Yesterday, Maro Lorimer of Anna Maria Island, Florida wrote, “As tax time approaches, do you think artists who sell very little work are better off treating their art as a hobby (claiming no expenses and reporting no income) or going through the formalities of reporting income and claiming expenses? Is there a threshold where it makes sense to switch from hobby to profession? Related decisions include whether to claim part of the home as business space, get a business license and get a reseller’s license to buy wholesale. For the artist who wants to keep life simple but who occasionally sells originals, giclees and cards, what’s the best path?”
Thanks, Maro. For this one I had a chat with the artists’ tax expert Bob McMurray. Right away he told me in his experience artists who go the reporting and claiming route tend to do better. “Just by keeping records,” says Bob, “they get a better grip on a career. They take themselves seriously, learn more stuff, and, just like blondes, they have more fun.”
Bob has counselled many emerging and established artists. He urges artists worldwide to talk to their own tax specialists. “Different jurisdictions have different spins and loopholes,” he says. “And every individual artist has specific needs and requires specific advice.” Apparently, all taxing agencies provide guidelines for artists who are considering reporting. Generally, to report for tax purposes two main questions need to be positively answered: Are you carrying on a business? Are you in pursuit of profit?
If your answers are positive, then you should report your activities whether or not they are showing a profit. It’s understood it might take a number of years to actually show a profit, but that doesn’t mean you are not carrying on a business.
It seems most emerging and semi-motivated artists find their expenses exceed their revenues and these losses can be deducted from any other income. Its possible to lower taxes generally by reporting your art losses.
“The artist must report all income, both cash and non-cash, and may claim all expenses that can reasonably be related to the income earning process. In most places there are lots of deductions, depreciations and other benefits,” said Bob.
“But it’s all such a pain,” I blurted out.
“Not painful for you,” said Bob. “You just give us a great big cardboard box and go on having your fun.”
“Scotch?” I said.
“No ice,” he said.
PS: “Acting professionally breeds professionalism.” (Bob McMurray)
Esoterica: Bob McMurray has been doing my taxes for thirty years. A couple of years ago he decided to retire and get serious about painting. He was always impressed with how much fun his artist-clients were having. These days he gives tax workshops as well. He’s the only guy I know with two FCAs after his name: “Federation of Chartered Accountancy,” and “Federation of Canadian Artists.”
The great fun of taxation
by Bob McMurray, Vancouver, BC, Canada
The income tax rules will vary significantly from one jurisdiction to another. In the U.S. artists must contend with the IRS at the national level, the state tax laws/rules for the state where the individual resides or does business and then many of the larger cities have their own tax laws/rules. It’s possible that a U.S. resident could be required to comply with three different sets of rules and filing requirements.
In Canada the income tax laws/rules are harmonized pretty much between the Provincial and Federal governments with the exception of the province of Quebec which has its own laws/rules. The lucky Canadians need file only one income tax return.
My work has been in Canadian taxes and my knowledge of the income tax laws/rules in other countries is extremely limited.
I recommend, strongly, that anyone facing decisions about reporting business income seek the services of a qualified accounting/tax professional (CPA) located in the jurisdiction(s) where you are taxed. It is fair to ask for cost estimates before engaging the professional, if they have extensive experience with artists and to what work you can do to keep their time involvement to a minimum — it’s not cost-effective to have a professional to sort through scraps of paper to make a summary of your accounts. Your time may be better used producing inventory than trying to gain reasonable understanding of the applicable tax rules and preparing your own tax return(s).
If you have revenues from your art activities you should ensure that you record your related expenses and retain supporting documentation. If you have income after expenses you should report it but be sure to claim all the expenses to which you are entitled. If you have losses after expenses they may be applicable to other income or used to advantage in some other way.
If you don’t know of any professional advisors, you can often get a referral from a number of sources — other artists, anyone in small business, regional and local art societies, bankers, lawyers, trade magazines, yellow pages, etc. The best advisors are ones familiar with how artists work.
