On the Business of Art…A Financial Education Series
Being a business owner complicates your life exponentially. Tracking revenue and expenses is a daily chore, and complying with all the various forms, rules and regulations of owning a business is a hassle. Nevertheless, there is something very liberating and gratifying about building your own business, or doing your own thing, that just about makes-up for all the associated headaches!
Artists that sell their work are generally no different than any other professional service provider from a tax and financial perspective. There are a few random tax rules that just apply to certain works of art (e.g. the sale of musical works and copyrights), but by and large a professional artist is a business person like everyone else. Here are some tax and financial questions artists and art students commonly have about the business of creating and selling art.
I am an art student or art professional. Can I deduct any of my education expenses?
Maybe. There are several types of deductions available for education expenses but their application is very limited.
(1) Student Loan Interest: A business expense deduction is allowable on certain student loans, but maxes-out at $2,500 per year, and is phased out entirely at certain income levels. (Check with your tax advisor, as this is a moving target). The deduction may be available for loans obtained solely for “qualified higher education expenses”.
(2) Tuition, Books, Fees, etc. A business expense deduction may be available in limited circumstances for tuition and books, etc. if your education either maintains or improves required skills in your present employment or business; or, meets the express and bona fide business requirements of your present employer. (The best example of this is the art professional who has already secured professional employment and takes what I call “continuing education” courses or buys art publications to stay current or to refine professional art skills). Most students in college or other advance learning environments are there to qualify for a new trade or business, and thus cannot deduct these types of education expenses.
(3) Travel as a Form of Education. Traveling abroad to learn about art is not deductible in most contexts, unless the expenses are of the nature that would be deductible as a business expense under (2) above. An example of this is the art teacher who travels to Europe to take a course only offered there in furtherance of his professional employment.
(4) Classroom Expenses of an Art Teacher. A K-12 teacher can reduce his/her taxable income by up to $250 for most classroom-related expenses, with any additional classroom expenses deductible as an “itemized deduction” (and therefore subject to computational limitations).
I’m out of work, can I deduct job-hunting expenses?
Maybe. Job-hunting expenses incurred in seeking professional employment in the same line of work may be deductible (subject to computational limitations).
I would like to sell my artwork simply using my own name. What do I need to do to get going?
There are two recommended steps to take:
(1) Open a checking account and credit card that is used strictly for your art business. Doing this will keep you extremely organized and ensure that you don’t miss-out on reporting any item of income or expense. You can generally move money back and forth between your personal and business accounts to meet cash flow needs without tax or financial reporting consequences.
(2) Apply for a sales tax license and ID with the State of Michigan. Having this license should allow you to buy art materials at retail/wholesale locations without paying sales tax. If you sell your work through galleries only, there should be no sales tax reporting on your end. But, if you sell anywhere else, including art fairs and the internet, you will be required to collect sales tax and file a sales tax return to remit the tax at least annually. For internet sales to out-of-state residents, you may not have to collect sales tax (check with your tax advisor in this event).
I would like to sell my artwork on my own under a brand identity. What do I need to do to get going?
The simplest thing to do is to register an assumed name with the county clerk’s office in your area (in which case you simply file a form and pay a nominal fee). This will allow you to open a bank account so that you may accept payments made to your brand name.
I would like to open an art space or art business on my own and protect myself from liability or loss associated with selling and handling art and dealing with the public.
The simplest thing to do is to secure insurance to cover anticipated damages or loss. For around $1,000/year you should be able to secure adequate insurance coverage. All art contracts and business dealings should address liability concerns in writing.
I would like to open an art space or art business with other artists or business partners.
What do I need to do to get this going?
This is when things get much more complicated. You have a few different options, the simplest route being to set up a joint account and file for an assumed name with your county clerk. This would work for a “pop-up” show and the like just fine. The more sophisticated option, with more asset protection benefits and formality is to set-up an entity, like a limited liability company. To do this, at a minimum you need to:
(1) Select a name that is not already in use by someone else in the State (search State records on mich.gov);
(2) Obtain a sales tax license and ID from the State;
(3) Obtain a tax ID# from the IRS (you can do this online – see irs.gov);
(4) Pay a filing fee and file Articles of Organization with the Secretary of State (see mich.gov);
(5) Establish a leadership structure (e.g. officers and directors);
(6) Create Bylaws that dictate officer and director duties and leadership processes; and
(7) Manage the business through regular leadership meetings which are held and documented pursuant to the rules in the Articles and Bylaws.
Michigan has online registration for business set-up – the “One Stop”. I much prefer the old fashioned way of downloading and submitting forms, as navigating the online registration is like getting caught in one of those fall corn mazes.
