Business and Personal Accounts: Keep ’em Separated

This article originally appeared in ArtFCity on 6/13/17. Updated 7/23/2021.

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 or the love of making hand-crafted objects. But at the end of the day, if it is a for-profit business (and not, say, a non-profit), a major purpose is to make money to pay for the expenses of living. 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.

Let’s say you operate a letterpress. Your core income is from printing high-end wedding invitations, but your true love is printing full color publicity posters for rock bands. This is a totally respectable business model, and while you love what you do, you are definitely earning a living. But the business part has never been your strong suit, and you have been depositing your printing business money into your personal checking account, and using that same account for personal expenses like buying groceries and clothes, and paying rent.

Now let’s say that after a string of bad years in your printing business due to forces beyond your control—a boycott of your state because of a recently passed piece of transphobic legislation, for example—you get audited. So far, this is all pretty normal—people with a string of losses in their arts business will tend to get targeted for audit, because the IRS wants to check that the business is legitimate, and not a hobby or a tax shelter. Because your printing business is generally sound, and the recent downturn is explainable and not within your control, you can probably expect to come out of this audit unscathed.

But when the IRS looks at your bank records, they see one account where business and personal items mix together. To them, this is a strong indication that your business is a personal hobby, and not something you take seriously or treat in a businesslike manner. They deem it a hobby, and disallow your recent losses, resulting in you having to pay back the difference in taxes, plus penalties and interest. It totally sucks to be in this boat, and you could likely have avoided it if you had a separate business account, and you kept it clean of personal expenses. 

The IRS has a nine-point list of factors they consider when judging whether your arts business is a bona fide business or a hobby. They give a lot of weight to the separation of your business and personal accounts.

All businesses are run by individuals. When you operate a sole proprietorship and file a Schedule C for it on your personal tax return, you have no legal separation between yourself and your business. Millions of small businesses in the US operate this way, and when you’re small and not incurring much liability, it’s perfectly fine to do so. But a snag arises when you get in legal trouble.

Let’s say that you, Arty McArtist, are operating a sole proprietorship arts business. You make large wooden sculptures, and during your latest installation, one of the installers is crushed when your sculpture falls on top of him, and he can never work again. The worker decides to sue. Because there is no legal separation between you, Arty McArtist the person, and Arty McArtist the arts business, when he sues you, he can not only go after the assets of your business – your tools, your studio, your inventory – he can also go after your personal assets – your home, your car, and your kids’ college fund. That could sink you. 

There is a way to eliminate the personal legal exposure that this nightmare scenario illustrates. You can make your business its own separate legal entity. This has other benefits on top – some corporate structures allow you to raise capital by issuing shares, and potentially reduce your self employment tax – but the liability protection is the major consideration for most smaller businesses. There are different options, including partnerships, C corporations and S corporations, (and I won’t go into detail on them here), but a very common and flexible one is the Limited Liability Corporation (LLC). The main point of becoming an LLC for most small businesses is to protect their personal assets from a lawsuit. This separation between the individual and the business is referred to in law (and rather poetically, at that) as “the corporate veil.”

As an accountant, I want to warn you against the mistake that people make here. When you form an LLC, it becomes critically important that the business entity really is separate from the person running the business. The “corporate veil” must be real. Among other things, this means you must track your business books and keep a separate business bank account. If you go to the trouble and expense of forming an LLC (or one of the other types of separate entity), you are agreeing to maintain that separation.

What happens if you don’t? If you get sued, the court can “pierce the corporate veil,” thus nullifying the benefits of an LLC. In other words, in a lawsuit, your business practices will come under scrutiny, and if you’re found to be acting as one and the same as your business, not as a separate, distinct entity, then that legal protection you thought you had drops away, and the plaintiff can come after your retirement fund, your house, your art collection, and your vacation fund.

