Translating the New Tax Bill for Small Businesses

“Am I going to benefit from the new business deduction?”

“Do I need to incorporate to take advantage of it?”

These are questions I’m hearing a lot since the passage of the massive new tax bill. Much of the worry centers around some misconceptions. So, I’d like to outline what’s in the new provision, who it affects, and why you likely don’t need to change a thing to benefit.

The most important outcome of the new tax law (officially the Tax Cuts and Jobs Act, or TCJA) was to give a large, permanent tax cut to corporations. The corporate tax rate went from 35% to 21%. Those numbers are a little deceptive, because most US corporations don’t pay nearly that rate once you factor in tax credits and loopholes. A 2016 U.S. Government Accountability Office study found that between 67% and 72% of all active US Corporations between 2006 and 2012 had no tax liability after credits. In fact, the effective corporate tax rate (a much more meaningful number) is closer to 15%. But despite the fact that most corporations don’t pay anything close to the corporate tax rate, the point of the TCJA was largely to cut that rate.

But most businesses in the US are small businesses, not large corporations. In fact, 30.2 million businesses (or 99.9% of US businesses) are small businesses, according to a government-sponsored  2018 US Small Business Administration report. About half the private workforce in the US is employed by small businesses, and more than a quarter of the small businesses are minority-owned. However, the big corporate tax cut rate did not help these businesses at all. So rightfully, Congress introduced a provision into the TCJA to create a little more parity, called the deduction for Qualified Business Income (QBI) (also known as Section 199A). This provision, unlike the corporate tax cuts, is strictly for businesses known as “pass-through entities.” (More on that in a moment.)

But first, here’s what it does: …read more…

Sales Tax for Artists Q+A with Rose Lulis

I’m an income tax specialist, but I often get questions about sales tax. So I called on accountant Rose Lulis to share some of her deep knowledge of sales tax. Rose and I both work with clients all over the country, but we are both based in Asheville, NC, so that’s where we talked, and we used some local examples. Here’s my interview with Rose Lulis.

HC: Rose, thank you so much for sharing your wisdom with us. Many of my clients are sole proprietors, doing everything on their own. What is the best way for a small-budget craftsperson or artist to get a handle on sales tax?

RL: It’s best that you speak with a CPA or an accountant to be certain you’re conforming to your state’s sales tax requirements and to determine where you may have sales tax nexus.

If you don’t have the resources available to do so, look for continuing education classes at your local community college that include accounting, bookkeeping, business and taxation. Read the class descriptions to see if sales tax is a covered topic. Classes are generally free. You can also look up sales tax training online and participate in online workshops and webinars to learn more. Also, don’t hesitate to call your state’s Department of Revenue to ask any sales tax related questions you may have. You may even have a local office somewhere near you that you can visit.

HC: I think it’s good for people to know that they really can just call the Department of Revenue to ask sales tax questions. Ok, now Rose, can we cover some sales tax basics?

RL: Yes. So, states make their own sales tax laws and rules. Therefore, sales tax varies state-by-state. For example, the following five states don’t have a sales tax, while all others do: Alaska, New Hampshire, Delaware, Oregon and Montana.

You want to establish where you have what’s called nexus. If you have nexus, you are required to collect and remit sales tax. You have nexus with a state if your business has some type of presence or connection to the state. Generally, you’ll have nexus in your home state, or where your office/gallery/studio/warehouse is located. You can have nexus in other states, too. Maybe you sell artwork at fairs or markets outside of your home state. This may create sales tax nexus in additional states.

HC: I think a lot of us have heard that a recent Supreme Court case (Wayfair) made big changes in sales tax. Can you summarize the Wayfair decision?

RL: Yes. The most recent type of nexus is called economic nexus. It’s based on a Supreme Court case called, “South Dakota v. Wayfair, Inc.” On June 21, 2018, the Supreme Court ruled that remote sellers are not required to have a physical presence in a state to create sales tax nexus in the state.

HC: What did internet sales tax look like before Wayfair vs. now?

RL: Before this ruling, sales tax nexus was based on where businesses had a physical presence. Based on this ruling, many states are now requiring businesses to collect and remit sales tax if the businesses have a certain number of transactions in the state and/or hit a specific sales total. Legislation has already changed in about half the states based on this ruling. For example, the North Carolina Department of Revenue issued a directive on August 7, 2018, stating that remote sellers with gross sales that exceed $100,000 sourced to NC or have (200) or more separate sales transactions sourced to NC in 2017 or 2018, are required to collect and remit sales tax to North Carolina, effective 11/1/18.

(Here’s a link to the Sales and Use Tax directive issued on August 7, 2018: https://files.nc.gov/ncdor/documents/files/sd-18-6_0.pdf )

HC: It seems like the states are reacting incredibly fast to the Wayfair decision, and new rules keep cropping up. How do I find updates about new sales tax legislation?

RL: It only took from June 21 to August 7 for the state of NC to issue its directive. I found two great resources for artists, with links to all the states’ new legislation:

https://blog.taxjar.com/economic-nexus-laws/

https://www.salestaxinstitute.com/resources/remote-seller-nexus-chart

HC: This seems pretty complicated. Are the definitions at least the same across the different states?

