June Walker | HOBBY OR BUSINESS: Are you a professional artist?
Artists and designers and crafts-people: Does the IRS consider you a professional?
You’ve been chosen for juried shows. You sell your work. People praise its quality and design. You think of yourself as a professional artist. But … are you a professional in the eyes of the IRS? And why does that matter?
It matters because it can have a big impact on your taxes, especially if you spend more money pursuing your art or craft than you bring in.
Let’s say that in one year you spend $10,000 more in art expenses than you bring in as sales. Also in the same year, you receive $50,000 in income from Grandma’s trust fund, or $50,000 salary from your corporate job. If your art or craft activity is a business rather than a hobby, then you get to subtract the $10,000 business loss from the $50,000 taxable income. You are now looking at taxable income of $40,000 instead of $50,000.
But you may deduct the art loss from Grandma’s trust income or from any other taxable income only if the IRS considers your art activity a business.
Maybe you don’t think of yourself as a self-employed designer or crafts-person in business. Perhaps you’re still at the thinking-about-it stage of making your art your work or you love what you do so much you don’t think of it as a business. You may believe you’re not self-employed because you haven’t made any money. Or perhaps you know you’re in business but work only part-time at your art and doubt that the IRS would think you’re a business.
The IRS criteria on the issue comes in two parts.
The first: Are you self-employed or are you an employee?
The second: Are you doing what you’re doing as a hobby or is it a business?
With regard to the first question, the IRS has put together a guide to help determine whether someone is self-employed or an employee. The focus of that guide is upon a single issue – the issue of control. It looks at things like whether you use your own methods and set your own hours? Who directs and controls the money, that is, who pays the expenses of the business — customer or worker?
Glen Glass has a client who wants stained glass candle holders designed and made by July 1 as an anniversary gift for his wife. He will pay Glen $1,000. On July 1 the candle holders are ready. The client likes them. He gives Glen a check for $1,000.
Trixie Trinkets designs and makes jewelry. She sells a silver necklace to her friend for $1,000.
In neither case did the customer have any control over what hours to work, what supplies or equipment to use, or any other aspect of production. The customer is free, of course, to cancel the order or not buy the product but even that may be regulated by contract.
Both Glen and Trixie are self-employed. There’s more info on employee vs. self-employed at It’s all about relationships: Are you an employee or are you self-employed?
· Do you carry on your work in a businesslike manner? For instance, do you keep accurate records of income and expenses?
· Do you strive to learn more about your work? For instance, do you visit museums? Take design courses? Do you have business cards? Do you have copies of juried show applications you submitted?Let’s look at a hobby and a business.
Aunt Ada lives nicely off the income generated from her investments. She enjoys quilting. She has given her quilts to nieces as wedding gifts and every once in a while an acquaintance or relative buys a quilt she’s made. Ada does not advertise. She sees her quilting income as play money. Whatever she makes she spends in Atlantic City testing her gambling skills.
Based on these facts, Aunt Ada has a hobby. If Ada sells $1,000 worth of quilts in a year she is allowed to deduct up to only $1,000 in quilting expenses, even if her costs were more than $1,000. Why? Because hers is a hobby, not a business.
Trixy Trinkets, unlike Aunt Ada, has no investments. She works as a design assistant at a clothing store where she earns $40,000 a year. Evenings and weekends she designs and makes silver jewelry. Unable to keep up with the requests of those who want to buy her unique pieces, she cuts back on the hours at her clothing store job to devote more time to designing, creating and selling her jewelry. She’s not sure how long it will take, but she’s determined to leave the clothing store eventually and make a living as a jewelry designer. She was an excellent apprentice to a highly respected silversmith in her town and even helped him redesign his studio. She keeps careful records of how long it takes her to complete each piece and sets her prices by her records and the going market rate. She advertises and keeps a record of income and expenses.
Based on these facts, Trixy is a self-employed jeweler. She is in business — even before she quits her regular job.
If Trixy sells $1,000 worth of jewelry, she may deduct any amount of business expenses that she incurs even if they amount to many thousands of dollars. If Trixy has a net loss from her jewelry design business, that loss can be deducted from her other income and could reduce her taxes. For instance, If her expenses total $6,000, she would have a $5,000 loss. From her wages of $40,000, she may subtract her $5,000 loss, to arrive at taxable income of $35,000.
!! To prove that your art is a business, treat it as one. Show that your aim is to make money. Then, if you end the year with a loss you have proof that such was not your intention. And you can deduct your losses without fear !!
I do mainly freelance design work and fine art, hoping to make a profit. I consider myself a Creative Professional, and my business is providing creative services. But I also take on temp or contract positions which I am considered a temporary employee. How does that affect my status as a business, or ability to make deductions?
It has no impact on whether or not you may be an artist in business. As a matter of fact, that’s the way most artists deal with financial needs — they have a “job” to help things along.
I’m trying to get a definitive answer concerning the need to show inventory/COGS on my returns. I’m a self-employed jeweler with a part-time “day job”. I’ve shown a small business profit for the past two years – but only because I haven’t deducted the cost of raw materials! I have deducted supplies, advertising, mileage, etc., to offset most of my profits from sales. I know several jewelers who just deduct everything they spend rather than treating any unused materials as inventory. That’s certainly easier, but is it too good to be correct?
Yes, it is too good to be correct. Keep an inventory.
I have been planning for months to write the definitive post on inventory. However, because there is so much confusion about a relatively recent regulation — even at the IRS — I am holding off until I can get at least two sources to agree on something.
For now, plan on keeping an inventory. It can be as easy as figuring that in every piece of jewelry you sell, about 20% of the sale cost is actual materials. In which case, for a $100 pair of earrings, your cost of goods sold would be $20.