The Home Studio – my final entry for Tax Deductable Business Expenses

The home office or studio deduction has been one of contention for some time but it is really quite straight forward. To take the deduction you must use your studio exclusively for your business. It doesn’t have to be an entire room but the square footage that you use to calculate your deduction must be partitioned and used exclusively business. That is, if you have a 300 square foot family room and you partition half of the space for your studio, the deduction calculation will be based on 150 square feet. If you have a 2000 square foot home you will deduct 7.5% of home related expenses on Form 8829 (Expenses for Business Use of Your Home). Uses of the room in addition to studio space might include storage of artwork and supplies or office space for record keeping and other business expenses. The costs that you could deduct might include rent, mortgage interest, real estate taxes, condo fees, utilities, insurance, repairs, etc. If your studio qualifies, this can be a powerful deduction for your business.

Assets and Depreciation: Equipment

The cost of equipment purchases may either be fully deductable in the year it was put into service or depreciated over time, usually over 5 to 7 years for art equipment.   There are IRS limits to the amount that can be deducted.  Generally, the maximum deduction is $250,000 for property placed in service in 2009.  If your purchase is within the IRS limitations you may take the “section 179 expense election” and deduct the full cost of the equipment in the year you placed it into service.  If the useful life of the equipment is greater than one year and the cost is greater than the IRS limitation you will take the expense over the useful life of the equipment.  Either way, the full cost of the purchase will be depreciated and deducted for income tax purposes.

Art equipment purchases that you will depreciate may include items such as a computer, a kiln, a printing press or other types of machinery.  Items that are directly expensed are the supplies for your art such as clay, paint, brushes, film, etc. 

If you are depreciating equipment over its useful life the accounting entries will look like this:

Furniture and equipment           $xx.xx
      Cash                                                          $xx.xx
                Computer purchase

Depreciation expense                $xx.xx
       Depreciation: Furniture & equipment    $xx.xx
                Computer depreciation

The first entry is made for the full amount of the purchase.  The second entry is for the amount of depreciation taken in the tax year and will continue to be made in subsequent years until the equipment is fully depreciated.

Tax Deductable Business Expenses - Travel & Meals

Overnight business travel for the artist is a tax deductible expense.  Some of the associated expenses that are deductible are airfare, hotel and lodging, tips, phone calls and meals, though meals are only 50% deductible.  Deductible direct travel expenses include the cost of art fairs, visiting galleries, delivery of artwork, etc. 

When traveling, the IRS allows a meal “allowance” instead of having to keep records for all meal expenses.  Visit www.gsa.gov to find the rate that applies to your destination.  While you don’t have to keep receipts for meals to take the allowance you do have to be able to substantiate the travel.  Also, if you have traveling companions, their expenses are not deductible unless they are employees of your business. 

Remember, meals are deductible (50%) as a business expense when you are not traveling as long as the purpose is business related.  You may be meeting with a gallery owner, other artists or with professionals such as your accountant and lawyer.  For your records, keep a log of who was present and the nature of the meeting.  Business cards are good for documentation as well.  You will want to keep receipts for business meal expenses unrelated to travel.

Tax Deductable Business Expenses

For the next few entries I’ll be writing about business expenses that are tax deductable for the artist.  First let’s take a look at automobile vehicle expenses.  There are two ways you can take a deduction for auto related expenses.  There is the standard mileage allowance, which for 2010 is 50 cents per mile, or there is a direct right off of incurred expenses. 

To use the standard allowance you will keep a record of all business related travel.  It’s not required that you keep an odometer reading but you will need to keep good records of all of your travel.  This may include gallery trips, trips to classes and workshops, shopping for art supplies, etc.  If you record all these trips on your appointment book you will have a handy reference to tally the total travel for the year.  Your deduction will be the total business mileage multiplied by 50 cents.

The other method is to take a direct right off of actual expenses.  You will have to keep a record of fuel purchases, repairs, insurance and also depreciate the cost of your vehicle.  If you use your vehicle for both business and personal travel your deduction will be based on the business percentage of the total use. 