So now that I’ve scared you, what can you do to prevent these awful scenarios from happening? Primarily, you want to operate in a businesslike manner. You need to keep your business accounts and personal accounts totally separate. If there are any credit cards that you use for both business and personal expenses, cut it out, and get a corporate card for the business.

A happy side effect of keeping your accounts separate is that your bookkeeping becomes a lot easier. When you have a separate business credit card and checking account, and you use them strictly for business reasons, there is no more combing through bank statements to figure out what is business and what is personal. Your hardest problem is just figuring out which legitimate business expense category to put each purchase into.

So if I’m earning money in my business and the point of having it is to make a living, how do I pay myself from my business account? Great question. You are allowed (and expected) to move money between accounts. When you invest your personal money into your business (a common occurrence!), it’s called a “owner’s contribution,” and that’s the category you file it under in your books. When you take money out of your business to pay for your personal living expenses, it’s called an “owner’s draw,” and likewise, you record it as such in your books. Note that you shouldn’t be using the corporate card to charge a gorgeous leather jacket at Prada and then booking that transaction as “owner’s draw” after the fact – though this is the way to correct that mistake, if you make it. The best practice is to withdraw a chunk of money, in a predictable, periodic fashion (like you’re paying yourself a salary).

So the simple takeaway here is clear. Keep your business books clean and businesslike. Separate your personal and business accounts. It simplifies your bookkeeping, it’s not hard to do, and the trouble it can keep you out of is worth all the effort.

I Like Your Work Podcast: Knowing Your Numbers and the One Best Thing You Can Do Now

When you know what your profit is, you unlock the power to know what things cost you, whether you need to raise your prices and how much you owe in taxes way before the deadline. So how do you do it, and what is the one key action step that will help you right now? Find out on the my latest mini episode of the I Like Your Work Podcast.

Money Story - Christopher Denise: Building Habits and Space to Focus on Your Creative Work

Christopher Denise (he/him) is an illustrator, writer, teacher, and lecturer. He has illustrated many critically acclaimed books for young readers including Alison McGhee’s Firefly Hollow, Rosemary Wells’ Following Grandfather, Anne Marie Pace’s Groundhug Day, as well as several in Brian Jacques’s Redwall series. Christopher lives with his wife and collaborator, Anika Denise, and their family on the coast of Rhode Island.

HC: Who are you, what are your pronouns, and what do you do?

CD: My name is Christopher Denise, my pronouns are him/his and I am an illustrator in primarily kids’ literature, and an educator. I teach in various programs. I have taught at RISD, in undergrad illustration, where I also attended, and recently in a Master’s program at Holland’s University. This Fall I am teaching at Montserrat College of Art.

HC: How did you get into the world of illustrating?

CD: I had been studying archeology and art history at St. Lawrence University. That led to studio classes and a greater interest in making my own imagery. Around that time I visited my brother at Rhode Island School of Design and found that the level of conversation there was completely different. I applied as a transfer student initially into the architecture department because I had no idea what an illustrator was. But when I got to RISD, I started taking illustration classes, and it was really satisfying. I liked telling stories with images, not particularly for kid lit [kid’s literature]—I just liked being a visual communicator. In my junior year I started freelancing, creating work for newspapers and educational publishers (textbooks). After graduation some of those images caught the attention of an editor in New York. 

HC: That’s a big lucky break. Can you explain more how you got in front of that critical editor?

CD: I did promotion. I sent out mailings and dropped off my portfolio at various publishers. I was very fortunate, because I ended up working with this editor for years.

Our first book together was The Fool of The World and the Flying Ship. That was a breakthrough moment. It was daunting, because the illustrator who had created a version of the story a few years prior had won a Caldecott Award. My version also got a good amount of attention. It got  starred reviews. I did interviews and book signings. But it didn’t sell many copies. The upside of good press but not a lot of sales was that was it allowed me to continue to work in “relative obscurity.” If The Fool of the World had been a huge financial success, and I had felt compelled to reproduce it, it could have been disastrous. Creative endeavors are challenging, but when they change because of the financial piece, it can change your relationship with the creative process. If you’re not connected with the work, but you’re making money, that can be challenging. 