RL: Unfortunately, no. Regarding economic nexus, the definition of “remote seller” may vary state-by-state. For example, in North Carolina, a remote seller is defined as a

“…retailer, by purposefully or systematically exploiting the market provided by this State by any media-assisted, media-facilitated, or media-solicited means, including direct mail advertising, distribution of catalogs, computer-assisted shopping, television, radio or other electronic media, telephone solicitation, magazine or newspaper advertisements, or other media, creates nexus with this State.”

Whereas, in another state such as Maine, a remote seller includes,

“…a person selling tangible personal property, products transferred electronically or services for delivery into this State.”

HC: Yikes. Let’s get back to some sales tax basics. Can you explain destination-based vs origin-based sales tax?

RL: Sure. The question is whether you have nexus in an origin or destination-based state when it comes to sales tax. For example, of the 45 states that have a sales tax, 11 of them are what’s called origin-based states for sales tax purposes: Arizona, California (mix of origin and destination-based), Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah and Virginia. It’s pretty straightforward if you’re located in an origin-based state.  You collect sales tax based on the sales tax rate(s) of your selling location.

If you have nexus in a destination-based state, you’re required to collect sales tax based on where your artwork or pieces are being delivered, or on the buyer’s location.

HC: Ok. Let’s say I’ve figured out whether I’ve got nexus in an origin-based state or a destination-based state. Now how do I pay?

RL: In order to report and pay sales tax to the states you have nexus in, you will register with the state’s taxing authority, which is typically called- [State Name] Department of Revenue. Oftentimes, you can register online and report; and pay sales tax online, as well. You’ll be assigned what’s called a sales tax filing frequency when you register for your sales tax account. Filing frequencies are generally based on how much you sell, which is tied to how often you are required to report and pay sales tax: monthly, quarterly or annually. And if you have a period with zero sales, you need to file a zero sales tax return with your state to avoid any potential penalties or issues.

HC: I think people get tripped up on this detail, so I want to repeat it: If you have a period with zero sales, or a period with strictly non-taxable sales (like for services, which are mostly not subject to sales tax), you still need to file a sales tax return. Meaning, you need to file a sales tax return even if you have no sales tax obligation, just to report the fact that you have no sales tax obligation. And there can be penalties if you don’t do this.

RL: Yes. A fabulous sales tax resource for remote or online sellers is TaxJar.com. If you sell via Amazon, Etsy, PayPal, Shopify and several other channels, you can sign up with TaxJar, and it not only manages your sales tax, but also helps you determine where you have economic nexus. It syncs with your selling channels and generates sales tax reports for every state. You receive a 30-day free trial. I’m not affiliated with TaxJar but have read and heard great things about the service.

HC: Yes, I have to say, I love Tax Jar. They have great articles about sales tax, and you can look stuff up by state. It’s a great resource, even if you’re just doing research.

RL: Yes. But it’s best for remote sellers: You can’t use TaxJar for everything.

HC: That’s a good segue. I want to ask you to talk us through some common scenarios. We’re talking now in Asheville, NC, which is home to some amazing craftspeople. So let’s take an example of a ceramic artist selling work online to people in Asheville.

RL: Let’s talk about nexus first. If you are not an NC resident, then you must consider economic nexus now. So - if you’re a remote seller making sales sourced to NC-- you first have to determine if you have economic nexus. And remember, the definition of remote seller varies state-by-state. In NC, it can be someone selling via computer, radio, television - it’s all encompassing. This applies to you if you don’t have a physical presence in NC and you have either 200 or more separate sales transactions or at least $100,000 in sales sourced to NC in a calendar year.

If you are an NC resident, since NC is a destination-based state for sales tax purposes, you’d charge sales tax for sales to NC buyers.

Once you know if you have economic nexus, you need to ask yourself “what is the sales tax law of the place I’m going to be selling?” Usually, you do have to collect sales tax. There is typically a form the artist can download from the county or state level.

So let’s take a different scenario - say our Asheville ceramic artist is doing a craft fair in Clayton County GA. The artist should research Georgia’s sales tax laws on the Georgia Department of Revenue’s website or call the state’s Department of Revenue. Most state sites include sales tax FAQs, which are very helpful. Upon doing this, the artist will learn that he/she must collect sales tax during the craft fair and report total sales from the craft fair to the Georgia Department of Revenue, as well as pay the applicable sales tax due on the craft fair sales. The Georgia Department of Revenue provides a form called, “Miscellaneous Sales Event,” for out-of-state sellers. This varies state-by-state. Again, it’s always a good idea to reach out to the applicable state’s Department of Revenue or do your own research online regarding sales tax before any special sales events.

HC: I’m glad you’re reminding people that they can just call. Let’s go back to our Asheville-based artist, and now let’s say she’s going to do The Big Crafty right here in Asheville.

