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