HC: For a lot of creative people with amazing careers like yours, there is a Critical Moment. Can you talk more about how that happened for you?

CD: A part of it was luck, which is always nice. But I was ready. I was ready to take advantage of that opportunity. I had developed a practice and a discipline, so when opportunity arose, I could capitalize on it. I diversified my workflow so I could take on a project that was more time-consuming and less profitable. [It allowed me to] Be ready for an interesting opportunity. 

That led to me being introduced to Brian Jacques, the author of the Redwall series. He wrote a picture book for me to illustrate. It offered me another chance to grow my work artistically. 

In regard to the financial part—I was being paid more, so [ironically] I paid less attention to the business side of things. I was single, with no family, so I could do that. One thing I did do, against the advice of some family members, was invest in buying a house, which turned out to be a good decision. But I was working all the time and lacked balance. 

Having a successful career in the arts is not a static goal. It’s not something that you “achieve.” You develop a practice. Something that Sunlight Tax articles and Money Bootcamp talks have highlighted that resonated with me is that getting on top of your money is also a practice. Financial literacy is not just a tool that fixes things, it is a structure. My Uncle Frank used to tell this joke, “I bought this trunk organizer. I threw it the trunk two weeks ago, and damn if I looked in there yesterday, and this whole thing is still a mess.” So, in other words, you have to actively apply sound financial practices to your creative life. 

A practice builds empowerment, and as a result, freedom. Who doesn’t want freedom in their life? It allows time to focus on what gives you purpose in life. That looks like many things: a chance to support causes and people you believe in, a chance to spend more time with friends and family, and a chance to produce non-commercial work.

A career in Illustration is not a sprint, but a marathon. You need a structure. You need to a map that breaks the steps in the journey down so you know what to do, and when. It makes everything feel a lot more achievable. And it helps you get back on track if you go off in the weeds.

In the past, I would approach my project and finances without the map—I would barrel into the work and block out the rest of my life. I would get paid, and then retire all my debt. That felt great for about a week after I had finished. But that was fleeting, because new bills would arise, and a new cycle would start again. This led to both artistic and financial burnout.

HC: Something I see in so many of my Money Bootcamp members is that one of the key things that money allows is the space to rest. Can you talk about this idea of hustle vs. rest?

CD: A family will force you to take breaks from work! I’m married to a writer, so we do a lot of balancing. In the past I felt as though if I was not working, I was not working at being paid. That was frightening, because projects were long, and there was no sense of where I was financially. 

Now that I have more structure, I feel more comfortable taking some time off. I’ve become more efficient. When I get to the studio it’s “go time.” I know why I’m there, and what I'm supposed to be working on. I allow for mistakes. I can do that because I have a production schedule.

I have a few friends who are 8-10 years my senior, and are top-level character designs for animation. They warned me about burnout and that definitely caused me to pump the brakes a bit. I love illustration too much to let that happen. Nevertheless, I made some bad decisions, like passing up a trip to go back to Ireland to visit with family friends because I was on a deadline. When we had kids, I didn't want to miss that time. So much so that I took some capital from a book that did well, and built a studio here on my property, so I could be around. That allowed me more time with the kids but also forced me to really structure and balance my time.

So much of the world now [because of Covid and working from home] is getting a glimpse into that kind of balance.

Now when I’m having a good painting day, when there is flow, I’m ready. It’s a funny thing though—everyone develops their own studio practice. In the past, if someone said, “you have to do it this way,” there’s a pretty good chance I wouldn’t do it. But if they engage me and ask, “Here’s a project, how do you want to approach it?” then I’m all in. I’m independent or maybe just stubborn!

HC: A lot of creative worlds have their own unique and unspoken assumptions. Grant Conversano, a filmmaker in Money Bootcamp, was describing in a recent interview the unspoken codes they felt in the filmmaking world. Are there codes like this in the illustrating world?