RL: She would simply charge sales tax based on the Buncombe County sales tax rate (this is a destination-based state, so we charge based on buyers’ locations, and The Big Crafty takes place here in Asheville).

HC: Great. What about if this same artist goes to The Big Crafty in Atlanta?

RL: Call the Georgia Department of Revenue and ask what form you need to complete to remit sales tax to Georgia for this special event (most likely the same “Miscellaneous Sales Event” form mentioned earlier). Follow their instructions. You need to call before the fair. You need to be sure you’re charging enough and collecting the correct sales tax.

HC: I want to clarify for everyone what you mean when you say “remit” and “collect.” Sales tax is different from income tax. In income taxes, you earn money, and are taxed on that money, which you then pay out of your earnings. But sales tax is totally different - you never earn sales tax. You just collect it on behalf of the state. Then you remit it back to the state. We use the words “collect” and “remit” rather than “earn” and “pay” because unlike income tax, sales tax is never your money.

RL: Exactly. We’re just acting as a representative. We don’t report it as income. Sales tax is not income - we just collect it for the state and remit it back to the state.

HC: So how would you handle it from a bookkeeping standpoint then?

RL: We never report sales tax we receive as income - we keep it separate. What we do in the bookkeeping world is assign it to an account called “sales tax payable.”  It’s called a liability account, because we owe it to the state. It would not be reported as a business expense. We simply track what we’ve collected for a given period. It’s important to track it. But we must keep it separate from income.

HC: I feel this points to good bookkeeping. And the need for it.

RL: Yes. You need to get your infrastructure set up right and work with a competent accountant to do so. It’s a whole new ballgame for some artists and sole proprietors who may be used to no bookkeeping system or relying on hard copies of receipts and docs, or Excel. And, it can be challenging to find the right fit with an accounting professional who not only understands your unique business requirements, but also cares enough to connect with you in terms of helping you learn and grow with your business. So do the work up front in setting up an efficient, effective bookkeeping system with a good chart of accounts.

HC: I’d like to highlight what you just said. Taking the time and spending the money to get your books set up correctly at the beginning sets you up for success down the road. A lot of artists try to DIY their books  even though they don’t know how to correctly set up a chart of accounts. When they do this, they end up tracking things incorrectly for a potentially long time. Then, they end up paying a bookkeeper a lot more down the line to fix years of bad books than they would have if they just made a small investment up front. It’s much cheaper to set up a good system and use it than it is to jury-rig a system and pay someone to fix all the mistakes it causes along the way.

HC: What does this crafter we’ve been talking about do for an online setup?

RL: I would refer them to TaxJar in this instance. It’s a good starting point, and it’s very readable - someone who knows nothing about sales tax will have a good level of knowledge and comfort. If they don’t have all the info they need, they’ll get links to articles/resources they need. Additionally, you can use the TaxJar service for online selling - it’s a fabulous resource. It takes all the think work out of it. Ignorance is not bliss when it comes to tax. As a business owner, it is our responsibility to research tax and sales tax laws to be sure we’re conforming. As business owners, we’re choosing to go into the businesses we’re in. Worth mentioning is that I may work on your taxes, but at the end of the day, you - the business owner - are the one signing your tax forms, and so we can’t use ignorance as an excuse if something is questioned. And artists should have great working relationships with the accountants, tax preparers or bookkeepers they’re so critically relying on for education, information and support.

HC: You’re bound by the laws whether you’re aware of them or not. So what do I need to do as a seller, when I make a sale?

RL: You need to give a receipt, listing sales tax separately from the items that were purchased. Square will email the buyer a receipt. Depending how you have your POS set up, you email a receipt to the buyer.

HC: What’s the best practice for a cash sale? A lot of craft fairs deal in a lot of cash.

RL: Protect your cash - you should use a locked box. But we definitely need to give a sales receipt that breaks out the sales tax paid. That pad you can buy at Staples is fine for receipts. As long as the seller keeps a copy and gives a copy to the buyer, we’re fine.

HC: Rose, you’re a fountain of knowledge. Thanks so much for sharing your wisdom on sales tax.

Rose Lulis is a dog lover, hiker, antiquer, and a hobby artist. She’s also an accountant with 15+ years of accounting, management, sales and startup experience, providing remote, virtual and outsourced accounting and bookkeeping services to creatives across the country. Her specialty is professional service providers (architects, engineers, and consultants) taxed as S corps with over 250k in yearly gross revenue. She teaches Small Business Bookkeeping, Business Formation and QuickBooks Online at A-B Tech Community College in Asheville, North Carolina. She specializes in QuickBooks Online. You can find her at www.roselulis.com.

No, You Really Can't Get a Deduction for that Artwork You Donated to Charity

Some arts organizations misleadingly suggests that artists can get tax deductions for works they donate to charity. Here’s why that’s unfortunately not the case.

Last month, I wrote about how the tax law passed in 2017 — officially the Tax Cuts and Jobs Act (TCJA) — will soon bring big changes to charitable giving.

