they deserve donations. It’s just that when you donate your art, you’re not getting much bang for your buck. So what are your alternatives?

One thing is to pay to “advertise.” For example: I support a small, local ballet company. I used to just donate money to them, but now instead I purchase an ad in their performance program. They get the money they need and I get a business deduction for advertising. This is especially good for me. Before, being in the 25% tax bracket, my $100 donation was worth $25 off my taxes. Now, as a business expense, my $100 advertisement reduces my taxes by $40 ($25 from my regular tax plus an additional 15% for my self-employment taxes.) The advertising option gives you the best tax value on your donation because you can use it to offset your self-employment taxes.

Do be careful about the charity advertising though. I once did an ad thinking I was supporting a local organization, when really the money was going to an advertising agency. The organization got some money, but most of it went to the promotional company. I won’t make that mistake again.

Another option for you is to donate the profits from one of your art pieces. For example, let’s take that $500 painting; assume you paid $100 for your materials,that’s a $400 donation to the charity. Most likely, that’s a better donation than what the charity would gain if they auctioned one of your pieces off. If you’re in the 25% tax bracket, you still get a $100 reduction in your taxes. It won’t help with your self-employment tax, but you do get the good feeling of making a donation and your art work sells for its actual retail value instead of some discounted auction price (another disadvantage of donating your art for charity.)

There are many worthwhile causes out there that need and deserve your help. If providing a piece of your art work is how you want to help, by all means do it. Just remember, it’s not your best tax strategy.