An artist asked me recently if it’s true that artists are often targeted by the IRS for audit, and, if so, what can you do to avoid an audit. Good question, I thought, so I asked my own tax accountant, Karen Summerhays of The Summerhays Group, for some advice.
First a disclaimer: The following certainly isn’t an exhaustive exploration of this issue. Just as we shouldn’t diagnose and treat our aches and pains based on a column in a popular magazine or newspaper, here, too, consulting an expert for individual advice is the best way to find the tax treatment that’s best for you.
Are you a “hobbyist” or a “professional” artist?
This is probably the most important question to ask yourself as you think about how to handle the expenses for all those art supplies you’ve been buying. When the IRS sees expenses but little income, resulting in a loss, they’ll ask the same question.
The proof is in your records. Do you meet the “500 hour material participation” test? Can you show that you are spending at least 500 hours a year working as an artist? How does that time compare with other work you do? Is your art income increasing? Do you have a business plan that shows how and when you expect your art business to become profitable? According to Summerhays, “The IRS can live with a loss for a while if you can demonstrate that art is your business and not just a hobby.”
Should you not claim some expenses in order to show a profit?
“No,” says Summerhays. “It’s against the law not to claim all your business expenses.” If you can show through your records and your business plan that art is your business, then claim all your expenses.
Of course, you don’t send the IRS all your backup records when you file your taxes. So you must hold your breath and wait to see if your tax return is flagged for an audit. And, yes, artists who claim losses are more likely to be audited.
Are there some categories of expenses that are easier or harder to defend?
Good record keeping is key to defending any type of expense. Be sure to save receipts, time and mileage logs, and relevant notes for at least seven years. A good computer-based accounting program, such as Quick Books, is easy to use and makes you look more organized and professional.
Specific categories of expenses artists can claim include: art supplies and framing (considered “costs of goods sold” in accounting terminology); postcards or other advertising to promote exhibitions; refreshments at exhibit openings; studio rental or in-home studio costs, as a percentage of home expenses based on square footage (the space must be 100% devoted to your business and not shared with other family members or uses); travel to visit prospective galleries or to attend openings of exhibits of your work.
Regarding travel, it’s important to keep a mileage log, notes about those with whom you met, i.e., what was discussed, names, and contact information. Catalogs or programs proving your participation in an exhibition also serve as evidence. If your travel expenses are excessive, it might raise audit interest, so be prepared to defend your claim.
If the artist has another job (or business line), should income/expenses be commingled on the same tax return?
Summerhays says, “This depends on what the other job may be.” Let’s say you are also a writer, framer, or work in a similar creative field, then it’s appropriate to file one return for all. Or, if you have a “real job” in a company that provides a W-2 for tax reporting, you may file one return with a “schedule C” for your other (art related) income. Once you start making more than $50,000 per year on your art, there may be tax benefits in filing a separate return, advises Summerhays.
How do you handle charitable donations of your artwork?
If you donate a piece of art for an auction, be sure to ask the charitable organization for a letter acknowledging your donation and its value. Keep this letter with your other tax papers to back up the charitable donation claimed on your tax return.
Well, here it is March and perhaps you’ve already filed your taxes. Or maybe you haven’t filed but you’re thinking, “Darn! Why didn’t I keep better records?!” It’s not too soon to get organized for next year. Set up a system to saving and recording your expenses and notes as you go through the year and your tax preparation job will be much easier next year.
Now, where did I put that shoebox with all my receipts in it?
Sue Martin holds an M.A. in Theatre and has worked in public relations. As an artist, she works in watercolor, oil, and acrylic to capture Utah landscapes or the beauty of everyday objects in still life.
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