Tax Reporting on the Sale of Your Artwork
The whole key to benefiting for tax purposes from being an artist is to actually sell some of your work. Otherwise, you are very limited in your ability to deduct any art related expenses. If you are not making a good faith effort to sell and profit from art that you create, forget about trying to deduct any art-related expenses.
Where on my tax forms do I report the revenue and expenses from selling my artwork?
Selling self-created artwork is generally like selling any other inventory item. The sales and expense activity is generally reported on Schedule C of Form 1040 (unless of course you’ve created an entity with other business partners). The sales price is reported as ordinary income, and the cost of the materials, sales commissions, and other related expenses are reported as deductions that offset the income.
Any and all “ordinary and necessary” expenses that you incur in your art business should generally be deductible business expenses that will offset sales income. An expense should be “ordinary” if it is one that is common and accepted in the art world. An expense should be “necessary” if it is helpful to your art business. Not exactly a precise science, but you should be able deduct expenses related to just about anything that goes into creating, marketing and selling your artwork (entry fees, supplies, technology, printing, travel, etc.).
Having said that, there are a number of exceptions or special circumstances, for example:
(1) Home office expenses may or may not be deductible – there are complex computations and limitations here. The space must be used exclusively and principally for your art business and the complexity of the computations may not be worth the trouble! If you care to give it a try, eligible deductions include rent, mortgage interest, utilities and property taxes. Deductions are prorated (based upon square footage) and diverted to various spots on your tax return, and the home office portion is further limited to the extent of your art sales net income.
(2) Meals and Entertainment. Only 50% of business meals are deductible and the expenses cannot be “lavish or extravagant”. If you travel for business, you should familiarize yourself with the IRS per diem rules. Under very limited circumstances 50% of entertainment expenses are deductible.
(3) Commuting expenses (e.g. parking, bus, gas, etc.) to/from home and work are generally not deductible. There is an obscure rule about deducting expenses for traveling between two business locations. If this applies to you, look into this rule further.
(4) Clothing is generally not deductible, unless it is required (e.g. a uniform) or protective.
(5) Travel expenses that are business related are generally deductible, however:
a) No deduction is allowed for travel expenses of a spouse, dependent or other individual who accompanies you on a business trip unless that person is an employee serving a bona fide business purpose, etc.;
b) A deduction is not allowed for travel that is a form of education (e.g. that trip to France to study the Impressionist movement);
c) Airfare (or other transportation costs) should be deductible if the trip is primarily for business (as determined primarily by time spent on business vs. personal matters). If you travel to New York for a two day art fair, and stay three days, your airfare should be deductible, but your out-of-pocket expenses on that personal day should not.
d) Use of Auto for Business. If you periodically use your personal auto for business reasons, you should familiarize yourself with the IRS mileage allowance (deduction based upon your business mileage). If you use your car or truck 50% or more for business, you may opt to use an alternative method to compute a business expense deduction for your auto expenses – these can often really add-up to a big benefit (e.g. deductions may be available for lease payments or depreciation).
(6) As a general rule, expenses that are personal and business related should be allocated between the two, and only the business portion should be deductible.
I had to buy a $5,000 kiln for my art business, can I deduct this on my tax return? Yes, you should be able to expense immediately equipment purchases that don’t exceed a certain IRS “Section 179” dollar amount. This amount changes yearly, almost on a Congressional whim. Equipment not eligible to be deducted immediately is generally “depreciated” and therefore deducted over 5 or 7 years.
Trading Your Artwork
From time-to-time I trade artwork with others in exchange for other art and supplies. What are the tax consequences of this?
If you trade your artwork, things get really weird.
(1) Let’s say you pay $50 for materials, and you trade for another artist’s piece that has a retail value of $300. You should report sales of $300, and tax a business expense deduction of $50 – even if your traded artwork has a $300 retail value.
(2) If you trade that same artwork for art materials (or other business items) of equal value, there is no tax consequence, as the $300 sale should be offset by a $300 business expense.
I only paint for enjoyment, and I rarely every sell anything. How does this impact my taxes? If you sell your work only rarely and with little intent to profit, and minimal effort and formality, you are likely a “hobbyist” in the eyes of the IRS. Your tax computation will be a bit different than that of a professional artist, with art-related expenses deductible only to offset (but not to exceed) income.
Donating Your Artwork
Someone asked me for a charity auction donation of my artwork. How should I report this? For self-created artworks, the value of your charitable income tax deduction is based upon the cost of your materials, not the value of the artwork. If it cost you $50 to make a piece you value at $500, you should only be able to deduct $50 on your income tax return.
This article is meant for educational purposes only, and is not professional tax or financial advice. Tax law is always changing, and therefore some of this information could be inaccurate or superseded by the time you read this. Please consult your tax and financial advisors for further information.
By Elyse Germack, Attorney and Founder of Art Effect Gallery