What is Tax Deductible for Artists and Photographers?
Yeah, complaints probably aren’t tax deductible…. Tax jokes aside, there are many business tax deductions for artists and photographers. Our “How to Stay on Track & Get Paid” article covers common tax deductions, what is tax deductible for photographers and artists, tips for retaining independent contractor status, and information about deducting your home studio. You can find all our top tax deduction tips in the excerpt below. You can also read the complete article in the 2014 Artist’s & Graphic Designer’s Market or on ArtistsMarketOnline.com.
Keep creating and good luck!
Take Advantage of Tax Deductions
You have the right to deduct legitimate business expenses from your taxable income. Art supplies, studio rent, printing costs, and other business expenses are deductible against your gross art-related income. It is imperative to seek the help of an accountant or tax preparation service in filing your return. In the event your deductions exceed profits, the loss will lower your taxable income from other sources.
To guard against taxpayers fraudulently claiming hobby expenses as business losses, the IRS requires taxpayers to demonstrate a “profit motive.” As a general rule, you must show a profit for three out of five years to retain a business status. If you are audited, the burden of proof will be on you to validate your work as a business and not a hobby. The nine criteria the IRS uses to distinguish a business from a hobby are:
• the manner in which you conduct your business
• amount of time and effort put into your work
• expectation of future profits
• success in similar ventures
• history of profit and losses
• amount of occasional profits
• financial status
• element of personal pleasure or recreation
If the IRS rules that you paint for pure enjoyment rather than profit, they will consider you a hobbyist. Complete and accurate records will demonstrate to the IRS that you take your business seriously.
Even if you are a “hobbyist,” you can deduct expenses such as supplies on a Schedule A, but you can only take art-related deductions equal to art-related income. If you sold two $500 paintings, you can deduct expenses such as art supplies, art books, and seminars only up to $1,000. Itemize deductions only if your total itemized deductions exceed your standard deduction. You will not be allowed to deduct a loss from other sources of income.
To deduct business expenses, you or your accountant will fill out a 1040 tax form (not 1040EZ) and prepare a Schedule C, which is a separate form used to calculate profit or loss from your business. The income (or loss) from Schedule C is then reported on the 1040 form. In regard to business expenses, the standard deduction does not come into play as it would for a hobbyist. The total of your business expenses need not exceed the standard deduction.
There is a shorter form called Schedule C-EZ for self-employed people in service industries. It can be applicable to illustrators and designers who have receipts of $25,000 or less and deductible expenses of $2,000 or less. Check with your accountant to see if you qualify.
Deductible expenses include advertising costs, brochures, business cards, professional group dues, subscriptions to trade journals and arts magazines, legal and professional services, leased office equipment, office supplies, business travel expenses, etc. Your accountant can give you a list of all 100-percent and 50-percent deductible expenses. Don’t forget to deduct the cost of your copy of Artist’s & Graphic Designer’s Market or Photographer’s Market!
As a self-employed “sole proprietor,” there is no employer regularly taking tax out of your paycheck. Your accountant will help you put money away to meet your tax obligations and may advise you to estimate your tax and file quarterly returns.
Your accountant also will be knowledgeable about another annual tax called the Social Security Self-Employment tax. You must pay this tax if your net freelance income is $400 or more.
The fees of tax professionals are relatively low, and they are deductible. To find a good accountant, ask colleagues for recommendations, look for advertisements in trade publications, or ask your local Small Business Association.
Whenever Possible, Retain Your Independent Contractor Status
Some clients automatically classify freelancers as employees and require them to file Form W-4. If you are placed on employee status, you may be entitled to certain benefits, but a portion of your earnings will be withheld by the client until the end of the tax year and you could forfeit certain deductions. In short, you may end up taking home less than you would if you were classified as an independent contractor.
The IRS uses a list of twenty factors to determine whether a person should be classified as an independent contractor or an employee. This list can be found in IRS Publication 937. Note, however, that your client will be the first to decide how you’ll be classified.
Report All Income to Uncle Sam
Don’t be tempted to sell artwork without reporting it on your income tax. You may think this saves money, but it can do real damage to your career and credibility—even if you are never audited by the IRS. Unless you report your income, the IRS will not categorize you as a professional, and you won’t be able to deduct expenses. And don’t think you won’t get caught if you neglect to report income. If you bill any client in excess of $600, the IRS requires the client to provide you with a Form 1099 at the end of the year. Your client must send one copy to the IRS and a copy to you to attach to your income tax return. Likewise, if you pay a freelancer over $600, you must issue a 1099 form. This procedure is one way the IRS cuts down on unreported income.
Register With the State Sales Tax Department
Most states require a 2–7 percent sales tax on artwork you sell directly from your studio or at art fairs, or on work created for a client. You must register with the state sales tax department, which will issue you a sales permit or a resale number and send you appropriate forms and instructions for collecting the tax. Getting a sales permit usually involves filling out a form and paying a small fee. Reporting sales tax is a relatively simple procedure. Record all sales taxes on invoices and in your sales journal. Every three months, total the taxes collected and send it to the state sales tax department.
In most states, if you sell to a customer outside of your sales tax area, you do not have to collect sales tax. However, this may not hold true for your state. You may also need a business license or permit. Call your state tax office to find out what is required.