Sales Returns and Allowances

On some occasions you might find it good business practice to accept the return of an item that you sold and then issue the customer a refund.  Maybe you made an internet sale of wearable art and the customer just didn’t like the way it fitted.  Maybe the item was lost or damaged in the mail and you need to refund the purchase price (hopefully you purchased shipping insurance).   A sales allowance occurs when the customer agrees to keep and pay for an item while you offer a reduction in the price.  The reduction amount is the allowance.

The sales returns and allowances account is a contra account to the sales account.  A contra account has a normal balance opposite of what is usual.  The sales account carries a credit balance and the sales returns and allowances account carries a debit balance.  Usually the two accounts will be subtotaled to Net Sales.  On the income statement it will look like this:

Sales                                       $2,500

Sales returns and allowances           50

   Net sales                              $2,450

Let’s say you sold an art-to-wear necklace for $175 that you accepted for return because it was too short for the customer’s heavy-set neck.

Journal entry recording the sale:

Cash                $175

            Sales               $175

                        Necklace sale

Record the return:

Sales returns and allowances              $175

            Cash                                                    $175

                        Refund for return of necklace

Maybe the customer is willing to take the necklace to a jeweler to have an extension put on it and you agree to offer a discount.  The journal entry to record the sale would be the same as above.  

To record the discount:

Sales returns and allowances              $25

            Cash                                                    $25

                        Discount given on necklace purchase

It’s good accounting to keep a separate account for return and refund amounts.  You will have a record of total sales and be able to monitor and identify if there are problems occurring.

After you’ve checked your merchant statement for accuracy you will make the following journal entry:

Cash                                                            $1,625
Merchant transaction fees                                  225
Terminal Rental & merchant expense                   50
Sales returns                                                     100
           Sales                                                                        2,000
                       Record credit card sales for May

(Remember, debits on the left and credits on the right)

As I wrote previously, the transaction fees will either be deducted as a cost of sale or as an expense. If you had merchant transaction fees of $225 you will see below the two different ways it might appear on your Profit and Loss Statement. In either case the monthly gateway and terminal fees will be expenses. The example shows $50 in monthly merchant statement and rental fees. (I’m not showing the expense side in the first example, the statement and rental fees would be listed as in example 2.)

Example 1:

Sales                                                                       $2,000
           Cost of Goods Sold
                   Supplies                                    $300
                   Merchant Transaction Fees          225
            Net Cost of Goods Sold                                $525

Gross Profit on Sales                                              $1,475

Example 2:

Expense
       Office Expenses                                 $100
       Postage                                                 88
       Marketing                                            120
       Merchant Transaction Fees                  225
       Terminal rental & merchant exp              50
Total Expense                                                            $583

Merchant Statements continued

The next part of your Merchant statement contains the transaction detail.  It shows the daily detail of your batch processing.  Included are the day of the month, reference number, the transaction code (deposit, chargeback, adjustment or reversal), type of card used, number of sales and amount of sales.  If you are set up for a daily discount program, previous discount payments would be included also.

The next section is your fee totals.  You will be making a journal entry based on the information included here and in the next section.  Some of these fees might include the monthly terminal rental and per transactions fees incurred.   The statement totals are found in the final summary section.  You will be making an entry for any statement fees and minimum discount fees charged (if you didn’t reach the minimum required for the month).

The IRS allows some merchant fees to be categorized as Cost of Goods Sold (COGS).  So, depending on your accounting, they will either reduce Gross Income or be an expense.   I should make a note here that the gateway fees (what you pay monthly for processing) are not considered COGS but are a dues and subscriptions expense.   I’ll follow with sample journal entries at my next writing.

Merchant Statements

When you receive your first Merchant Statement it might look a little overwhelming.  There are lots of numbers to decipher but let me urge you to take the time to review your statement and process the numbers separately rather than just recording the net cash you received.  Today we’ll review 2 sections of the merchant statement.

The heading of the statement will contain some general information: your merchant number (use when calling with questions), bank routing number (a unique number that identifies your bank), deposit account number (identifies your account at the bank) and processing month. 