CD: Yes. That you should get an agent. That’s how you get better contracts and get seen. I did not take that route for fifteen years of my career. I met independently with publishers and negotiated my own contracts. This was helpful in some ways—I knew what I was getting into.
It used to be that you sent out postcards, got in touch with people, and dropped off your portfolio. That aspect of the business is so different now. Within an afternoon you can get your website up and running and out there. Because of that, the market is flooded. There are so many people with so much fantastic work. This has democratized things, which is great. In the past, you had to be able to print postcards, have a decent-looking professional portfolio, and get yourself to New York City on a regular basis. That’s all changed now. 

I’ve found that in today’s publishing market, it is helpful having an agent. It allows me to focus more on the creative part, and less on the hustle. Anika (my wife and collaborator) and I share the same agent. Our relationship with our agent Emily Van Beek at Folio is a partnership and friendship. We know from experience that we’re in good hands, and that she’s got our back. She vets projects before they come to me. It helps.

HC: Do you have any advice for a young illustrator starting out?

CD: Instagram is amazing to get your work seen. My general advice is not that different [from how it would have been when I started]. Show work that you are excited about. Work that you’d be excited to do. Don’t show your potential clients what you think they will like, especially if you didn’t like doing it. Be true to your work and eventually you will find an audience. I’ve seen it happen. 

On the business side, besides showing work you can stand behind, there is a question that I always ask my students, “What is the one factor that might inhibit your Illustration career?”

When I ask my students, I get many answers. But the real answer is debt. Debt will keep you from taking those jobs that might pay less but be really good for your work. Debt can lock you in a place of fear and anxiety. It literally shuts down your creative side. I also talk about sleep.

HC: Amen! I thought is was all about money, and now I realize it’s about rest.

CD: Over the past few years I have become fascinated with neuroscience, creativity, and sleep. I want to make the most out of my time, and out of my life. Having a good work-life balance, running, exercising, getting enough rest, etc. is all good for my creative process. 

It was Ariana Huffington’s book on sleep that really got me thinking about this. She’s an amazing thinker and aggregator of information. She had gotten to the point where she’d convinced herself that she could exist as a creative person on four hours sleep a night, and it brought her to a breaking point-literally. She turned her focus to assessing her habits and where they’d gotten her, and wound up creating an amazing book. Another great resource, not on sleep specifically, but on creativity and finding stillness is David Lynch’s Catching the Big Fish. The audio edition is brilliant.

Teaching also helps me find balance by changing my headspace. That’s actually why I teach. Financially, teaching is not a big part of it, but in teaching you are learning. You have to approach someone else's artwork from a different perspective. Every time I teach, I come back to the studio a better artist for the experience. In fact, I just saw a quote pop into my inbox this morning from Gretchen Rubin quoting Octavia Butler “as habit is more dependable, continued learning is more dependable than talent.”

HC: Christopher, this has been wonderful. Thanks for sharing so much about your journey. It’s inspiring to hear the whole arc of it, and how you would advise a younger person in your field. Is there anything you have coming up that you want to share with everyone?

CD: Thank you. I have a book coming out in March. I’ve illustrated over 25 books, but this is the first one I've written and illustrated. It’s called Knight Owl. 

I Like Your Work Podcast: An Artist's Journey from Money Shame to Accounting Magic

In one of four new mini episodes of the I Like Your Work Podcast, I talk about my journey as a painter who had miserable experiences with accountants when I was starting out. So how did I decide to become one? I share the origin story of Sunlight Tax and talk about how the magic and love of the artist community was the right motivation to build a business that serves artists with the tax education they need.

Visit www.sunlighttax.com/moneybootcamp and use the code ILYWMONEYSQUAD to get exclusive access to the free community I Like Your Work Money Squad. The I Like Your Work Money Squad is only available to listeners when they join Money Bootcamp and is a free support group for artists that includes monthly emails and a private Slack channel that will help keep you motivated and accountable. 

