What's the Deal with Receipts?

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 deductions, 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. You can hire a bookkeeper to do this for you ($30-$60/hour) or, you can join Money Bootcamp, which is designed to teach you how to do it yourself (and have quarterly bookkeeping co-work sessions to keep you on track and up-to-date, along with loads of other valuable financial and tax skills). 

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. 

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.

Does Anyone Make a Living Doing Public Art? A Money Story with Liz LaManche

Liz LaManche (she/they) is an artist on a mission to add more color and fun to the world through big art in public places and small art in weird places.

Hannah Cole: Tell me about what brought you to a place where you wanted to learn more about taxes and getting your money organized.

Liz LaManche: I spent a bunch of years in software doing UX/UI consulting, so I had practice doing that, and getting decent rates, and doing contract negotiations, so that wasn’t the hard part. The hard part has been figuring out what artists get paid, and all that learning I talked to you about. Being avoidant about money in general. Not wanting to know my budget, not keeping track of receipts, even though at the end of the year I had this big terrible accounting project of tallying all my receipts. 

You’re the first person who has been able to teach me in a calm, accessible way. I had old men accountants who said they would teach me, but then actually just asked for my numbers which they would just enter into their system. When I would ask them questions, they would say, “Just read the instructions on the form.”
The fact that you’re able to realize in a psychological way what is going on with people, gently and realistically, has been really nice.

This was part of a program I set myself where I was intending to get better at the financial thing, and set myself up better. I’m examining, “What are my attitudes? What is keeping me from getting specific? From actually tackling this stuff?” You helped with the specifics--as in, here’s how to do this and that.

I think psychologically, I bounce between overfunctioning and underfunctioning. I can’t deal, and then I bounce back. I have a tendency to want to get everything done perfectly, then I can’t deal anymore. You’ve been very helpful about putting it all in perspective. You say, if you improve one thing, you’re headed in the right direction. It doesn’t need to be all perfect immediately. 

I would go from ignoring my receipts for months, to “I have to enter every 50 cent coffee I ever get into this spreadsheet.”

HC: What did you observe in your transition from consulting work to the art world?

LL: Being up front with clear communication took practice. I got good at writing contracts that were basically in English that people normally speak, but take care of contingencies that both parties actually care about. You need to spell it all out in an understandable way, and to have it covered in a contract. A lot of my artwork is commissions and consulting.

HC: So you really have to use contracts for that. 

LL: Yeah. You have to lay out what is going to be done in this project.

HC: Can you describe your art?

LL: I’m doing public art and murals. I’m also working with an organization that helps cities and towns work on their pedestrian access, safer streets, bikeways, and designing asphalt art. I make artistic crosswalks, intersections, and pathways. I get to use my architecture background, making urban environments more beautiful, and sustaining human beings. It has been helpful coming from being an architecture major. First, you have to figure out what the client wants and needs, and what environment the client is in. Then you design something bespoke to solve those problems and make something that is both beautiful and usable within its environment and neighborhood. 

Business skills have helped a lot in the project work I’m doing. Being able to form a relationship with clients where they feel taken care of, and they are sure I know what I’m doing, because I approach things like a pro, I know what the issues are, and I can get them a solution that works for them. I show up and behave like a professional. People dealing with artists are a bit afraid about that.

HC: Has there been anything particularly helpful that you have learned?

LL: I had some habits that helped me already. I can do math, I had business bank accounts, I can use spreadsheets. But others you helped me a lot with were--I couldn’t face my receipts, and keep a running tally of what was going on. I couldn’t look at my actual financial situation. I would just try to get money coming in and hope that things worked out. Then I would panic if the account balance got too low. 

Following your program, I’ve been able to get a handle on things, know where I’m at, develop some good habits (if not make and stick to an actual plan). Things like getting more methodical about putting money aside, being able to check on it, that sort of thing. Being able to get on top of the quarterly tax thing, and what I should be doing taxwise, has made me a lot happier and calmer. 

HC: That stuff provokes so much anxiety.

LL: It’s just astonishing that no other tax person has gotten me to do quarterlies ever.

HC: I’m so proud

LL: One of the things I’m working on now is trying to learn more about what artists are getting paid, in my field and in others. I want to learn more about what’s realistic. Because there’s so much secrecy around money all the time. That doesn’t serve us well.

I spent some time in circus performance doing aerial dance, and there’s a lot of talk there about “charge what you’re worth” and “don’t undercut others,” and how to get people a living wage.

The same is true in performance. There’s the thing or service you’re selling, and then there’s the years of work and study that made you good at doing that thing. There's more overhead than people expect.

I would love for art to be a sustainable thing for more people. Because it's such an important thing for our culture, and for being able to sustain ourselves as a society.

There’s awe and beauty--those uplifting feelings. In public art, too - you’re getting beautiful things out to people who are just getting through their day, in what would otherwise be a dull streetscape. It might make their day better.

I’ve heard about people quoting extremely low rates, basically doing things for free. That’s problematic because it leads to that being the expectation. And there should be a graduated scale based on your experience, and the type of work and that sort of thing. But that’s the question that we run into in circus arts, too. There has to be a place for people to start, but people commissioning work need to realize there’s a difference in the final quality, too.

I’m hoping that there is a tier for professional artists to stay professional and make a career of it.

People look at me as someone who is successful, because I’ve done projects that are known around town. [But I’m still wondering], “Does anyone get a living wage doing public art?”

I Like Your Work Podcast: How to Pay Yourself

In my last episode of the I Like Your Work Podcast, I shared the one key thing you need to do to get started with control of your numbers in your creative practice. Now I’m answering the question behind why you haven't done it yet: how to pay yourself.

If you’re ready to de-stress your taxes, save time and feel understood so you have the freedom to create your biggest, boldest work, click below to join the FREE masterclass at Sunlight Tax: De-Stress Your Taxes and Get Back to the Studio (for Creators)

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.