The next section contains a summary of your sales by card type, any credits you might have processed, the net sale amount (sales less credits), the average transaction amount, the discount percentage rate and discount amount due to the bank.   Check the sales total against your record of credit card sales that you’ve been keeping and make sure they are the same.  Different transaction types and cards are processed at different discount rates – check these for accuracy.  Now, let’s assume the month’s sale amount was $1,200 at a 2.5% discount rate.  The entry you make (if you haven’t already recorded the sales) will look like this:

            Cash                                                 $1,170.00

            Credit Card Discount Expense               $30.00

                        Sales                                                      $1,200.00

(As a review, journal entries are written with the debits on the left and the credits on the right.  In this example, cash and credit card discount expense are debits and sales is a credit, all increases to general ledger accounts.)

If you have already recorded your sales because you make entries as they occur your original entry would have been:

            Accounts receivable                         $1,200.00

                        Sales                                                    $1,200.00

After you receive your statement you will make the following entry:

            Cash                                              $1,170.00

            Credit Card Discount Expense             30.00

                        Accounts receivable                             $1,200.00

This entry will reduce the balance on your accounts receivable account, increase the balance of your cash account and increase the balance of your credit card discount expense account.

Credit Card Processing

Are you thinking about accepting credit card payments?  It’s in your best interest to know what types of fees are charged by various merchants so you can estimate your costs before you sign on.  Some of the terms might be new to you.

Startup Cost includes the cost to set up your account and the Payment Gateway.  A Payment Gateway service verifies your customer's credit card information, judges the authenticity of the transaction, then either declines or processes the credit card payment.  Gateway fees are commonly charged by month and range from $5 to $15.

Most every credit card processing company charges a statement fee. The current industry standard is $10.00 per month.

In addition to start up and monthly fees you will be charged fees based on your transactions.  A transaction fee is a per charge fee that is the same no matter how small or large the transaction is.  The fee may range from $0.20 to $0.30.  In addition you will be charged a Discount Rate.  The amount is a percentage of your sale.  Both of these fees might vary depending on whether the charge is retail or over the Internet.  The retail discount rate tends to be lower than the Internet discount rate by about .5%.  Expect to pay anywhere from 1.6% to 2.3%.   Another per transaction fee is the Address Verification Fee. Every time an address is verified you will be charged.  The range is $0.05 to $0.10.

Some merchants require a monthly minimum and if you don’t meet the minimum you will have to pay the additional amount.

There are many different models of credit card swipers and some merchant account companies offer more than one for their retail customers.  When you display and sell at Art Fairs you’ll need a way to process the credit card at your booth.

Other things to consider when choosing your merchant and setting up your account is the amount of time it will take for the money to clear the account.   This could be 1 day to 3 days unless you have Real Time Processing which means that right after the customer enters required data, the payment gateway will research the validity of the transaction and process the credit card.

Finally, customer service adds value to the account.  If ordering supplies is easy and the representatives are friendly and helpful you will be happy to do business with them.

Tax Day - How to Make it Easier

Tax day was last Thursday and I hope you all fared well!  Now it’s time to take a look at your tax return process and see how you might be able to improve things for next year.  We’re a quarter into the year but it’s not too late to make changes. 

Question #1:  Did you have all the information needed and were all your necessary papers easy to gather to complete your tax return?

Question #2:   How were all of your income and expenses categorized?  Can you simplify or restructure your categories in any way to make finding totals easier?  For example, maybe you had meal and entertainment expenses intermingled with other expenses that had to be totaled separately for your return.

Question #3:  Did you miss any deductions because you weren’t tracking expenses?  What about mileage and a percentage of maintenance on your car for business travel?  Maybe there are other deductions or tax credits for 2010 that you should be planning for now.

Question #4:  If you are making estimated tax payments were they for the right amount? 

Question #5:  Is it time to hire an accountant?  I don’t ask this question to be smug.  Sometimes the effort to work things out on our own is more costly than hiring someone knowledgeable to do it.  And even if you hire an accountant it’s still in your best interest to keep your records current and accurate.  Ask your accountant what’s needed to make the job easier and follow through.   Maybe it’s time to purchase accounting software.  

Finally, I hope your art business is flourishing!  I haven't experienced a more needful time for art in our world than now. 