You don’t have to do it
I really enjoy all your inspiration emails, but you’ve got to be joking on this one. The government has no right to your money. If you want to be a slave to the system and let them force you to pay them at gunpoint for your hard work then by all means keep feeding the beast. But it’s like getting a permit to sell your stuff on your own property. The government has no right to that. They force us to pay income tax when there is no law that says you have to. The 16th amendment was not ratified and is supposed to be an apportioned tax, not a direct tax. Property taxes, income taxes are all unconstitutional and illegal. Do you actually understand the philosophy of liberty? It sounds to me by this letter that you do not. Please watch and try to understand the colossal mistakes you made in this email.
(Bob McMurray note) Thanks, Bonita. It is an urban myth that income taxes are unconstitutional and illegal.
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You’ve gotta do it
by Cynthia Podren
I am an attorney and my area involves using tax returns. I have a small art income, and am quite familiar with your writer’s situation. Also, I just spoke with my tax man about my situation!
Technically, as long as there is any income, it must be reported. It can be balanced by expenses, but it is an area which the IRS often investigates as a tax dodge, according to my advisor, who told me this after looking in a large loose-leaf notebook. (A guarantee of reliability!) So, if expenses exceed income by a large amount, it may be prudent to offset that by disclaiming the expenses with something called a “hobby” entry. That way, you don’t pay tax on what little income you had, but don’t invite audits by trying to shelter other income by your art deductions. Clear as mud?
(Bob McMurray note) Thanks, Cynthia. Canadian tax rules are a bit more friendly to artists. As long as they are “carrying on a business” and “in pursuit of profit” they are given a longer period to show a profit and, in the process, can deduct losses from other income.
Just starting out
by Linda Erickson, CA, USA
I am a full time middle school teacher. In May of this year I am finishing my Masters of Fine Art. So far if I sold a painting I just chalked it up to being a student and figured my expenses would more than cover any issues the IRS would have so I haven’t reported anything as yet. Now that I am about to graduate and hope to continue to sell my art where do I go from here? I live in California. Do you have someone you can put me in touch with? I’m sure there are business licenses, taxes for a business, maybe even social security, ugh, it becomes overwhelming. I would like to get into a gallery and supplement my income.
(Bob McMurray note) Thanks, Linda. I have not worked extensively with US taxes but I know that in the U.S. artists must contend with the IRS at the national level, the state tax laws/rules for the state where the individual resides or does business and then many of the larger cities have their own tax laws/rules. It’s possible that a U.S. resident could be required to comply with three or more different sets of rules and filing requirements.
I recommend, strongly, that anyone facing decisions about reporting business income seek the services of a qualified accounting/tax professional (CPA) located in the jurisdiction(s) where you are taxed. It is fair to ask for cost estimates before engaging the professional, if they have extensive experience with artists and to what work you can do to keep their time involvement to a minimum — it’s not cost-effective to have a professional to sort through scraps of paper to make a summary of your accounts. Good luck with the art business.
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In need of connections
by Marion Evamy Morrison, Victoria, BC, Canada
I have recently moved to BC (Victoria) and make a reasonably successful living as a full time artist. I need to find a local tax accountant who is familiar with the artist’s plight… can you suggest anyone, as I know Robert hangs his hat in this province? Many thanks. PS: Looks like you are enjoying your second career as an artist too! Congratulations!
(Bob McMurray note) Thanks, Marion. I’m not aware of a tax accountant in Victoria that deals with artists but suggest that you contact the Victoria chapter of the Federation of Canadian Artists (www.artists.ca). The president there is Mary Ann Laing at 250 727 3670. Perhaps they can refer you to someone local. In seeking an advisor you should look for a Chartered Accountant or Certified General Accountant and ask for cost estimates up front. If you still can’t find someone let me know and I’ll give you the contact information of my old firm (they deal with a significant number of artists, are in Surrey and have clients all over western Canada).
Also, an excellent reference book for artists is Artists Survival Guide by Chris Tyrell (I wrote the chapter on taxes), $34.95 at Opus Framing and Art Supplies.
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Seeks studies on artists and taxes
by Jerry Hallan
I am starting a go around with the IRS concerning my art as a business rather than a hobby and will at some point in the not too distant future move into a formal appeal status. I am not trained in taxation but have been kind of an interested student since tax preparation software emerged on the scene. I am interested in finding any studies that show the development of artists income-wise over time. I am going to do an internet-based search and will also engage one of our local university librarians. I am also going to search a number of foundations and the National Center for the Humanities. Are you aware of any such studies?
