If you have a choice between “creating art” or “record keeping of art”, which would you choose? Well, even for me, that is an easy choice – create art. Unfortunately, we have to “do the business of recordkeeping”. So why do we have to keep track of our expenses and income? The main goal is to lower our taxes. We certainly do not want the proceeds of our wonderful artwork to go for State and Federal taxes. If we want to lower our tax liability then we need to track our income and expenses.
Need another incentive to do your record keeping? The Federal government believes that if an artist is losing money year after year that you may have a hobby rather than a business. If you are an artist that is not yet profitable, then providing proof that you are truly doing your art as a business is key.
Okay, so now I have convinced you that you need to do record keeping. What do you need to do?
Let’s go into three areas: tracking income, tracking expenses, and tools needed to do your record keeping. I will not be able to go into lengthy detail in these areas, but you will have the basics for starting your records.
You will need to track all income that you receive as an artist. This includes amounts paid for your artwork, prizes, awards, fellowships, endowments, subcontractor payments, and what the IRS calls “taxable income other than cash”. You will also need to keep track of any sales tax that you collect. Assuming that you are a cash basis taxpayer, you will also need to record any advance payment for work that is to be completed sometime in the future. If you have published and are collecting royalties, this will also need to be included in your income.You need to include in your recording of income the following information: Date, Price of artwork, Sales Tax, Total of Sale, Received From (Include name, address, telephone number, email address for your customer records), Description of income (Ex: Sale of “name of piece”), and Form of payment. In some cases you may receive a Form 1099 at year-end from customers that are businesses. You will need to retain them to support the filing of your return.
As artists we have some unusual expenses that can be deducted as business expenses. The IRS states that businesses and individuals may deduct all “ordinary and necessary” items to run a business.Who or what defines “ordinary and necessary”? This is not an all-inclusive list. My advice to you is – if you are in doubt as to whether your expense is deductible, keep the receipt and consult your tax preparer. Your business is an artist. Your deductions should be related to your art and the business of producing your art for sale.
- Office supplies – business cards, stationery, stamps, etc.
- Office or studio rental
- Commissions paid to galleries or managers for sale of artwork
- Art supplies and materials
- Special clothing or safety equipment
- Equipment used in your artwork (checkon depreciation of purchased equipment)
- Legal and accounting fees
- Publications and periodicals
- Entry fees to shows even if work is not accepted
- Membership fees/dues
- Shipping, mailing
- Taxes and Licenses
- Travel Lodging
- Meals (only 50%)
- Sales Tax Utilities
- Fees for workshops or seminars
- Rental of equipment
- Bank fees
- Home Studio deduction
- Website design
Just as in tracking your income make sure that the receipt shows the date of the expense, description of purchase, form of payment, amount of expense, sales tax charged on the expense and reason for purchase.
Tools for Record Keeping
You now have an idea of all the information that you need to retain. How about a place to keep the paper and where are you going to record all this information? Well, you could store it in a shoebox and smile when you give it to your tax preparer at the end of the year. Or - organize and record everything in a ledger book. A ledger book can be purchased at any office supply store. This is an inexpensive, manual record keeping system. You can still keep all the paper in a shoebox, but at least it will be organized in the ledger book.
Another manual way is to record all the information in your date book. This could become cumbersome very quickly. If you are anything like me, it is hard enough for me to record dates and appointments in my date book! I don’t want to clutter it further with business information. You can computerize your record keeping without the purchase of an expensive accounting program. Using a simple spreadsheet will allow you to keep your business information in a format that will be easy for you or your accountant at tax time. For example, using Microsoft EXCEL you can use one workbook with a tab for income and a tab for expenses. (See “Instructions for Artist Record Keeping”).
You can purchase an accounting software program without spending a fortune. There are many good programs available that are user-friendly. You do not have to be a computer whiz or an accounting expert to use these programs. It is as simple as using your own checkbook. I personally use QuickBooks. This program allows me to do receipts for my sales, track my expenses, print checks, and maintain information on my customers and vendors. Other easy, inexpensive programs include MONEY and Quicken. No matter what system you use, manual or computer, make sure you save all of your physical receipts of expenses and a copy of all your receipts of sales and other income.
Now what do I do?
So you are saying to yourself, “What do I do now?” A good place to start is to go to an office supply store. Purchase the following: a two-part receipt book, an accordion file box divided by month or the alphabet (whatever works for you), and a ledger or record book. When you have a sale complete a receipt in the book with the information we discussed in the “Tracking Income” section. This will provide you and your customer with a copy of the transaction. File your copy and any expense receipts that you have in the accordion file box. Once a month sit down and write all the sale receipts and the expense receipts in the ledger book. If you don’t want to record everything in the ledger book, at least your accountant will appreciate that you did organize all of your business information in a nice file box. If you want your accountant to really love you then use the ledger book also. It might help cut down on the time spent to prepare your return and may save you in accounting fees.
I know record keeping and taxes can be a bit overwhelming and not the rewarding part of our passion. Hopefully with this knowledge you are not as “overwhelmed”. If you decide to shop for a tax preparer make sure that the person has experience in the taxation of artists. You will also want to ask questions concerning other tax strategies that are available to you as well as state requirements for filing sales tax, due dates and other compliance issues. Avoid the rush – get started before tax time!
As a final note, if the IRS ever audits you, your proof for business deductions, including your proof that you are conducting a business and not a hobby, will be in your record keeping.