Last Word on Sales Tax

Now what?  How do you know what to do to stay within your legal requirements as a retailer? As a retailer you will be filing Form ST-1, Sales and Use Tax Return for each reporting period.  It must be filed on or before the 20^th day of the month following the end of the reporting period.  These dates will be printed on the Form ST-1 that you receive.  For most taxpayers this will be monthly. 

If you pay on time you will be allowed to take a discount on the total owed.  For late payments you will lose the discount and you will have to pay a penalty plus interest.  Like most things these days, you can pay the tax owed electronically through the EFT program.  In addition, instead of filing the return by mail you might be able to file electronically or by TeleFile.

There might be a time when you will make a tax exempt sale and these will need to be supported with certain records.  These include the purchaser’s name and address, the type of transaction (for example, to an exempt organization or for resale), the date, and the amount.

Finally, keeping complete and accurate records will make filing easy.  Sales tax is not really as complicated as it might seem at first glance.

More on Sales Tax

As a retailer you are responsible to know the Sales and Use Tax rules for your state.  For Illinois based companies this includes collecting the right amount of sales tax on taxable sales that you make, documenting tax-exempt sales that you make, paying Use Tax on items purchased and not resold, keeping good records of these transactions and sending sales tax owed with the proper forms to the Illinois Department of Revenue. 

The first step of the process is registering with the state as a retailer.  If you do business in Illinois, have a site or an office in the state or a warehouse from which goods are delivered, or if you sell items at craft shows, fairs or such in Illinois this requirement applies to you. 

As I mentioned yesterday, the rate that applies to retail sales will vary based on the location of the sale.  Form ST-1, your sales tax return, will have your rate preprinted on the form.   The sales tax return is not difficult to complete if you keep good records.

Illinois Sales Tax

Do you sell your work on line?  While it is generally believed that interstate sales are not subject to sales tax this is only true to some extent.  When you shop from an on line catalog the catalog company is required to collect sales tax when delivering goods to a state where they have a physical presence.  That means if you are selling your work on line you should be collecting and remitting sales tax on the art you sell in state.  I live in Illinois and the Illinois’ system is exceptionally complicated.  There is a base rate that is broken down into a percentage for the state, city, county and in addition, the local government might impose a percentage as well.  The rate in Illinois could be anywhere from 6.25% to 11.5%.  The tax is also broken down into four divisions, Retailers’ Occupation Tax, Use Tax, Service Occupation Tax, and the Service Use Tax.  An artist selling in state is required to pay the Retailer’s Occupation Tax who then in turn collects the Use Tax from the consumer offsetting the amount and remitting it to the Illinois Department of Revenue.

Estimated Taxes

Yesterday I mentioned the need to classify equipment purchases and other types of asset acquisitions differently for tax purposes even if you are using cash basis accounting.  It’s still early in the tax year so I think it would be wise to talk a bit more about taxes. 

When you were working as an employee, and maybe you still are, you had a certain amount of taxes deducted from your gross pay.  These deductions might have included federal, state, and local income tax, FICA, Social Security and Medicare and were reported to you and the government on form W-2. 

If you have been hired as a contract worker it’s likely that no taxes were withheld from your income and the full amount paid to you would be reported on form 1099-Misc after the close of the year.  If you are selling your work to the end user you are also liable to claim the income as taxable income also from which no taxes were withheld.  If no tax payments are made to the government throughout the year you could end up with a hefty tax bill and penalties to boot.  To prevent this you will make estimated tax payments that can be calculated using form 1040-ES.  To learn more about making estimated payments go to http://www.irs.gov/businesses/small/article/0,,id=110413,00.html.  Payments can be made through the EFTPS system as often as weekly so long as the full amount estimated to be owed for the quarter is paid by the due date.

Assets and Depreciation

In yesterday’s blog I mentioned asset acquisition and depreciation.  Just to backtrack a bit, when you start up your business you will decide whether you will use the cash method of accounting or the accrual method.  Most small businesses (and artists) use the cash method.  What this means is that you will include your income and your expenses in the year that you actually pay for them.   The accrual method is a little more complicated.  You become liable for your expenses when they occur and you need to report income in the year it is earned.  The accrual method is mostly used by large businesses and those with significant inventories. 