I do a novel kind of sculpture and produce large scale versions of birds and other animals; I am currently working on a series of 6 feet long butterflies. The technique used involves plywood, solid polyurethane foam, wood shavings colored with clothing dye and hot melt adhesive. I have had a couple of magazine articles and TV interviews, primarily in Florida and will have two one person shows later this year. I am a retired academic with no formal training in art and am having fun with this new career. All of this is likely more than you wanted to know but I look forward to a reply.
(Bob McMurray note) Thanks, Jerry. One of our main reference sources for data on tax matters is the library of decided cases. This shows how the courts have interpreted the tax laws/rules and is the final word (unless Revenue Canada Taxation appeals and wins). I can go online to the Government of Canada resources and look up tax cases dealing with artists. I assume that the IRS would have a similar data base and publications that could provide a lot of information for you if you can access it. Those cases would be most pertinent to your interest.
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Using losses against partner’s income
by Todd LaChance, Canada
I am a Canadian artist. My question: I usually (my wife actually) does my taxes to have it come up even. Can we use the rest of the losses against her income?
(Bob McMurray note) Thanks, Todd. There is no provision for transferring losses to a spouse. The losses can be carried forward and back if you paid tax in the last 3 years or will be taxable in a future year. In that case, the reduction of your income by losses carried back or forward may allow your wife to claim you as a dependant, wholly or partially, in those years. If you have donated artwork to charity(ies) your wife can claim the donation receipt(s) on her return if it is advantageous. Also, your business-in-the-home expenses can be carried forward indefinitely against future income from the business.
Gazing down the gator
by Terry Mason, Sarasota, FL, USA
I needed this kick in the butt. That was absolutely convincing. From now on I track all my plein air miles. I track all my supplies. I track my sales. I track it all. Because if I don’t take myself absolutely dead seriously, who will? Thanks. This was inspiring. Yeah, I will get tired of it. So what? I get tired of marketing too especially if I would rather be in the field getting eaten by bugs, avoiding snakes, and mixing sweat with oils as a new medium. If I take myself seriously enough to gaze down a gator then I can take myself seriously enough for a tax man.
Declaring yourself a professional
by Linda Walker, Bemidji, MN, USA
As a co-chair of membership for a national art association I can attest to the fact that there are more persons getting into the art as business field than ever before. Taking the time out to set up the steps that will declare yourself a professional can have a myriad of positive reactions. Just as you would learn the basic creative techniques before turning out accomplished work you might learn the business basics that are a part of being a professional such as mailing lists, inventory, show applications, etc. and yes taxes. It can take a long time to make the business decisions that will catapult you into fame and fortune (if that’s what you desire). In the meantime you can just take the onus off of what many consider doing the chores by learning how to control the process.
I’ve doubled my income from sales of both large expensive pieces, I figure from the ‘half full’ group; small, easier to afford originals to the ‘waiting it out’ group, and smaller giclee prints to the ‘half empty but got to have it’ group. To all of which I’m grateful. The problem is that my expenses have caused this to be not as big a celebration on the business side but puts a big smile on the face of my creative ego.
(Bob McMurray note) When an artist disposes of an artwork by charitable donation two things have happened; a salable asset has been disposed of for its fair market value and the artist has made a donation to a charitable organization equal to the same value. I’m not sure how the US taxing authorities treat this but in Canada the artist reports the sale and the donation at the same amounts but has the option to use a number between zero and the value for that purpose.
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Sales are the killer
by Abbie Williams, Nobleboro, ME, USA
A wonderful teacher of mine many years ago said, “Don’t stand up for the applause,” in other words paint for yourself not just for the sales. When artists get too dependent upon sales of their paintings to make a living they are bound to be headed for disaster because the economy is fickle. It’s like actors, musicians, or any other artistic person. We all have a season so most of us have to have a day job to see us through the rough years. It’s only the very lucky few who make it really big that can give up their day job and even they will at some point go through dry periods. Besides, the question needs to be asked, “Are you painting for the money or for the love of painting?” If it’s for the money, and not the love of it, chances are painting will eventually become a job and when the economy goes south the reason for painting will go south, too.
