The Tax Rules for Creative Minds

If you are self-employed in an artistic endeavor, like an artist, writer or photographer, your tax return could get a little messy.

Many self-employed filers wonder: What can I deduct? What does the IRS allow? What deductions send up a red flag? Will I be audited?

These are all valid questions that plague everyone, and I will not burden you with formulas and numbers when it comes to the tax code, let’s stick with concepts.

Here are the basic rules that will help artistically-inclined self-employed filers determine which questions they need to ask:

Self-employment tax. The big question, of course, is “How much will I have to pay in taxes?” When you find out, you will certainly want to find all the deductions you can get.

Unless you are working for W2 wages, you are classified as a self-employed independent contractor. As such, your tax liability will be greater than if you were on payroll because you will have to fork over income tax as well as the self-employment tax (15.3% of you profit), which funds your social security and Medicare accounts. That can add up to quite a chunk.

What can I deduct? When you file your taxes as an independent contractor, you will report your income and expenses on Schedule C. Take a good look at the form.

The main categories of expenses allowed to you are listed on the first page. But notice that on page two, part V, there are blank lines where you may list other expenses common to your industry. There are no set rules on what you can claim, the IRS allows you to deduct “all ordinary and necessary business expenses.” So anything you pay for that is due to your self-employment activity may be deducted. Just make sure you keep receipts and other documentation to prove business intent.

There are special rules regarding automobile, meals, travel, and entertainment expenses that you need to know. When it comes to claims around these topics, it’s all about intent. The IRS will allow all reasonable deductions if you can prove business rather than personal intent and you have documentation to back you up.

What are the red flags? The red flag items that can draw the attention of an auditor include any claims that have a hint of fun to them. You guessed it: automobile, meals, travel, and entertainment. Home office was a big audit project back in the 1990s, but not so much anymore. Other red flags include deductions that are much higher than industry averages, and obvious errors on the tax return. For example, your 1099s total up to $50,000 but you report only $45,000.

When can I deduct expenses? Perhaps you are working on a painting that won’t be done by the end of the tax year or are in year two of the writing the great American novel and haven’t even scouted out a publisher yet, you can still deduct the expenses incurred thus far. Well, the IRS has a special code section 263(A)(h) designed to allow you to write off current expenses.

Here’s the catch: this part of the code can only be applied to writers, photographers and artists who fall into the prescribed IRS definition: “In general the term “artist” means any individual if the personal efforts of such individual create (or may reasonably be expected to create) a picture, painting, sculpture, statue, etching, drawing, cartoon, graphic design, or original print edition.”