Based on reader feedback, I now want to address a longstanding practice regarding charitable giving in the art world that needs to end. …read more…

How the New Tax Cuts and Jobs Act Impacts the Art World

(graphic Hrag Vartanian/Hyperallergic, original image via Credit Score Blog)

Under the new tax laws, the wealthiest will have even more incentive to make charitable donations, while the average middle class family will have less.

The tax law changes passed in 2017, officially the Tax Cuts and Jobs Act (TCJA), represent the largest change to the tax code in 30 years. With so many changes, Hyperallergic wants to address — in this and future articles — how the legislation will affect the art world.

One area in particular that impacts almost everyone in the art world — from artists, to collectors and patrons, to cultural institutions — is charitable giving.

read more here…

Money and Happiness: Artists' Superpower

Chicory, acrylic on canvas, 2016 by Hannah Cole. Courtesy of Slag Gallery, New York.

Artists Have a Superpower

I see all kinds of incomes in my tax practice, and the one thing it confirms for me is that, once past the basic human needs, money and happiness aren't related. I've been doing a lot of reading on the science of happiness lately, and also on the financial independence movement, (favorites: Mr. Money Moustache, Frugalwoods, and the Mad Fientist) and I've suddenly been noticing the strong thread of happiness science within the extreme-frugality movement. 

And I had a thunderstrike: artists have a superpower. We already know this. No one goes into art because their top priority is getting rich. And most artists do go into it because they feel a need, and they get things out of art that are more important than money. Things like connections, community, curiosity, continuous learning, challenges and projects, and engagement with the unknown. 

So this post is just a word of appreciation. 

But here are a few things you can DO with your money to help it grow and give you lifelong security. Because that is my particular passion project:

• Open a SEP IRA.

• A super basic (and funny) intro to low-cost investing, from Mr. Money Moustache

What's the Deal with Receipts?

Look at all these tax deductions! These are my actual studio tools.

Here’s the confusion: You keep hearing that the IRS requires you to keep receipts and documentation for all of your business expenses. So why is your accountant annoyed when you try to hand her your receipts?

Here’s the story. Yes, you are required to keep receipts and documentation to prove each and every one of the business expenses that you deduct. That is the law. And here is the actual gospel, from the IRS itself. And here is a comprehensive list of what New York considers to be legal proof of your expenses. In case it’s not clear - and I get enough questions from people to know that it isn’t - the reason that you need this documentation, besides being a good practice for your actual business anyway, is that should the IRS or your state decide to examine your tax return, this is the proof of expenses they will require you to show them in order for them to allow you to keep those deductions. If you can’t, then you have just lost your audit, you may have a bad experience, and you will owe them money. You need to save these receipts and documentation for 7 years.

So why is your accountant irritable when you hand over receipts? That is another story. Tax season is super stressful. Most people, despite their intentions, don’t get their tax documents organized until a few weeks before the tax deadline, so your tax accountant has a drinking-out-of-a-firehose situation from about March 1-April 15. A lot of inexperienced taxpayers with freelance income don’t realize that they have a fairly big job to do before they can get their taxes done - that is, they need to do their bookkeeping. They need to tally up their receipts and income, and put it into some basic expense categories. Here’s a beautiful chart to help you with that. If that’s intimidating to you, hiring a bookkeeper is a great idea. Your bookkeeper can help you put things in the right categories, teach you how to maintain your own books, answer your questions and set you up with a system that works well for you. A good bookkeeper is worth the money.

So keeping your books is a requirement if you run a business. And if you’re a freelancer of any kind, though you might not have realized it, you are running a business. My course The Ultimate Honest Guide to Understanding Artists’ Taxes is a great primer on the need for good books and records and gives great insight into what happens in an artist/creative worker audit. It’s one hour, and very worth it.

So showing your accountant your receipts says that you haven’t done your bookkeeping, that you probably don’t realize that you have a sizeable job ahead of you, and that you probably need some coaching about the basic tax rules.

This is totally understandable. You’re just a bespoke latex dog-costume designer, not an accountant! This might even be your first year freelancing. But your accountant is facing an immovable deadline with an obscene flood of work. So if she’s not keeping up with her loving-kindness meditation, she might get grumpy with you. As a person who was new at my arts practice once, and as a tax accountant, I’m advocating for understanding in both directions here.

So with that, here are some basic guidelines for you:

• Bookkeeping. If you have a system that isn’t working, pay a bookkeeper to look it over for you, or take a bookkeeping course yourself. Good bookkeeping is a question of habit. So schedule a regular time to do it.

• Saving receipts. The law says that if you can’t produce the receipt to prove it, it never happened, and you can’t deduct the expense. Your bank and credit card statements aren’t enough. For meals and entertainment, the documentation requirement is even stricter: the receipt must be accompanied by the name of the business contact you are meeting with, plus the reason for the meeting. A receipt alone will not suffice. Personally, if I don’t grab a pen and jot these things down at the moment I am handed the receipt, I will never do it. So that has become my personal habit – I write directly on my receipts, and the save them in a file folder.

• Some people are handy enough with their phones that they snap a picture of every receipt (many accounting softwares integrate a receipt-saving feature like this, and there are stand alone apps dedicated to it). I am not fast enough with my phone for this to work for me, but if you are, it is a great method for keeping your receipts.

