Detailed, accurate accounting practices are important for artists for three major reasons:
- Income Statements
Income statements are reports that reflect your financial transactions. They tell you everything you need to know about what is most profitable in what you are doing (e.g. selling seashells at the fair using square on your iPhone vs. selling prints on Etsy using PayPal). It shows you where you can afford to raise the price of products and where you can cut unnecessary costs. It tracks the costs of selling your goods or services as well as tracking your more fixed costs like overhead and insurance so you can really see how much profit you are making after all is said and done. Your revenue is affected by trends and your costs will fluctuate, so the income statement reflects the dynamic nature of a small business. It shows you how to adapt and evolve through the life of your business so you can continue to make a profit and avoid gratuitous costs along the way. Income statements are also used to obtain financing should you wish to grow your business and invest in newer equipment or personnel. A great idea will not be enough to convince a potential source of financing to invest in your business; you will need a detailed income statement that reflects the financial reality of your business over a number of years.
- Deductible Expenses
Tracking all of your expenses in a detailed manner ensures you reap more profit by realizing what constitutes a deductible expense. You may be surprised by what this includes. An eligible expense is defined by the IRS using their form Schedule C as a guide. What can be classified as an “ordinary and necessary” expense varies widely from artist to artist but it should include every item needed to run your business at many levels.
- Business vs. Hobby
Doing what you can to remain profitable (using the income statement and deducting all eligible expenses) allows you to retain the classification of your art making as a business rather than a hobby, as defined by the IRS. Artists who continually report more of a loss than a profit year after year are “demoted” to hobbyists which can have enormous tax ramifications. In general, you lose the protection and benefits that the classification of being a business awards you. For more detail refer to this in depth article on the differences between art as a hobby vs. a business: http://www.nolo.com/legal-encyclopedia/when-artists-work-business-versus-hobby-irs-analysis.html
Tips to begin tracking your income and expenses:
- Keep your personal accounting separate from your business accounting
- “Income” includes everything from product sales to royalties to awards and so on. You also need to keep track of your sales tax as you will likely be selling your art in various municipalities.
- Record the description of the item sold, sell date, price, sales tax, total of sale, customer info (name, address, phone, email) and payment method used. Retain 1099’s from vendors for tax purposes.
- Use form Schedule C as a beginning guide on how to classify your expenses for tax purposes. (https://www.irs.gov/pub/irs-pdf/f1040sc.pdf). Some of the resources below will provide more detail on common expenses for artists.
- “Accounting: The Art of Record Keeping for Artists”: http://www.saqa.com/resources.php?ID=2276
- “Artist Goals 2014 – Basic Financial Knowledge – Understanding the Income Statement”: http://creativesandbusiness.com/tag/accounting-for-artists/
- “IRS Defines the Role of the Artist”: http://www.accountingtoday.com/news/IRS-Defines-Role-Artist-61772-1.html
- “Moving Beyond the Receipt Shoebox” Practical Accounting & Administration for Artists”: http://www.oilpaintersofamerica.com/resources/articles/beyondreceiptshoebox.cfm
- “Top 10 Accounting Tips”: http://www.indiemade.com/blog/top-10-accounting-tips
- U.S. Small Business Administration: https://www.sba.gov/