An Audit Nightmare Turned Artist Victory: An Interview With Susan Crile

This article originally appeared in ArtFCity on 12/15/16. Updated 7/22/2021.

American businesses sometimes lose money. Those losses actually create a tax shelter for other income. While the tax code explicitly provides this incentive for businesses – to encourage investment for growth, and to allow for unpredictable events – losses that go on for too long tend to draw scrutiny from the IRS.

If your arts practice loses money for more than a couple years, they may question the legitimacy of the business – specifically, the profit motive. Typically, they reclassify such a business as a hobby, and disallow the artist from expensing deductions past the point of their income from the activity. That’s bad news for any artist, but it was a near nightmare scenario for artist Susan Crile.

Crile spent eight years in tax court (from 2005-2013), defending her right to take losses. She is an accomplished artist by any measure. She has had over 50 one-person exhibitions, and her work is represented in dozens of museum collections, including the Guggenheim, the Metropolitan Museum of Art, The Hirshhorn, and the Cleveland Museum of Art. She is also a tenured professor of art at Hunter College.

However, despite this decades-long professional history, the IRS threatened to reclassify her art as a hobby, disallow her losses, and force her to pay over $200,000. In the end, Susan Crile won on the question of being considered a professional artist, and the precedent that her case set is that her day job was clearly judged to be a separate profession—not the reason for her art. But the judge did not rule on the allowability of her large deductions—that piece was sent to a settlement, and not all of the deductions were allowed.

In this interview, we discuss how she proved her case, what it took, and what she recommends for artists in a similar position.

Hannah Cole: First I wanted to thank you for putting yourself through what you have. You set a precedent that really helps other artists.

Susan Crile: I’m still recovering from it! I was very lucky that the law firm Cravath Swaine & Moore took it on pro bono, but my accounting was not taken care of pro bono. So I’m still getting my feet back from that.

HC: How did the audit start? I assume you got a letter in the mail and I want to know what went through your mind. (PSA to readers: an IRS audit always begins with a notice in the mail. If you receive a phone call announcing an audit, it is a scam.)

SC: Well I’ve been audited several times over the years and I hadn’t had any problem. I never had to pay anything. But this time it seemed as if there was no reason for it and my accountant [and I] both thought that we should question it. So, it was going in a normal way up the audit chain and suddenly something changed. No one’s been able to figure out what happened. By the time it got to the appeals they had decided that I was a hobbyist, that we had to pay this huge amount [in back taxes, penalties and interest] and had added seven years to the audit.

Early on it wasn’t a huge amount disputed—about ten thousand [dollars] in deductions.

HC: Wow. For the readers’ information, both hobbyists and professional artists must report all income, but in the years of her audit, a hobbyist could deduct expenses up to the amount of their hobby income. A professional artist, in business to make a profit, could then and can still claim expenses beyond income. In other words, they can claim a loss. Please note: in 2018, the Tax Cuts and Jobs Act changed the rules for hobbyists, so that as of 2018, hobbyists may no longer deduct any expenses at all. The rules for business deductions remain unchanged.

SC: So I think there were two things that made them decide to [expand and shift the focus of the audit]  First, I think that they were probably looking for someone to use as a test case.

HC: That’s my suspicion as well.

SC: Second, my deductions were high and my income was very variable year-to-year. I also had a full-time teaching job. There were a lot of variables in there, and if they could get me, they could get a lot of people, all of whom would be omitted from taking deductions.

HC: This would allow the IRS to classify all similarly situated artists as “hobbyists,” and therefore not entitled to take a loss.

SC:  Yes. The IRS kept changing why they were taking this route. By the time the law firm Cravath Swaine and Moore came in, they were not interested in settling at all. The first thing Cravath Swaine and Moore did was send them about a thousand pages of backup. This was five years before the judgement.

HC: That’s amazing.

SC: So the audit started in 2004 or 5 went to trial in 2013 maybe ended in 2014.

