7 Things Artists Should Know before Filing Taxes
For U.S. residents, tax day is April 15th. And if you’re an artist, filing your income taxes is probably not so straightforward.
Like other professionals who work in a freelance capacity, artists typically earn untaxed income that they must report to the IRS—and if the artist had a clear intent to make a profit, their practice is considered to be a business. That means they can file a Schedule C form (which is designated for small businesses) to report earnings or losses and deduct expenses. But what counts as an expense? How should artists keep track of these things? And is it necessary to hire an accountant? We recently spoke to artist and accountant Hannah Cole—who counts many artists among her clients—for some basic tips to help artists navigate tax season smoothly.
Behave like a business
When artists report their income on the Schedule C, Cole explained, “you’re making an agreement with the IRS that you’re operating like a real business”—and that means you have a profit motive. People making art without a profit motive are considered hobbyists and cannot deduct expenses, she added.
“In the arts, I see a lot of people who really don’t talk about a profit motive,” Cole said. “They feel like they’re professional, but they’re focused on so many other things aside from just making money; they might be focused on getting good press and building their reputation and just making great work. But artists need to be extra, extra careful, and actually just think of themselves more the way that everybody else does—if I’m a professional, I’m trying to make income.”
…Even if you’re not turning a profit
Losses and a lack of income may make it hard to prove a profit motive—but you still can. You can be “applying for grants, doing your bookkeeping, and in general behaving like a business—trying to circulate your work and get it sold,” Cole said.
Having dips and spikes in income over the years is part of what can make filing taxes tricky for artists. You might win a sizeable grant and sell many pieces one year, and then have very little income the next. “But side hustles are the American way, so that is okay,” Cole said. “You can have a legitimate business that you do nights and weekends in your garage.” What’s important is to maintain a profit motive regardless.
However, issues may arise if you report losses on your Schedule C too frequently and you have other income: Losses can shelter that stream of revenue—essentially becoming a tax shelter. If that happens too often, it starts to look suspect. “The IRS may rightfully question whether you actually have a profit motive, or if you should actually be listing your art as a hobby (which means not taking any expenses as deductions),” Cole explained. In order to prove that your art practice is not a hobby, you should be able to have proof on all nine points of this hobby loss test.
If you have a clear profit motive that you can prove with documentation and you’re not making an income from your art, one thing you can do is opt not report all of your expenses. “You don’t have to claim deductions that you’re entitled to,” Cole said. “It’s illegal to not claim income that you make—you have to report your income, there’s no messing with that. But if you want to not report all your expenses, that’s a privilege, not a right.” If you don’t report all of your expenses, she added, you’re effectively overpaying your taxes, which the IRS permits.
Learn which expenses you can deduct—and be conservative
Keeping track of your expenses is to your benefit as an artist. Expenses can include obvious things like art supplies and studio rent, but they can also be costs relating to a studio space in your home, and portions of your phone and internet bills. You can also include museum trips and research expenses if they relate directly to the work you are making, as well as travel. For example, you could deduct travel expenses if you attend art fairs and make appointments in advance with curators and collectors. You could also take into account the cost of driving to see shows or purchase supplies.
“The more you can tie it to a specific thing you’re working on,” the better, Cole explained. “The general principle is to make conservative estimates; it’s when you get greedy that your returns get looked at.”
Cole noted that she often finds that artists try to include clothing as an expense, which is only allowed if the clothing is a costume—the general rule is that it cannot be something you could wear on the street. For an artist like Nick Cave, who incorporates clothing into his sculptures, Cole said, “I would start getting into more fine-grained detail about clothing, because that truly may be material for his artwork.”
Use a separate bank account for your art
The IRS expects you to operate as a business, so, in step, you should have separate bank and credit accounts for your art practice. “As a professional, you should not be commingling business and personal expenses on a single credit card or in a single bank account,” Cole explained. Another benefit of doing this is that it makes filing your taxes and gathering all of your expenses much easier. “Then, everything on that bank or credit statement is a deductible business expense,” Cole said.
Another way to organize your expenses is to keep a folder for digital receipts on your desktop or in your email, Cole said.
Don’t confuse itemized deductions with deducting expenses
One mistake artists often make, Cole said, is confusing itemized deductions with deducting expenses on the Schedule C. This can lead you to miss out on a lot of deductions. “Those two things are completely separate and unrelated,” Cole said. “Itemizing is specifically for mortgage interest deductions or charitable deductions and state and local tax deductions.” (There are other, smaller deductions, but those are the big three, she added.)
Be careful with crowdfunding
If you do a crowdfunding campaign, all of the funds you received are taxable income. However, presumably, you’re crowdfunding in order to use that money to do something, and when you do, you can deduct those expenses, Cole said. “So as long as you document those expenses really carefully, they probably will offset each other,” she explained.
“The thing to watch out for is the calendar,” she continued. “It would be better to do your crowdfunding when you get the money early in the year, so that you have all year to spend it. It would be trickier if you got all the money in December and didn’t spend it until the following calendar year, because then you’ll get taxed on it all before you ever get a chance to incur expenses.”
Find an accountant who’s a good communicator
Popular tax software programs that many people use, like TurboTax, are generally a good value, Cole said; they’re efficient and ask questions in simple English. However, they can leave you in the dark. She’s had several new clients come to her saying they’ve earned some income from their art and want to report expenses for the first time on a Schedule C, only to learn that they had been doing that for years through one such tax software, and were missing out on deductions.
So, if the tax process feels unwieldy and you’ve never filed a Schedule C before, you may want to seek out an expert. An accountant or tax advisor can help you make sure that you’re not missing out on deductions you may be eligible for, and that you are properly adhering to tax code.
As far as what to look for in an account, Cole said: “I have come to value communication above most other things.” Even if you’ve found an expert, she explained, if they don’t “let you make informed choices—they’re not making sure you get it—then it’s not worth much to you.” She added that it’s rare to find someone who specializes in working with artists (since tax code is so broad), but someone who has experience working with freelancers will generally be well-equipped to help artists.