Even though you have chosen to use the cash method, any assets that meet the requirements for depreciation or amortization will not be fully expensed at the time of payment or purchase.  This is an exception to the cash method of accounting that is required for tax returns.  There is a Form 4562, Depreciation and Amortization, that you will complete along with your Schedule C, Profit or Loss from Business.  On this schedule you will list your property, its value, the term for depreciation, the method, etc.  Again, this is another good reason to have a good tax accountant even if you are keeping immaculate records.  Property owned can have different classifications regarding its useful life which determines how much of an expense you can take in one year.

Cash Outlays

Today let’s look at the entries for a simple purchase of supplies and an equipment purchase.

The entries you make for office expenses you incur are pretty straight forward.  When you make a purchase your cash is decreased (credit) and the expense account is increased (debit) for the same amount.

                                    Debit               Credit

Office expense             $45.00

Cash                                                    $45.00

If you put the same expense on your credit card it would look like this:

Office expense            $45.00

Credit card payable                             $45.00

Then when you pay your credit card you will debit the credit card payable account and credit cash.  If you incurred any associated fees (interest) your credit to cash would be that much more and you would have a debit to interest expense for that same amount.

Credit card payable     $45

Interest expense             $3

Cash                                                    $48

If you make a significant purchase of office equipment that will be used for more than one year the transaction is different.  Instead of debiting an expense account you will capitalize the asset by debiting an asset account.  At the time of purchase your profit and loss statement is not effected, just your balance sheet.

                       

                                    Debit               Credit

Equipment                   $2,500

Credit card payable                             $2,500

The depreciation that you take yearly is the expense that is deductable on your business tax return.  Your tax accountant will determine the term and method of depreciation that you use based on tax law.

A Couple of Entries

You sold a print for $30 from your website! Awesome. The payment was made through PayPal which charges you 4% of the total sale. How do you book it? (Not to get confused – always remember – debits on the left and credits on the right)

PayPal disburses directly to your checking account increasing your balance by $28.80. That’s $30 less their 4% fee.

                                 Debit             Credit
Cash                         28.80
Transaction fees          1.20
Sales                                            30.00

This time you sold an original piece at a local art fair so you had to charge sales tax. The charge was for $450 and processed on VISA. Your sales tax rate is 7%. It takes a couple of days for your bank to process the charge and enter it into your checking account. This is the entry on the date of the sale:

Accounts receivable  481.50                       (Sale + Tax)
Sales tax payable                         31.50     (7% of the sale price)
Sales                                         450.00

The bank charged you a 4% processing fee. This is the entry to make when the bank disburses the funds to your account:

Cash                      462.24
Transaction fees       19.26                       (4% of the amount charged)
Accounts receivable                   481.50

At the end of the month you need to file a tax return for sales tax collected during the month. When you send the return with your money this is the entry you will make:

Sales tax payable    31.50
Cash                                          31.50

You can consider the receivable accounts and payable accounts as “holding pens” until you actually receive or disburse cash.

To keep your bookkeeping accurate and complete you just need to think through what all the accounts are that are going to be effected by the transaction, then make sure that the left side (debits) always equals the right side (credits).

A break from the details

My plan for today was to continue with my explanation of bookkeeping entries but having had my hands in fiber most of the day with no thoughts of bookkeeping interfering the creative process I decided to take a little reprieve.  As I was creating I was wondering how much interest there really is in accounting 101.  If you are keeping good records and have contracted a bookkeeper to prepare your financial statements you don’t really need to know how to handle the daily accounting entries.  Then again, if you are familiar with these entries you will have a better understanding of your financial statements and a better understanding of your business and then be more prepared to make decisions down the road. 

I’m going to age myself here but when I started working on a computer it was DOS based.  Because I worked in DOS I understood what the computer was doing.  It was frightful for me to start working in a windows based environment.  Nothing made sense anymore.  I hated it but there was no turning back.  I’m now thankful that I have the DOS background because when something goes wrong I have a better idea about how to fix it. 

