How End of the Year Tax Planning Can Help You Avoid Surprises, Like an Audit, Later

[Michelle Pajak-Reynolds]

Each individual’s tax situation is unique. If you’re creating artwork for sale, at wholesale or retail, there are some basic steps you may want to consider taking before the end of the year to reduce your taxes, make your life easier come filing deadlines, and help minimize your risk of nasty surprises, such as an audit or hefty fines, later. 

 

The first step in any tax planning is to hire an accountant and one that specializes in small businesses can be worth their weight in gold for your business.  Tax regulations change frequently and your accountant will be able to help you avoid common costly tax mistakes.  Accountants are also knowledgeable in all of the little deductions and the most tax friendly business structures that can make a big difference when filing your return.  Sole-proprietorships are the most common business structure for artists; however, incorporating your business may reduce your tax liability. 

 

The second step is to become an excellent bookkeeper and understand what deductions are applicable to your business.  IRS Form 535 provides a comprehensive list of the type of expenses that you may be able to deduct, including the very valuable business use of the home deduction (see the bottom of page 3).  Understanding what items you can deduct and keeping meticulous records can lower your tax bill and make your filing a lot less stressful.  Speaking from personal experience, keeping thorough and well-organized records and utilizing all of the deductions my business is eligible to use has helped me save thousands of dollars each year.

 

The third step is to make sure you have the proper licenses or permits.  A vendor’s license is a crucial document because it enables a business to legitimately make sales and purchase raw materials at wholesale prices.  Purchasing raw materials at wholesale prices reduces your costs, which may increase your profits depending on your pricing structure.   

 

Part of the responsibility of having a vendor’s license and being a legitimate business is collecting and paying the appropriate sale taxes to the state(s) in which you conduct business.  Sales taxes and filing dates vary from state to state and the frequency of reporting and paying your sales tax will also vary based on the tax amount collected each month.  Your accountant can help you determine which sales tax filing schedule is appropriate for your business.

 

An important thing to keep in mind is that “all sales are presumed to be taxable until the contrary is established.”[1] If you sell work through your own website or e-commerce sites, like Etsy, then sales tax needs to be collected on transactions made to customers within your state.  If you travel for retail art shows, you will need a transient vendors license and complete the appropriate filings for each state where you conduct business.

 

If you are wholesaling work to a gallery or other retail venue then the burden of proof is on you that you did not have to collect any of the applicable sales taxes when the work is sold.  In order to meet the burden of proof you can include a statement on an invoice that indicates the items listed on the invoice are for the purpose of resale by the gallery and that the gallery is responsible for collecting and paying any applicable sales tax.

 

Getting organized and securing the proper business documents is important for any business and not as complicated as it sounds.  I’m happy to help you with either of these tasks or anything else related to your business.

 

Thanks for reading,

Michelle

If you enjoy learning in a workshop setting, I'm offering business skills workshops through the Ohio Jewelry & Metal Arts Guild, Touchstone Center for Crafts, and Art Paradise in Portugal.  These workshops are open to all and I hope you can join us.

 

January 28, 2012 Business Basics 101: Starting Off on the Right Foot

June 4-6, 2012 Best Business Practices for Craft Artists (registration coming soon)

June 17-25, 2012 From Hobby to Small Business: Essential Tools to Make You Successful

 

 

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[1] Section B, Tax Rules: Final 5703-9, http://tax.ohio.gov/divisions/legal/rules/final/5703_09/5703_9_03.stm

 

[Alison B. Antelman]

There's also another benefit to organizing your books, it allows you to view your business from the point of view of, well...a business person. How much is coming out and what is going out--do you spend too much on shipping and too little on advertising? are you surprised at what you pay in merchant services for credit cards? Why did you spend so much in X this year? or uhoh, didn't spend enough and made too much--we all wish...but in a good economy this can happen. 

What I'm saying here is that although tax planning is a pain, it does give you all of the answers for you to make decisions for the next year and into the future.

[Michelle Pajak-Reynolds]

Thanks Alison, I couldn't agree more with your comments. Taking a look at your books now while there is still a few weeks left to the year and time to make additional spending decisions can help you avoid the "uhoh, didn't spend enough and made too much" scenario.