• Keeping a calendar. In the days of Google calendar, you probably have one that is pretty good already. But you might not realize that this can be an important document to show your business activity in the event of an audit. Your calendar can be used to show the amount of overall time you spend on your arts practice — and that means everything from making the actual work to networking, marketing, and bookkeeping.  Your calendar can also show who you met with and for what purpose. This may corroborate other parts of your documentation, from travel expenses (your calendar shows the meetings you had set up in your travel location), to your meals expenses (meeting the strict substantiation requirement of who you met with and for what purpose).

• Maintaining important correspondence that shows your effort to grow your career. You may still snail-mail out old-school introduction packets to museums (and be sure to save those receipts if you do!), but you almost certainly reach out to art world people over email. In the days of searchable email, this is a lifesaver. If you use an email folder system, consider saving this correspondence into one place (ie. “gallery + museum correspondence 2018”), so that in the event of an audit, you can produce this important evidence of your businesslike intentions quickly and without having to rely on your memory.

• Maintaining your arts inventory. In Susan Crile’s drawn-out audit, her professional inventory system weighed heavily in her favor to prove that she was a professional artist and not a hobbyist. How do you track your art inventory? Having an up-to-date document that shows what you’ve produced and where everything is is an important tool in your arsenal.

• Tracking mileage. I went over the details of mileage tracking in my Miami travel expense post. But here’s a tip: go out and record your car’s odometer reading right now. And while you’re at it, set an alarm on your calendar to do this the first day of every year. Because tracking your business mileage means not only tracking the number of business miles you drove this year, you also must record your total miles for the year. By recording your odometer on day one, you have both your ending mileage for last year, and your beginning mileage for this year. Two birds. One stone.

MileIQ is one of several mileage apps that use the location detection on your phone to automatically record your mileage. Similarly to Xero Taxtouch, you swipe left or right to categorize drives as business or personal. You can also track the things people often don’t – volunteer miles driven (deductible at 14 cents/mile, if you itemize) and medical miles driven (ditto, but 17 cents/mile, with a high threshold before it’s useful). The free version doesn’t capture everything, so it’s useful to get the full version. And it’s a deductible expense! You can get a 20% discount by using this code: HCOL124A

DISCLAIMER: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone.

Here’s the confusion: You keep hearing that the IRS requires you to keep receipts and documentation for all of your business expenses. So why is your accountant annoyed when you try to hand her your receipts?

Here’s the story. Yes, you are required to keep receipts and documentation to prove each and every one of the business expenses that you deduct. That is the law. And here is the actual gospel, from the IRS itself. And here is a comprehensive list of what New York considers to be legal proof of your expenses. In case it’s not clear - and I get enough questions from people to know that it isn’t - the reason that you need this documentation, besides being a good practice for your actual business anyway, is that should the IRS or your state decide to examine your tax return, this is the proof of expenses they will require you to show them in order for them to allow you to keep those deductions. If you can’t, then you have just lost your audit, you may have a bad experience, and you will owe them money. You need to save these receipts and documentation for 7 years.

So why is your accountant irritable when you hand over receipts? That is another story. Tax season is super stressful. Most people, despite their intentions, don’t get their tax documents organized until a few weeks before the tax deadline, so your tax accountant has a drinking-out-of-a-firehose situation from about March 1-April 15. A lot of inexperienced taxpayers with freelance income don’t realize that they have a fairly big job to do before they can get their taxes done - that is, they need to do their bookkeeping. They need to tally up their receipts and income, and put it into some basic expense categories. Here’s a beautiful chart to help you with that. If that’s intimidating to you, hiring a bookkeeper is a great idea. Your bookkeeper can help you put things in the right categories, teach you how to maintain your own books, answer your questions and set you up with a system that works well for you. A good bookkeeper is worth the money.

So keeping your books is a requirement if you run a business. And if you’re a freelancer of any kind, though you might not have realized it, you are running a business. My course The Ultimate Honest Guide to Understanding Artists’ Taxes is a great primer on the need for good books and records and gives great insight into what happens in an artist/creative worker audit. It’s one hour, and very worth it.

So showing your accountant your receipts says that you haven’t done your bookkeeping, that you probably don’t realize that you have a sizeable job ahead of you, and that you probably need some coaching about the basic tax rules.

This is totally understandable. You’re just a bespoke latex dog-costume designer, not an accountant! This might even be your first year freelancing. But your accountant is facing an immovable deadline with an obscene flood of work. So if she’s not keeping up with her loving-kindness meditation, she might get grumpy with you. As a person who was new at my arts practice once, and as a tax accountant, I’m advocating for understanding in both directions here.

So with that, here are some basic guidelines for you:

• Bookkeeping. If you have a system that isn’t working, pay a bookkeeper to look it over for you, or take a bookkeeping course yourself. Good bookkeeping is a question of habit. So schedule a regular time to do it.