So, Accounting 101 it is, tomorrow…

More on Debits and Credits

As we became managers of our own money and opened checking accounts we got the idea instilled in us that when an account is credited that’s an increase and when an account is debited that’s a decrease. That’s simply the bank’s side of the equation of the general ledger account representing your money. Like I said yesterday, each of the types of accounts generally has either a debit or a credit balance. This is what your financial statements look like:

Balance Sheet:
        Assets (debit) = Capital (credit) + Liabilities (credit)
Income Statement:
        Revenues (credit) – Expenses (debit) = Profit (credit) or Loss (debit)*

*At the end of the year the profit or loss is “closed” into the capital account. On a very basic level, capital is the sum of profits over the years and any investments made by you or other investors less any money taken out of the business.

Today I’d like to give you a very general picture of the financial statement of an artist and tomorrow go through some examples of transactions you might make.

Balance Sheet
  Assets
     Cash
     Accounts receivable
     Inventory
     Equipment
  Liabilities
     Accounts payable
     Credit Card
     Sales tax payable
     Deposits from clients
     Loans
  Capital

Income Statement
  Income
     Sales
  Expenses
     Materials
     Small tools/supplies
     Shipping
     Art Fairs
     Workshops
     Advertising
     Bank fees
     Depreciation Expense
     Insurance
     Office supplies/expenses
  Net Income (Loss)

A beginner’s intro to debits and credits

Balanced accounting is like a math equation, one side must equal the other, the debits have to equal the credits. All of your financial accounts (assets, liabilities, equity, income and expense) have a normal balance as either a debit or a credit. When you increase one account, another account has to be increased to keep everything in balance.

As a simple example let’s say you sold a print of one of your art pieces for $30 cash. Cash is an asset account (it’s what you own) and Sales is an income account. Asset accounts normally have a debit balance and Income accounts normally have a credit balance. To record this transaction you would debit (increase) cash and credit (increase) sales each for $30. The equal increase to both accounts keeps everything in balance. Sounds simple, right? It is, as long as you have a good chart of accounts, that you know what type of account you are increasing or decreasing and that you always keep everything equal.

Credit Cards

What About Credit Cards?

If you are just starting out as a business owner you might have begun thinking about the ways you accept payment for your art. We live in an age of plastic, even for a coffee and a muffin. Many people don’t carry cash or checks anymore so as a business owner it certainly makes sense to accept credit cards. A couple of other great reasons to accept credit cards are the convenience to both the buyer and seller and also for you to get the payment for your sale quickly deposited to your checking account. Yes, there is a percentage that you pay for processing but let's just say for example’s sake that you have a booth at an art fair and someone wants to make a purchase. If you can’t accept a credit card and the buyer doesn’t have checks or cash, you’ve lost the sale.

A question that often comes up is should I add a convenience fee to help offset my costs? When you are paying for a service or item how do you feel about paying extra when you want to use a card? I know I don’t like it and do my best to avoid knowingly paying extra. When you price your art a lot can go into your calculations and I won’t get into art pricing now but if you are including overhead costs in your price calculation the processing fees might just be included in your total.

Lastly, let’s say you accept credit cards, how do you record the transaction? What you don’t want to do is write in your cash receipts or sales journal the net amount of money from the sale. You should record the sale for the full sales price and then list the expense you incurred to process the card as an expense item. Cash received = Sale minus Fee. That’s the 2 sides of the accounting entry that you or your bookkeeper will make in recording your sale.

Record Keeping Part 3

What records should I keep?

Now that I’ve given you an overview of different ways to keep your records and why you should keep accurate records, here’s a brief synopses of what information to record.

Assets. This is the equipment you use for your business. Keep a record of what you purchased and when, how much you paid and how much you use them for your business. This information is necessary to calculate depreciation and the gain or loss when you dispose of the asset.

Income. Your income records would include sales related items such as invoices and contracts. Along with those, include copies of checks and your bank deposit slips. Other income items you want to keep are W-2 forms and 1099 forms.

Expenses. The detailed list of your expenses should include who you paid, what you purchased, the date, and the purpose of the expense. Be sure to keep all related sales receipts, bank card slips and canceled checks if you get them. If you travel for business you should also keep a detailed travel log that includes the date, destination, and mileage of each trip. Purchases of gas and car maintenance can be kept on this log also. If you qualify to take a tax deduction for the business use of your home you will need to keep all related expenses.

