Reimbursed expenses: There's more than one way to dress a mannequin

Hi June,

I'm a designer working in fashion, snowsports, and the entertainment industry. I work on everything from costumes and sets to graphics and photography. The work keeps coming so I don't deny it. Currently I live and work in Brooklyn and have been working since 1999.

Here is my question - when working as a costume or set designer, stylist, or even in fashion, I often buy a lot of stuff - IE costume pieces, furniture, accessories, etc. These are items I'm not reselling to the public and are used exclusively for the project. I do invoice them for the cost, but its exactly at cost - more like an IOU.

Exactly how do I classify this on my taxes.

Thank You,
Jess


Hi Jess,


There are several ways to treat your props cost.


If never used again for another project then you may categorize the expense as "client costs" and the income or inflow of the reimbursement as "client costs reimbursement." The expense would cancel out the income and = 0.


If you used the props for other projects, or saw something interesting at an estate sale and bought if for future use, you could classify the income as "supplies." Include any income or reimbursement simply as income.


Sometime the choice depends on the amount of money we're talking about. For instance, $10,000 income, $100 props or $80,000 income with a $1,000 props may be treated differently than $80,000 income and $30,000 props.

Your tax pro may look at your entire tax picture and possibly choose a third method. If you props expense were a large portion of income she might treat the expense as "production costs."


Contrary to the understanding of most indies and the general public, tax preparation is not always a yes/no, this-way/ not-that-way, "exactly" situation. That's why I think indies should use the services of an indie-savvy tax pro.

Best,
June

Art as an Expense

June --

Embroidery Digitizer -- 2 yrs.

I have to purchase "clipart" and "artwork" from artists. This consists of either the artwork itself in the form of "clipart" or a licensing agreement for work I can download from their website. This is not artwork that I look at for "inspiration" but I actually take the picture of say the "dog" and make that dog in embroidery form.

What expense does this fall under, and is it subject to the certain percentage of what I made as profit??

This is my first year really working at this as a "true" business that I want to file on, and I have definitely put more into buying my initial artwork than I made last year in profit.

Abbie from Bloomington, IN

Dear Abbie,

To us it is obvious that you are not purchasing art for inspiration but that may not be as clear to the IRS. Because the IRS is firm on the no-deduction-for-art rule you will need to keep an especially accurate record of your art purchases. Were you audited you will need to show the direct relationship of your art purchase to your product.

There are a number of ways that your art expense may be treated. The final determination is up to your tax pro.

You may treat your art purchases as production costs. If I understand your work correctly, then I assume you do not know how many pieces of your work you will make to sell from one art purchase. So you need to pick a reasonable amount of time over which you will sell the "dog" piece. Then have your tax pro use that amount of time -- let's say 3 years -- to amortize the costs of your art. That means that $900 in art purchases would get you a $300 deduction over 3 years.

If you know the actual number of pieces you will make based on one art purchase your tax pro will set up a different method for tracking inventory and production costs.

Be sure to check out the book that can simplify your tax and financial life, and save you money! Self-employed Tax Solutions.

Best,
June

No Clothing Deduction

Hi!

I've just discovered your website and I think it's great! I'll be reading it regularly for sure.

If you have a small boutique and you are the owner and naturally you take some of the clothing home to wear it yourself. From a business perspective it's important that you wear your merchandise - it makes it easier to sell it, you need to know if it holds up, you need to know if it fits right. I know you would have to pay use tax on the cost of the merchandise that you wear. But can you deduction the cost as a business expense? And if so what would you call that account? I thought of research and development, but that doesn't sound quite right.

-- Kaylyn


Hello Kaylyn,

The IRS is a stickler on this. The answer is no, you cannot deduct these clothes because you wear them in your everyday activities. Were you to wear something for a specific period of time, keep a written record of when worn and the result of the test, then you'd be able to take the deduction.

Take a look at this post Clothing and Make-up as a Business Expense .

Best,
June

Tax Pro's Fees for Tax Return Preparation

June --

I am actually sending this for my wife. How much should an accountant charge for doing your taxes? I know I overpaid and it will be a deduction next year. I am learning more and I think I can handle the taxes next year. I went to the pro to see what expenses I missed and I really didn't do that bad the first year so I think I can handle it especially if I have your list of business expenses.

Yvonne's husband in NYC

Hello Caring Husband,

I wish I got a little more info from you so that I could give you a better example of how your question would be posed to someone in your profession.

Let me try. You said your business is Technical Design Consultant/ Fashion Industry, so, here goes: How much should I spend on my 2007 wardrobe? Or, how much should I spend on the design illustration of our main chemical process for my annual report?

You see what I mean? I have no idea of the complexity of your return. Is it a $10,000 or a $500,000 business? Is there an inventory? Are your records professionally kept or do you arrive in the office with estimated amounts? Do you have children? Investments?

And then there's the question of the skill and experience of your tax professional, better skills and experience mean higher fees. And of course, location, for instance, fees are higher in New York City than in Espanola, New Mexico.

A popular tax prep franchise did a return for my friend with only one W-2 and nothing else, and the fee was close to $200. My friend was their retuning client so she was already on their computer and so I estimated that the return took about 20 minutes to prepare. That's a fee of $600 per hour.

So, to answer your question, depending on location, tax professional's competence and complexity of the return, fees vary. Accountants typically charge from $40 to $260 per hour. A very simple self-employed tax return for a returning client with one resident state might take three or four hours.

It's admirable that you are learning more about taxes. The more you know the better prepared you will be to take advantage of all business deductions. Also the better prepared you are the less time your tax pro will need and so her fees will be less. Keep up the good work and your wife can put you on her payroll and give you employee benefits and then you'll pay less tax.

Check out the post below, Pick a Tax Professional: Experience or Price .

I suggest you read my book, SELF-EMPLOYED TAX SOLUTIONS. It answers many indie tax questions in the same easy to understand style you'll find in the columns on my website. And more than just answering those taxing questions, the information in SOLUTIONS will give you a firm foundation on which to make indie business decisions.

Keep in mind, I do not recommend any self-employed do his own return unless it is impossible to find a competent pro!

-- June

Recordkeeping: "I got it."

Dear June,

I had to write and tell you that I just finished reading your book, Self-employed Tax Solutions, cover to cover. I am an intelligent person, having graduated with degrees in microbiology and nursing and done quite a bit of graduate level work as well. However, business accounting has always been very intimidating to me, stressful, and overwhelming. this year I decided to give up on Quick Books, which I paid someone dearly to set up for me, and go back to paper, but to really learn about what I was doing. (Because my son is off to college soon and I need to double my income...at least!) Yours is the first book I read (except those warm fuzzy business books you refer to.) I got it! I set up my bookkeeping a bit more complicated than the simple system you outline (b/c I'm obsessive compulsive!) and I'm thrilled that someone has given me permission, in writing, to set it up my way.

Thank you!
Dawn Jardine, Dressmaker and Sewing Instructor in NY
Member, Professional Association of Custom Clothiers


Hello Dawn,

What a wonderful story. I fly out tomorrow morning heading to Massachusetts and then upstate New York. Despite the time crunch I had to take a moment to read your email to my daughter-in-law, an artist-writer. Yours is a such moving -- but not unusual tale. Others have told me that my book has, for the first time, given them confidence to deal with the business side of their indie venture.

When I was first writing my book and in the middle of explaining it to someone, he said, oh yeah, I get it, it's a Taxes for Dummies. I went bananas! Absolutely not, said I. It is taxes for very bright and talented people who never had the right teacher.

You are the perfect student. Thank you so much for letting me know the book's impact.

Best regards,
June Walker