• Saving receipts. The law says that if you can’t produce the receipt to prove it, it never happened, and you can’t deduct the expense. Your bank and credit card statements aren’t enough. For meals and entertainment, the documentation requirement is even stricter: the receipt must be accompanied by the name of the business contact you are meeting with, plus the reason for the meeting. A receipt alone will not suffice. Personally, if I don’t grab a pen and jot these things down at the moment I am handed the receipt, I will never do it. So that has become my personal habit – I write directly on my receipts, and the save them in a file folder.

• Some people are handy enough with their phones that they snap a picture of every receipt (many accounting softwares integrate a receipt-saving feature like this, and there are stand alone apps dedicated to it). I am not fast enough with my phone for this to work for me, but if you are, it is a great method for keeping your receipts.

• Keeping a calendar. In the days of Google calendar, you probably have one that is pretty good already. But you might not realize that this can be an important document to show your business activity in the event of an audit. Your calendar can be used to show the amount of overall time you spend on your arts practice — and that means everything from making the actual work to networking, marketing, and bookkeeping.  Your calendar can also show who you met with and for what purpose. This may corroborate other parts of your documentation, from travel expenses (your calendar shows the meetings you had set up in your travel location), to your meals expenses (meeting the strict substantiation requirement of who you met with and for what purpose).

• Maintaining important correspondence that shows your effort to grow your career. You may still snail-mail out old-school introduction packets to museums (and be sure to save those receipts if you do!), but you almost certainly reach out to art world people over email. In the days of searchable email, this is a lifesaver. If you use an email folder system, consider saving this correspondence into one place (ie. “gallery + museum correspondence 2018”), so that in the event of an audit, you can produce this important evidence of your businesslike intentions quickly and without having to rely on your memory.

• Maintaining your arts inventory. In Susan Crile’s drawn-out audit, her professional inventory system weighed heavily in her favor to prove that she was a professional artist and not a hobbyist. How do you track your art inventory? Having an up-to-date document that shows what you’ve produced and where everything is is an important tool in your arsenal.

• Tracking mileage. I went over the details of mileage tracking in my Miami travel expense post. But here’s a tip: go out and record your car’s odometer reading right now. And while you’re at it, set an alarm on your calendar to do this the first day of every year. Because tracking your business mileage means not only tracking the number of business miles you drove this year, you also must record your total miles for the year. By recording your odometer on day one, you have both your ending mileage for last year, and your beginning mileage for this year. Two birds. One stone.

MileIQ is one of several mileage apps that use the location detection on your phone to automatically record your mileage. Similarly to Xero Taxtouch, you swipe left or right to categorize drives as business or personal. You can also track the things people often don’t – volunteer miles driven (deductible at 14 cents/mile, if you itemize) and medical miles driven (ditto, but 17 cents/mile, with a high threshold before it’s useful). The free version doesn’t capture everything, so it’s useful to get the full version. And it’s a deductible expense! You can get a 20% discount by using this code: HCOL124A

DISCLAIMER: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone.

Bio: Hannah Cole is an artist and Enrolled Agent. She is the founder of Sunlight Tax.

How The New Tax Bill Affects Freelancers

It’s 2018, and you are likely starting to think about your taxes. You may also be wondering what’s in the newly passed tax legislation (officially the “Tax Cuts and Jobs Act” or TCJA) and how it’s going to affect you. Here is some help, specifically targeted for freelancers and creative economy workers.

To be clear, the 2017 taxes you file in the next few months will be based on the rules you already know. In other words, the old tax laws apply to the 2017 taxes you will file this year. The TCJA applies to 2018 and beyond, so this is for your planning for the coming year.

When you file your 2018 taxes (next year), most people will get an initial tax cut (that will expire in 2026), but the wealthy get most of the benefit. People in high-tax and high cost of living areas and those with kids may see their taxes rise. New York City artists with children, this means you. There are a lot of nuts and bolts reasons for this, which is what the bulk of this article is designed to address, but it’s worth spelling out the rationale for these changes. Your taxes may go up because Republicans are targeting blue states in an attempt to force us to cut our spending. They are giving a large, permanent tax cut to corporations, and the majority of individual tax breaks to the top 1%. This cues up a big deficit that they will later point to when they try to cut social spending. By delaying talk of spending cuts, they hope we will all forget who created this deficit and why.

The Tax Cuts and Jobs Act is the biggest piece of tax legislation passed since 1986...Read more

Why Mid-Tier Galleries Leave New York

Monya Rowe Gallery, St. Augustine, Florida

As an artist who moved out of New York City, I’m not alone in finding new energy, inspiration and freedom. My move was from Brooklyn to Asheville, North Carolina. But when I noticed multiple long-established New York galleries also making such moves, it surprised me. Don’t galleries have to stay close to collectors?

According to four dealers I spoke to who had moved out of the city, the cost of operating a gallery in New York City was a major factor for everyone, though lifestyle was also a factor. Says Monya Rowe, of Monya Rowe Gallery “Sadly, NYC is killing itself with all the rent hikes.” Rowe ran a gallery in Williamsburg, Chelsea and the Lower East Side for 12 years before she relocated to St. Augustine Florida in 2015.