Copies of Tax Returns. Previous years’ tax returns are helpful when you are filing the current year return. The Schedule C, Profit or Loss from a Business, will provide the information you need to calculate self employment tax. When you are ready to retire, the amount you contributed will determine the benefits you receive. You’ll want a good record in case down the road there is a discrepancy about how much you earned during your working years.

It’s best that you have a separate bank account for all business related activity. Just like a check register, keep a cash receipts and disbursements’ journal. You will always know how much cash you have for your business and where the money went.

Record Keeping Part 2

How should I keep my records?

Even if you hire a bookkeeper or an accountant, the better you keep records of your income and expenses the easier it will be to understand what’s going on with your art business and this will save you money. Here’s a progression showing how I’ve encountered business records working as a bookkeeping consultant.

Shoe box. Wow, not just one year of receipts in a shoe box but this client wanted me to go back through the previous year and get all his expenses organized. Even if this is what you decide you will do, at the very least make a note on the receipt what the payment was for. When you hand over your shoe box to your bookkeeper at least he or she will be able to identify and categorize the expenses.

Keep a paper ledger. Every time you make a sale or a purchase write down the date, the amount, and what you sold or purchased. You can have columns set up for the various expense categories and then simply total the columns to know how much money you’ve made and what you are spending. Be sure to save all of your receipts!

Computer Spreadsheet. This is basically the same as the paper ledger but formulas will do the calculations for you and you can know at any time what your income and expenses are.

Bookkeeping Software. There are many different types of software available at just as many different prices. There are inexpensive household versions of accounting software that will track income and expenses but a little more sophisticated record keeping is worth the expense. You’ll be able to track inventory, print financial statements, and watch cash flow. You will save money at tax time when your tax accountant doesn’t have to plow through records to complete your tax return.

Keeping Good Records

Question: Why should I bother to keep records of income and expenses?

Whether you sell your art to make a profit or if you sell casually at a few art fairs or to friends you are responsible to claim the income on your tax return. You will be able to reduce the amount of taxes you owe if the IRS determines that you are operating as a business. It is only as a business that you can deduct the expenses of your art. This not only includes the purchases you make for producing your art but other expenses as well. Some of these include advertising, professional services, office expenses, art fair fees or even a home studio deduction if your studio qualifies. This can greatly reduce the amount you will owe in taxes. The IRS has certain factors they use to distinguish hobbyists from professionals who get this tax advantage. One of these is if you take a profit three out of five years, as determined by your schedule C. You’ll need these records at tax time, why not make it easier on yourself and keep them updated weekly or at least monthly depending on how much income and expense activity you have.

Of course, income tax benefits are certainly not the only reason you should keep well maintained records. Your records will be an indicator of what sells well or what makes a bigger profit. It’s documentation that you will need if you decide to get a bank loan. If you want to hire staff you’ll be able to determine if you can afford to. There are so many reasons to keep good records.

Self Employment in the Arts, SEA, it’s the conference where I just spent the past 2 days, soaking in every bit of advice that I could from seasoned artists, professionals, and “graduates” from previous conferences. I attended as an artist myself, full of anticipation, eager to hear how other artists have succeeded and are making a living doing what they love. And I’m excited! Now, as I write, I have surrounded myself with inspiring material from the conference, a DVD on entrepreneurialship, a book on art law, and, oh what a treasure, a blow up doll of “The Scream” from the keynote speaker, Robert Fishbone. Like all conferences, to be worthwhile they need to produce change, not only in mindset, because we all know that after conference energy dwindles rapidly, but they also must produce action. The last session that I attended was one about accounting for artists. It certainly wasn’t a top choice for me but I just finished a one-on-one to have someone critique my work and I needed a place to go, as I wasn’t going to whittle away the next hour when there were so many valuable resources made available to me. Hey, I’ve been working as an accountant for most of my career so what did I think that I was going to get from that session? All the while as I was listening to the presenter and the questions she was being asked I thought, this just might be what I need to give to other artists, a piece of my accounting knowledge to help them understand the business end of what they are doing. So, today, Sunday, one day after the conference, filled with inspiration to produce ART, I’ve begun a blog on accounting.