The biggest mistake artists make when it comes to taxes is not being organized enough to get all of the deductions they are entitled to, say Steven Goldglit and Richard Shebairo, two New York City certified public accountants who specialize in artists.
“They don’t get a good chunk of the deductions they should,” says Goldglit.
He says three areas to look into for more deductions are travel, supplies and entertaining. To simplify recordkeeping, Goldglit suggests buying accounting software such as Quicken or QuickBooks.
Know what to deduct.
When determining what to deduct, Shebairo says only expenditures that are directly related to the “trade or business” of being an artist are deductible, such as art supplies, shipping costs, entry fees for juried competitions, festival booth fees, and travel costs to and from clients or other sales venues.
“Therefore, it is important for an artist to organize their expenditures between what is directly related to the conduct of their ‘trade or business’ and what is merely of general interest,” advises the accountant.
In order to deduct costs for your studio, though, you need to make sure that you are using the space exclusively to create and show your art. Likewise, furniture must be used solely for work to have it eligible for a deduction.
“With respect to home office deductions, the artist must be aware of the ‘exclusive use rule,’ which holds that a portion of your home can only be deducted if it is used exclusively for business,” Shebairo says. “Therefore, you couldn’t deduct your dining room if it was used for both work and dining.”
Be prepared to prove art is your vocation.
Shebairo says an artist should be prepared to prove to the IRS that making artwork is being done primarily with a profit motive in mind.
“Since the proof of a profit motive is subjective, the Internal Revenue Code provides a safe harbor rule which states that if a profit is made in any three out of five years, the artist will be presumed to be in a ‘trade or business’ and consequently will be allowed to report art-related losses on their tax returns,” said Shebairo.
However, he notes that if you don’t meet this presumptive test, you can still persuade the IRS to recognize your art making as a business by proving you have a profit motive.
“Once a profit motive has been established, there is no statutory limit on how many years losses can be deducted,” he says.
Ways of demonstrating you are in business with a goal of making a profit include, among other things, demonstrating that your work has been exhibited, that you seek representation at galleries and you make all reasonable efforts to expand your knowledge and professional skills and contacts or other similar things that would show you have the goal of profitability, Shebairo explains.
Other tips to help you plan.
Goldglit adds that artists should be aware of the self-employment tax, 15.3 percent above the income tax, which is an artist’s contribution to Social Security, so artists need to make sure they are putting enough aside to cover the costs. He also suggests that artists not to set themselves up as corporations because that is usually a way to shield entrepreneurs from liability and artists have very few liabilities, so it may not be worth the time and expense. In addition, you could pay additional taxes if you are set up as a corporation.
Finally, he advises artists to keep some of their artwork as a “savings account” and to set up a retirement account.
“Markets come and go. What you are selling now that is hot may not be hot 10 years from now,” he says.
For more tax advantages and information on how to set up a retirement account, such as a Simplified Employment Pension, or SEP, contact your local certified public accountant. For a list of organizations across the country offering tax help to artists for free or at a low cost, be sure to pick up the September 2008 issue of Art Calendar magazine.
Based in Washington, D.C., Ted Knutson is a veteran journalist whose work has appeared in The Chicago Tribune, The Washington Post, Crain’s Chicago Business and many other publications. He may be reached at [email protected].