HC: So how were you feeling when all of this went down? It doesn’t sound like the initial audit letter was that much of a shock.

SC: No. For the first year there was nothing about it that was really terrible. But when they started adding on years and the numbers of what I was going to owe started getting revised up I got scared. They weren’t going to allow me any deductions at all [beyond SC’s art income]. Then I would have been subject to The Alternative Minimum Tax.

HC: This tax was intended to ensure that high-income taxpayers, who may be savvy about maximizing deductions, pay at least a certain amount of tax.

SC: It began to look really onerous. At that point I went to Cravath Swaine and Moore. I knew one of the partners very well.They decided to take it on pro bono. It was just luck that I was able to be in that position.

HC: Wow, that’s amazing. I’m curious to know what you learned going through that experience?

SC: I don’t think anyone should get tangled up with the IRS if they don’t have to, for one. You get mauled. And unless you’ve got really really good backing and coverage, it’s really hard.

HC: Can you explain what backing and coverage means? It seems useful to mention here that the IRS uses nine points to determine whether a person incurring losses in their business has a profit motive. The profit motive is the key factor that determines the legitimacy of a business in the eyes of the IRS, and having one entitles the business to incur losses. Otherwise, the activity is deemed a hobby, and losses are disallowed.

SC: You have to have a really good accountant who knows and understands the law. The nine points are not just about demonstrating a profit alone. It is a preponderance of points and a lot of them relate to how you run your business.

HC: Right, they are given different amounts of weight in the judgement. Like the fact that you hired a professional bookkeeper, an accountant, and someone to digitize your inventory for a few big years, all play into the point about the expertise of the taxpayer and his advisors. You wouldn’t hire those people if you were a hobbyist.

SC: Yes. You have to have records and proof. Letters you’ve written trying to contact curators and museums, or trying to get gallery representation. I had to go through my date book and annotate everything I took for a deduction and why it was valid. If people get into the habit of good record-keeping and note-taking, they’re probably not going to have a problem.

Fortunately, I had decided early on that I wanted to know where my artwork was, so I have kept track of it. A lot of people I know don’t. Even when we went through [it], my sales were a lot more than what they said they were. We only could count those that I have proof of.

HC: That really puts a fine point on it.

SC: It took a huge amount of time out of my life. I mean, having to substantiate every move you’ve made for seven years. That, and I had to basically go through and count the amount of work I’ve made. I had to inventory everything…I had to dig up stuff from storage and boxes of stuff. In terms of figuring out sales, I had to go back forty years on every single thing I had ever done.

HC: Wow. That’s really incredible.

SC: It’s much harder for me, too, because I can’t do everything electronically. I’m older and not absolutely terrific with all the electronic stuff.

HC: It’s interesting that you say that because you are proof that the old-fashioned way is just fine if that works for you.

SC: Did you read the trial? Because they brought in this woman as their expert — Elizabeth von Habsburg, who tried to claim that I had no records because I had not gone electronic with everything.

HC: Right and she was an IRS expert witness, the managing director of Winston Art Group, who was brought in to testify regarding the art market and art appraisal.

SC: A good part of my  work had been digitalized, not just 1980-85.  Most everything from 1980 on has been digitalized, but my work goes back to 1965.

She was trying to say that because I hadn’t gotten everything digitally [catalogued] that I was an amateur. We have these boxes that I had had from the earlier time that had listed on them what I sold and to whom. It was a different form of doing it, but I had it.

I had an appraiser come in and take a look at my work in the country and what I have done here in New York. We came out very well on that because I have things wrapped properly and indicated on the back what the work was, and where it had been shown.

HC: The Hobby Loss Rule says that so long as you make a profit in three out of five years, you are presumed to be in business with an intent to make a profit. If not, you are presumed to be conducting a hobby.

SC: So you’re actually innocent until proven guilty, but they act as though you’re guilty until proven innocent.