After 35 years of painting I have been one of the lucky ones making a living at it, however, it hasn’t been made purely through the sale of paintings. Along the way I have done illustration, ads for newspapers, drawings of houses for money, designed houses, done portraits, taught and, sadly, spent 10 years of making “art” plates, lithographs and figurines for the collectibles industry. Right now, teaching is pulling me through along with a painting sale here and there until the economy turns around again.
(Bob McMurray note) Thanks, Abbie. You are indeed lucky. I read somewhere that luck happens when preparation meets opportunity — it’s not pure chance.
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The problems of a compulsive art supply buyer
by Terry Honstead, Bemidji, MN
I don’t know about anyone else, but I spend thousands on art supplies! They are actually taking over my basement as we speak!! LOL!! But that aside, I had a huge inventory also to claim and I had to estimate how much “stuff” I have that hasn’t sold yet. I had a really hard time because I got too much back from the government (is that possible??) But if I changed the amount of inventory I had, I could have changed what I got back. I tried more and less to see what it did, and then ended up going with my first guess anyway. How do you know how much your paintings are worth? It all depends on what you can get from others, so it is very personal (to me anyway!) I tell you though, as we speak, the carpenters are remodeling my kitchen for me!!
(Bob McMurray note) Thanks, Terry. I had been a regular at our local art stores for years until one day I realized that I had everything. I was depressed for three months until it occurred to me that I didn’t have back-ups.
Find a specialist in freelancer taxes
by Kittie Beletic, Dallas, TX, USA
My CPA retired a few years ago and when I looked for a new one, someone suggested I find someone who specialized in freelancers. I found a wonderful person in NY who handles artists, freelance writers, entertainers and who is familiar with the overs, arounds and throughs of the freelance tax world. I take one day and do the numbers, send my totals on a sheet of paper and hold all those little pieces of paper in a Whole Foods bag until all is said and done. Over the years my tax person has gently shared about deductions, options for recording things like mileage and supplies and work space, and telephone… Each year has its own taxing flavor but is basically the same. No longer painful, I just create a whole day around it. It can actually be fun! Receipts for special paints, printing supplies, research materials for articles and speaking, the occasional restaurant receipt — some bring back memories of specific paintings, books, customers. I have donated art and books that haven’t sold or are specialized and taken the deduction for those pieces. Asking your CPA to advise on whether or not to take the deduction, to declare certain supplies or trips or whatever might be pertinent is a good learning tool. The best years have been when we have bartered — exchanged our services.
The benefits of bookkeeping
by Dan McGrath, Lexington, KY, USA
You are so right, a few years ago I set up a little budget speadsheet in Excel, in it I have monthly planned and actual expenditures for classes, frames, supplies, rent, etc. It helped me to see clearly where my biggest expenditures were, custom-sized frames, and that taught me to use standard sized canvases, and therefore frame — when a painting didn’t sell, I was able to easily reuse the frame. Same goes for too many art classes, etc. I keep a folder for receipts for a given year and it takes 2-3 hours at tax time to do my income and expenses. Easy!
Unique situations in certain states
by Donna Pierce-Clark, Springfield, OH, USA
I live in Ohio, USA and have been claiming as a professional artist for 3 years. This will make year # 4. If I read the directions correctly, in Ohio, we can claim 3 out of 5 years. If after 3 years, we are not making money, but losing it, we have to claim as a hobbyist. But, I’m beginning to sell more now (as I am entering this year of 2010). I think I may have hit pay dirt, but now I can only claim as a hobbyist? I surely don’t want to get into trouble with the tax people.
(Bob McMurray note) Thanks, Donna. Seek professional help (tax advisor).
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IRS tightening up on some deducted expenses
by Linda Blevins
We own a giclee art reproduction company and recently have had a few of our clients audited by the IRS. IRS was not allowing painting supplies, and even reproductions as deductions. Perhaps we have a mean crew of IRS agents here in California, but because our clients listed us as suppliers, we are also being audited. Fortunately we use a very reputable CPA, and have excellent records. But many of our clients are now having problems with their deductions. Have the laws changed? I have been a professional artist for almost 40 yrs, and am getting very concerned. Any thoughts?
(Bob McMurray note) Thanks, Linda. I suggest you ask your CPA about changes in the laws.
