The information in this article is provided for informational purposes only and is not intended to substitute for accounting, tax, or financial advice from a qualified professional.
January 2016 has come and gone and for many of us that means just one thing: the tax forms are in the mail.
For artists, tax time can be fraught with uncertainty and fear. We’ve all heard a horror story or two about an artist who has had to defend their life’s work from being classified as a “hobby.” Even artists whose work is in the Guggenheim and the Met have not been immune from the dismissive hand-wave of the IRS.
But don’t fear. Despite the hype and the urban legends, the IRS is not really specifically out to get artists. Taking just a few clear-cut steps now can help you be ready to file with confidence and avoid the “red flags” that could trigger an audit, as well as the stress that often accompanies doing your taxes.
1. Make sure to report ALL OF YOUR INCOME. This may seem like a no-brainer, but it’s not an uncommon assumption that the less money we make, the less likely the IRS is to pick on us. In fact, the opposite is true: statistics show that more than 5% of returns among those making less than $24,000 per year trigger audits, and nothing is more likely to get negative attention from the IRS than a return showing a $0 income. So gather together all those 1099s and W2s and handmade receipts for the artwork you sold at that show or fair or through Etsy. Think of it as a celebration instead of a chore: your art actually DID make some money for you last year. Hooray!
2. Get your expense documentation in order. If you file Schedule C as a small business owner and are reporting a loss, make sure you have excellent records and documentation. According to FreelanceTaxation.com, a web site created and maintained by New York tax expert Susan Lee, you need to keep all of your receipts, even if you purchased supplies with a credit card. “Credit cards are not receipts,” the site emphasizes. Although a credit card statement shows you paid for something, a receipt is needed to give the details of the purchase. Those details are how the IRS will determine if those deductions are accepted or denied if you find yourself in an audit.
3. Start early. It’s important to make sure your return is filled out 100% correctly, so start putting time into your document organization now. If you discover you are missing documentation or receipts, it will be much better—and significantly less stressful—to start dealing with those issues in February than in April
What kind of things might land you in front of an auditor? According to the website Nerdwallet, things like math errors, not reporting 1099 income, reporting too many losses on Schedule C, or claiming too many business expenses are big red flags to the IRS. Recent court decisions have taken a slightly softer tone toward the “business vs. hobby” question, but remember that you do need to demonstrate a real intention and effort to manage your artmaking practice professionally and with key business systems, like inventory tracking, basic accounting, and expense reporting, in place.
Finally, don’t hesitate to engage a tax professional to help you with your returns. That person can guide you toward maximum deductions and steer you away from errors specific to your situation and the state you live in. And if you do fall victim to an audit, he or she will represent you at the proceeding, saving you an extra measure of stress.
Kennedy, Randy. "Tax Court Ruling Is Seen as a Victory for Artists." The New York Times. The New York Times, 6 Oct. 2014. Web. <http://www.nytimes.com/2014/10/07/arts/design/tax-court-ruling-is-seen-as-a-victory-for-artists.html?_r=1>.
Lee, Susan. FreelanceTaxation.com:Taxes for freelancers, artists, writers and psychotherapists. Susan Lee, CFP, n.d. Web. 02 Feb. 2016. <http://www.freelancetaxation.com/>. Includes deductible expense checklists for visual and performance artists, as well as extensive information regarding money management and financial planning for creatives and freelancers.
Paden, Romona. "7 Reasons theIRS Will Audit You." Web log post. Nerdwallet. N.p., 18 Dec. 2015. Web. <https://www.nerdwallet.com/blog/taxes/7-reasons-irs-audit/>.
Riley, Peter Jason. "Taxation & Tax Deductions forthe Self-employed Visual Artist." Arts Tax Info: Visual Artists. Riley & Associates PC, n.d. Web. 02 Feb. 2016. <http://www.artstaxinfo.com/artists.shtml>. Includes downloadable artist expense and income worksheets, example of inventory documentation for tax purposes, and a sample artist's tax return.
Taylor, Joy. "16 IRS Red Audit Flags." Kiplinger. Kiplinger Tax Letter, Dec. 2015. Web log post. <http://www.kiplinger.com/slideshow/taxes/T056-S011-tax-audit-red-flags/index.html>
"What Makes an Artist a Professional for TaxPurposes?" 1-800-Accountant.com. Web log post. <http://1800accountant.com/blog/what-makes-an-artist-a-professional-for-tax-purposes/>.