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Business and Personal Accounts: Keep ’em Separated

There are a million meaningful reasons to operate an arts business, from creating revelatory art experiences for the public, to a commitment to a tradition, to the love of making hand-crafted objects. But at the end of the day, if it is a business (and not, say, a non-profit), a major purpose is to make money to pay for the expenses of living. And if the purpose of the businesses’ earnings is to pay for our personal expenses, why then is it so important to keep the business financial transactions separate from our personal ones?

The reasons are simple. It protects you from tax trouble and legal trouble. And it’s the law.

Here is an example to illustrate the tax trouble scenario. 

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The Personal Finance Attitude Adjustment

In my last post, I outlined the basics of a personal finance plan. That article is the “what to do” where I answer questions about insurance, debt management, savings and investments. If you haven’t read it I suggest spending a bit of time with the post because it provides the foundation for getting your proverbial ducks in a row. This week, I’d like to get into the “how to do it” part.

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A Personal Finance Cheat Sheet for the Overwhelmed

Money is the most powerful metaphor we have. For many people it represents their self-worth, their standing, their power and their security. In many ways artists are a little different—we have a life where we choose to value different things than the rest of society – freedom, both artistic and from societal norms, as well as intellectual independence. Our very existence can be seen as a challenge to capitalism. It’s why some people feel threatened by us—our choice to place a high value on things other than money might call into question their own choices and values.

So I understand why many artists may want to or feel as though they live outside the “regular” financial system. However, we all still must function within it. I have seen too many artists succumb to their own lack of financial knowledge and security – by giving up art, making outsized financial sacrifices (like homeownership, children, or secure retirement), and even becoming destitute. Money can be very emotional: not knowing how to manage it can make us feel out of control, anxious, overwhelmed, and ashamed.

But the flipside is wonderful. Taking some basic steps to control your money is empowering. It can prolong your career, help you meet personal and professional goals, and set your mind at ease.

I’d like to outline the most basic ideas of personal finance. There are tomes written on each single line below, and a million variations. But since feeling overwhelmed can cause paralysis, I want to assure you that the very basics of solid personal finance are universal.* Here they are.  Read more...

The Estate Tax: An Economic Justice No-Brainer

Economic inequality is one of our biggest problems as a society, and it’s ruining our health. But it’s hard to write headlines about something that gets incrementally worse every day, instead of making a dramatic, newsworthy entrance. Bernie Sander’s campaign struck a chord by focusing on income inequality, and Trump garnered popularity by addressing workers on the losing end of the economy (though, I would argue, not with actual solutions).

I wish I could write a column about the perfect solution to income inequality. But a problem with many causes, needs multiple solutions. A lot of opportunity exists within the tax code to address these problems. The current administration either views income inequality as a benefit to society that should be boosted through the tax code, or simply does not care about anyone outside the 1%. We know this, because virtually everything in Trump’s tax proposal is regressive and would worsen income inequality.

There’s no shortage of topics to tackle with regards to the proposal (if that’s what you can even call the incomplete bullet list the White House sent out) but I’d like to focus on what I think should be an economic justice rallying cry: The Estate Tax. Read more...

Set up For Your Best Year Ever: A Tax Day How-To

Here we are at Tax Day. Your taxes are filed. (They aren’t? Here’s an IRS extension form – postmark it today. You’ll need one for your state, too.)

Last year you vowed to get your stuff in order. Then suddenly the tax deadline was upon you, and you scrambled through the process, and weren’t as careful as you intended to be. You suspected you should have been paying estimated quarterly taxes all year, but didn’t, and now your tax bill is surprisingly high.

You meant to set some money aside in a retirement account, but that shocking tax bill meant you didn’t have any cash to do it.

You suspect that there were deductions you missed.

If you’re being honest, your books were a mess (if you’re thinking “I need to keep books?” go back and read this.)

Now that the time pressure is off, let’s take a look at how you can make this year better. Plus some discounts on apps that can help you.  Read more...

Charitable Deductions for You, Me and Warren Buffet

Here’s a fact that may surprise you: lower income people give far more to charity than people in the upper income brackets. And yet the laws for charitable giving bend over backwards to accommodate high-income charitable givers, and often don’t allow low income people to get a deduction at all.

The reason is that only people who itemize their deductions get to claim charitable deductions, and lower income households usually don’t itemize. Here’s a quick primer:

Every person filing taxes gets a personal exemption of $4050 for every taxpayer and dependant claimed on her return. In English, this means that everybody’s first  $4050 of income is automatically tax-free. If you are married with three kids, you only pay tax on any money you make over $20,250 ($4050 personal exemption x 5 people).That’s true for you, me, and Warren Buffett.  read more...