In praise of expenses
by Liz Reday, South Pasadena, CA, USA
I’ve been reporting my art income here in the U.S. for many years, in good times and bad. As an artist, you do have to have some years where you turn a profit, or it is just considered a hobby. The advantage of keeping on the up and up with the IRS and the Franchise Tax Board (California State taxes) is that you get to write off expenses. As a self employed artist, the quality of life lies in the expenses. Art books, art supplies, art classes and most importantly, TRAVEL. My inspiration comes from anywhere, but there’s nothing like a foreign exotic country where they don’t speak English to get the old artistic juices flowing. The best way to go requires packing up the easel, paints, brushes, etc., but even a sketchbook with colored pencils or markers can be enough to convey a scene and catch the wonders on this beautiful planet. A camera helps sometimes. When I was younger, I hitch-hiked all over Europe alone, and still have the sketchbooks to prove it. In summer, it’s well worth checking out art workshop/schools in Europe to see if they need any helpers for room & board…I guess they call it interning now, but whatever, when you’re young (and healthy) you can travel on very little money if you’re prepared to stay in youth hostels, share bathrooms and camp. Back packers can be found in almost any country in the world, sharing cheap lodging, cheap restaurants and some wild stories. I travelled solo long before the Internet and the now ubiquitous Internet cafe, with strong legs, a cheeky attitude and very little money.
However, as we mature as artists, we tend to like a little more comfort in our travels, all of which can be deducted providing we make art and SELL IT. Photographs and sketches make great inspirational resources on return home. Save every scrap of paper, bus tickets, receipts from cafes, museum entry fees, hotels, motels, room & board, guesthouses and put everything in a large envelope. You may not be able to use all of your travel expenses, but a portion of them are legitimate tax deductions. You do have to sell those paintings! Check with your tax advisor on what is O.K. — clothes are not deductible, no matter how necessary. To be on the safe side, keep a log of places visited and money spent. Even Andy Warhol did this, scrupulously writing down every taxi fare, every cup of coffee. And yes, I have been subjected to a wonderful experience known as the ”random audit” (the IRS had some fancy name for it, but you get the idea). I produced stacks of large manila envelopes full of bus tickets, cafe receipts, plane fares, the lot, along with bank statements, and passed with flying colors.
(Bob McMurray note) Thanks, Liz. Good on you — you are doing everything right and enjoying the benefits.
There are 2 comments for In praise of expenses by Liz Reday
Fighting them and beating them
by Lyn Westfall, Caledon, ON, Canada
‘Income Tax’ are words of dread for many artists. I had my experience — a successful court case — with Revenue Canada. In 2000 I was audited for the tax years 1996 and 1997, with the conclusion that my art business had no reasonable expectation of profit. For $100.00 I could appeal this judgement. I had to do this — I knew I had a serious art business. My brother, Peter Westfall, was the only lawyer I could afford (free), but we prepared our appeal with diligence, to make the case that my art career did indeed have a ‘reasonable expectation of profit.’ The appeal had the title ‘Lyn Tramble (my teacher’s name) vs. Her Majesty the Queen!’ Your readers may want to read Associate Chief Justice Donald Bowman’s 26 point judgment — awarding me success in my business of an artist — WITH COSTS. (My brother got paid.) As well, Arthur Drache’s Financial Post article “Redefining Income Tax Act’s ‘reasonable expectation of profit’ ” — published in a National paper is available. Both items can be found on my website (lynwestfall.ca) under the heading ARTICLES. Although this case was tried some years ago, I am sure the same rules apply today. Maybe this will give some artists encouragement that we can fight back! It is worth the time and effort.
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W.T.H.G.O. #6 – 2006
oil painting 18 x 30 inches
You may be interested to know that artists from every state in the USA, every province in Canada, and at least 115 countries worldwide have visited these pages since January 1, 2013.
That includes Betsy Heckethorn who wrote, “In the course of researching how 1099 forms were to be treated, I found that IRS has two categories for artists. Any guesses? Answer: ‘Living’ and ‘Dead.’ ”
And also Anonymous, who wrote, “If you don’t believe in what the government is doing with your money, you protest by not paying.”
(Bob McMurray note) Thanks, Anonymous. Good luck with that.
Enjoy the past comments below for The great fun of taxation…