HC: It’s a question of onus. When you make a profit in three out of five years, the onus is on the IRS to prove that you don’t have a profit motive. But the issue that arises when you run losses for more than three out of five years is that you are presumed to not have a profit, and you have to prove that you do. So that is written in The Internal Revenue Code.

SC: They act as if you are absolutely wrong, as opposed to acting on the assumption that you can give them evidence that you are not. That was the sense that I got all the way along. That they were cut hard and dry that the law is if you don’t have [profit] three out five years then you are wrong, and you owe us.

HC: An artist running losses is in the position of threading that needle. You have to say here are my losses, but here’s the case law that says that that doesn’t disprove my profit motive.

SC: And I think that most people who come up against the IRS don’t know that. They are intimidated by it.

HC: It’s my experience that sometimes the auditors don’t know what the law actually says, and that the person being audited ends up in the position of having to educate the auditors about the case law.

SC: That’s hard for me to have an opinion about because I left it entirely to my accountant. I didn’t go to the audit. What I heard from my accountant was pretty shocking. At one point one of the auditors said “I have art books on my coffee table and I can’t take them as a deduction, why should she?”

HC: Wow.

SC: I mean, please. Don’t you have accounting books or tax law books? I think one of the real problems is that there’s a lot of cultural envy. In an odd kind of way they feel that we’re getting away with something.

It’s complicated too because so much of what we do in our lives is potentially deductible. That came up in the trial in the final deliberations with the judge who felt that that there had to be some demarcation points. He sent us back to negotiate on what deductions were viable, and what were not. Not that I wasn’t an artist in it for profit, but were all these deductions correct.

HC: Has the settlement part been decided?

SC: That was decided, and it took a year and three months. We only used one year as a model and applied it to the rest. At the onset of this seven years, with penalties and interest, and taking out every single deduction, it could have been over $200,000 that I owed. 

HC: Oh my goodness.

SC: During the negotiations, the IRS examiners offered to give me only 10% of my deductions—as though the trial had never happened! My lawyer was just fantastic. She had the patience of Job, and she just wore them down. And in the end, we got close to 85% of my deductions. It should have been a lot higher but we had to compromise at some point. [The IRS] just did not want to budge an inch on anything. We just let go of certain categories they had problems with.

HC: What about the day job aspect of the trial? Because even in the era of Churchman v Commissioner (who ran loses as an artist for 20 years and won her case) they were trying to prove that if you had a day job the fact that you weren’t living off of your art meant that you didn’t have a true profit motive. But what your trial proved, in my understanding, is that the day job does not invalidate the legitimacy of your arts practice.

SC: That was a huge piece of it. The IRS started with a hobbyist routine and when they found out that I had this massive amount of stuff — that I actually have exhibitions, I have sales, I had excellent reviews, they weren’t willing to back down and say, “ok she is in it as a business to make a profit.” They just switched, and said “okay, the only reason she is showing her work and trying to have it exhibited to keep her job as a professor”. Which is totally ludicrous. I had already been tenured and was a full Professor by 1995. It hard to fire a teacher with that status. That was not a very strong argument for the IRS. The judge wrote that this would invalidate so many areas for people who teach and was explicit in his rejection of this argument.

HC: For sure. I know a lot of artists who are serious professional artists working very hard, but running losses more than the three out of five years.

SC: You are in the position of having to educate your clients.

HC: Yes, I mean it’s one thing to think of an audit in very theoretical-someday-low-possibility terms and be running your practice. But when you realize the kind of thin ice you’re walking on if you’re taking losses, and you realize your entire defense is based on that record keeping, it definitely shores up your resolve to keep it as professionally as you’re able.  Do you think that it was all worth it?

SC: It’s worth it if it helps other people.

HC: Are there any last words that you would want to leave other people in the art world with?

SC: I think we all have to make sure that artists can continue to take deductions [including to the point of losses], because the art world is mimicking the real world – there’s the billionaires and the rest of us. The only way in which we can continue to be able to work is if we are also able to take losses.

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.

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