You must be in it to make money not to reduce your tax!

June --

I am a Full time IT Professional, and part time artist. I've been painting/selling my artwork for many years.

I'm just starting to think about how I can use that to my advantage during tax time.

My question is will your book be useful for me, as I'm not self employed - I have a job, but I'm also an artist? I was wondering if I should create a company to leverage against the income I get from my full time job, or should I just file my taxes differently.

Do you have any information on the topic? I paint dance-themed art. As an artist, can the creative material gathering process be included in a deduction. For example if I go to a salsa event and take pictures so that I can use that material for a painting that I will create? Is there a limit to this? For example I'm planning to go to a dance cruise - take pictures for creative material, network with people regarding my art, and give out business cards, would this be a business expense?

Would I have to become a company first?

Thanks, Alla
Philadelphia PA


Dear Alla,

Read my post, Hobby or Business? If it's fun, be careful. and you will see that in order to have a business and deduct expenses that are greater than your income, then you must have a profit motive. You must want to make money. Tax reduction is not a profit motive.

I also recommend that you read my most recent eLetter, Ways Through the Maze. The column, "Only Suckers Pay Taxes,"answers your question.

If you make money on your painting then you have taxable income even it you treat your painting as a hobby rather than as a business. My book, Self-employed Tax Solutions, explains the difference between hobby and business and also covers the tax and financial basics about being -- or thinking about being --self-employed.

You ask about forming a "company." Do you know what you mean by company? You need to do some homework. Use the search facility on my blog and in my site . For starters search "entity," then "LLC," then "corporation." You don't need to form anything to be a painter in business. You simply have to be doing it fto make money.

Whether you may or may not deduct your creative material gathering depends on how business-like you set up your indie endeavor. Right now, were I your tax pro, I would say no. Ask again after you've read and learned about indie business and decided how business-like you want yours to be.

Good Luck!
June

Artwork is not a deductible business expense ... even for artists.

Hi June,

I'm an oil painter who is being audited by the IRS. They are refusing to allow my deduction of oil paintings I have purchased from galleries. I have receipts for all of these purchases and have provided them to the IRS. I am deducting them because I believe they are necessary for my business. These are artists whose work I admire and learn from. From these paintings I can see how they solved similar problems. I can also use these paintings as examples when I teach. One of these painting is from my teacher's teacher who is deceased and this is the only way I can learn from him.

What do you think? Should I be able to deduct this from my business? I make my living as a painter, and I feel this should be valid. I'd appreciate any comments you have and if you know of a precedent for this?

Thank you so much for your time.

Cheri from Sandi Park, NM


Dear Cheri,

The IRS thinking is that art treasures and antiques do not depreciate in value and so you may not deduct their cost as a business expense.

There is ambiguity about something such as an antique desk used in your office or a musician's rare banjo. If they are used and subject to wear and tear they may be depreciated. That is not the IRS regulation however. It is from a tax court case only and so could be rejected in an audit.

I spoke with the IRS about this last week and the response from that particular IRS employee was: Yes, you may deduct the cost of the oil painting if it is part of the ordinary and necessary costs of the business. Therefore as long as the IRS has accepted that you are a self-employed artist seeking to make a profit you may deduct the costs of artwork as teaching tools. His opinion is not the one generally accepted by the IRS!

My experience has been that the IRS will not allow the deduction. I know of no precedent to the contrary on oil paintings or sculptures.

Of course what would make sense is to treat artwork like houses and other buildings. Deduct the cost and pay tax on the gain when it is sold.

Wish I had better news for you.

Best,
June

Two Studios

Hi June,

My husband is a self-employed watercolorist. He shares a studio at an art center which he paints and sells his paintings (three or four days a week). The rest of the time (including nights) he paints at home.

Our basement and loft is full of his painting supplies and products. My husband does his paintings at basement during the warm season and in the loft during the cool seasons. The basement and the loft are only used for his working.

We have never used home office deduction because we thought he has a studio at the art center and we do not qualify. Do you think that we are qualified for home office deduction?

Do we need to provide IRS with any proof? If we can have the home office deduction, will there be any trouble from IRS because we hadn't taken any deductions before?

My English is not that good. I hope you can understand my questions. Please feel free to contact me at xxx-xxx-xxxx (day) and/or xxx-xxx-xxxx (night).

Your kind help and advice is highly appreciated. I look forward to hearing from you soon.

Kind regards,
May, in Fairfax, VA


Hello May,

Absolutely yes, you may take a deduction for a home studio. It doesn't matter how many other work places your husband uses.

There is no problem in starting to take home office now even though you qualified previously.

You do not need to provide proof of home office use with your tax return. If your return were audited by the IRS you would need to show proof. I suggest that clients take pictures of their home office or studio, with something in the photo that shows proves the date. This is because you may be audited in a year when your home office is now the baby's nursery or grandma's bedroom.

There are several posts on this blog that give more info on home office. You might want to start with Home Studio .

Cheers!
June

Home Studio Exclusivity

Dear June,

I heard you speak at the NM Committee of Women in the Arts last spring and I bought your book, Self Employed Tax Solutions. Your book has been very helpful to me.

I have a question that I hope has a simple answer. I have never taken a home studio/office deduction on past advice from accountants. I would like to take that deduction this year, but am unclear if I really meet the requirements. I have a room in my apartment that is used exclusively for my painting. It's the only place I paint other than when I go outdoors to locations for plein air painting. So it's exclusive and it's regular use. However, I don't do my bookkeeping there (I do that in my office area that is not used exclusively as a business office) and I don't meet clients there since I normally sell out of shows or galleries. Can I still take the studio as a deduction?

Also, while I am doing my best to sell my work and earn a profit, I have yet to do so. I believe I would be able to prove my painting is not a hobby. Does that have any bearing on a home studio deduction?

Thank you for your reply.
Sincerely,

Lee


Hello Lee,

Yes, you have a legitimate deduction for home studio. You may be confusing the meaning of "exclusive use." in this situation." Exclusive simply means you cannot do anything else in the area you use for your business -- in you case, painting. It does not mean that you must do all your business -- all your painting and paperwork -- in that area. You may have more than one business work area. All are deductible as long as they are exclusive.

Because you don't yet have any profit only some of your home studio expenses will be deductible now. Others will be calculated and put on hold to be used against future income.

By the way, the accountants you've been dealing with are not unusual. So many out-of-touch tax professionals tell indies not to take a deduction for home office or studio expense. Those same accountants would never tell the local car fix-it shop not to deduct the repair shop. I find it infuriating. When that happens, I hear the tax pro saying: "You're not a real business. " Get away from that kind of accountant as quickly as you can.

Here's some columns to give you more info on home office:
It's tax time so ... beware of bad advice from the real-life Sammy Segar, CPA
Home Studio

Best,
June