Some Real Numbers for Artists on the ACA Repeal

GOP Rep. Jason Chaffetz says that the American people may need to choose between a new iPhone or health care when trying to afford insurance under the new GOP bill that would replace Obamacare. Image via: istockphoto

When I went back to school for accounting, I never thought I’d get an education in healthcare. But the Affordable Care Act (ACA, aka Obamacare) forced tax preparers like me into learning about our healthcare system, because most of the credits and penalties are reconciled on the tax return. As an accountant for artists, I see the direct benefits of the ACA on my clients. I am required, per the ACA, to find out if my clients were covered by health insurance all year, and if not, I calculate the penalty for each month they weren’t. I record the premiums my clients pay, which can be a big deduction for a freelance arts worker. And I see the monthly subsidies that they get, because I reconcile them on the annual tax return (the “Premium Tax Credit”). I also calculate the 3.8% Net Investment Income Tax and the additional .9% Medicare tax for my very highest-income clients – these are the additional taxes on the top income earners that effectively pay for the subsidies provided by the ACA. This amount is only calculated on the very top dollars of their income and it hits a proportionately tiny slice of my clients.

Given this background, I have some insights on what the new Republican proposal, the “American Health Care Act” (ACHA, aka Trumpcare) would do to you, me, and our federal budget. It’s not good.  Read more...

The SEP IRA: A Lovesong

We freelancers pay a lot of tax. We don’t just pay an income tax rate of anywhere from 0 to 39% on our freelance income – we also pay a flat 15.3% self-employment tax, no matter what our income bracket. Without tax planning, this can be a huge bite.

As artists and cultural workers, our freelancer tax strategy is generally to reduce the amount of our taxable self-employment income as much as legally possible. Tax planning is hard, because it’s about saving small bits in many places. There are few silver bullets. But the closest thing there is to a silver bullet is tax-sheltered retirement savings. Read full article

Why Refusing to Pay Taxes is an Ineffective Protest of Trump

Frustrated with President Donald Trump’s first four weeks in office? So far, he’s rolled out a sloppy and disgraceful travel ban on Muslims (notably omitting countries he has business ties to), and used taxpayer money to pay for his sons’ jaunts to other countries to promote Trump family businesses. His presidency has been rife with conflict of interest but he has not released his taxes, so there remain few ways to prove it.

It’s not surprising, then, that a lot of talk has surfaced among artists and progressives about not paying income tax this year in protest of the Republican administration’s policies. Is this a good idea?

The short answer is, “No.” It is a very, very bad idea that’s not only misguided and dangerous, but will be absolutely ineffective.

As an expert on taxation, I have some insight on why this is so problematic. So, let’s look at some of these issues and talk about some ways to direct this energy that will make meaningful change. Read full article

Rent Too Damn High? Deduct Your Home Studio.

One of the best tax breaks out there is the home office (or home studio) deduction. In tax terms, this essentially turns a portion of your nondeductible personal expenses (your home) into deductible business expenses (a workplace). A lot of people are confused about the rules, and some people are scared to take the deduction at all because they’ve heard that it can be a red flag to the IRS. As long as you are following the rules correctly, there is nothing wrong with taking the deduction. And it’s a big one! So here is some help.

First, when can you claim a home office/home studio?

You have to use it both exclusively and regularly.

Exclusive use means that the space is a dedicated workspace – no kids watching TV in there after hours, no guests staying there. There is no wiggle room on this part.  read full article

The Nitty Gritty: How To Prepare for Filing Your Taxes

Nobody likes filing taxes. But thinking ahead and getting your documents lined up reduce the stress of the process. Here are some key ways to prepare yourself for tax season, and get you ready to sit down to your own tax prep software or deliver an organized package to your tax preparer.

1. Download a 2016 tax year organizer. There are many available online. Mine is here. This will be your guide and checklist, and will help you see what you still need, and tell you when you’re done. Follow this guide.  Every accountant has a horror story about someone who, in the attempt to save themselves time, doesn’t read the organizer carefully, and causes no less than six follow up phone calls to chase down the information. Believe me when I tell you that a busy accountant in the heat of tax season will charge you extra for that kind of hand-holding. If you want to save yourself time (and money) on the tax process, have these materials fully prepared before heading to your accountant. 

2. Put your receipts, 1099-MISCs, W-2s and all your other tax documents in a folder. This can be virtual or manilla. But keep in mind...read more

Getting Organized: Financial Resolutions for Artists in 2017

As we enter a the new year, let’s take time to think about the priorities in our arts practices, and in our personal lives. You may roll your eyes at the idea of New Year’s resolutions, but there is evidence that writing down your goals actually helps you achieve them. So grab a pen, and let’s put some intention into 2017.

In my interview with artist Susan Crile about her eight year ordeal defending herself in US Tax Court, there was a lot of discussion about keeping records to prove the profit motive in one’s art practice. It brings up a good question for most of us: how are we doing on our own record keeping? If the IRS sent an audit letter tomorrow, would you feel good about the shape that your records are in? If the answer is not good, don’t panic. Here is a list of what you will need, and some thoughts on how to improve your record keeping going forward.

• Good Bookkeeping. Bookkeeping is important to any business. Without tracking expenses and growth, there is no way to improve your practice. It’s impossible to argue that you are actively trying to turn a profit when you don’t track your income and expenses. 

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