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.