Taxes and Artists | NevadaCorporateServices

Tuesday, February 23rd, 2010 | Author: Richard

Question:

I am a working artist who, like most creative folks, has a full time day job as well to make ends meet.

I have a Live / Work Studio that I declare the work portion of each year, I have material costs throughout the year, and I also have promotional expense to promote my work in the world, of which I also declare.

As for art related income, some years I have sales, some years I do not.

I keep track of all my art related expenses and income.

What are my risks for an audit, and how can I reduce them?

Answer:

The potential for audit and the potential to lose in an audit are two separate concerns. Obviously we want to avoid both. And the third part of this is the “1 in 3, 2 in 5 rule”

Having good records will give you argument points if you are audited. When individuals are audited, there are some very common areas where they cheat: understating income and overstating deductions are quite common. As long as you can justify the expenses (according to IRS rules, not just your perception of the rules) and you track all the income, then if you are audited, you’d probably win.

Avoiding the audit in the first place however is a worthy goal.

As an individual in business, You have a high likelihood of audit. Check the numbers: www.irs.gov/pub/irs-soi/07databk.pdf look at page 23 and 24. You’ll see that as an individual tax return that does not have a schedule C attached has about a 0.4% chance of audit, attaching a schedule C can raise your audit risk to 9.7% (a little over 25x more likely)

While doing your business as a Real corporation would reduce your risk, just by the numbers, assuming you are not carrying a balance sheet, would be 0.5% audit risk as a real corporation.

Not only would your risk of audit be far less, you’d enjoy lower taxes as a real corporation.

The 3rd item above was the “1 in 3 and 2 in 5 rule”: The IRS can re-categorize any business that fails to make a profit, one out of three and 2 out of 5 years. This would result in disallowing all deductions and attributing that is income to you which you would have failed to pay taxes for and now would be subject to penalties and interest.

SOooo, let’s make “profit” a priority. If you have not made profits in enough years to fit within that rule, then close the doors of the business, hunker down and wait 3 years. Once you get past that, you are safe. In the mean time you could open a corporation to do business; THAT CORPORATION has a new 1 in 3 and 2 in 5 clock that starts.

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