life on the ledger: how to make your art add up
TRANSCRIPT
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Lifeon the
LedgerHow to MakeYour ArtAdd Up
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To download the
outline for this talk
click here
presented by
Richard StreitfeldCPA
hosted by
Ignitiontransform your art passion into business
NOTE: Every situation is different and federal andstate tax laws are subject to change. Thispresentation is being made exclusively for
informational purposes and is not intended tosubstitute for obtaining tax or financial advice
from a tax or other business professional.
http://blissrequirescarefulplanning.files.wordpress.com/2011/09/lifeontheledgeroutlinefinalfinal1.pdfhttp://blissrequirescarefulplanning.files.wordpress.com/2011/09/lifeontheledgeroutlinefinalfinal1.pdf -
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What Can Artists Deduct?If you are employed by others then your ability to deduct out of pocketexpenses is limited
If you are self-employed then you may deduct whatever expenses areconsidered reasonable and necessary to conduct your business
Are you employed by others or self-employed?
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Direct expenses would not likely be incurred if you were not in business:
paying subcontractors
studio rent
accountants
supplies
Indirect/shared expenses are for items you may pay for anyway but theynevertheless have a legitimate business purpose as well. For instance:
a cell phone may be personal and business
so might your home internet
Types of Expenses
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What is a business meal?
hint: Not your daily cup o Joe!
Must be with a client, employee, prospect etc unless out of town
Must include a bonafide business discussion
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Automobile TravelThere are two ways to deduct auto travel costs but
either way you must track yourbusiness mileage.
Based on mileage and the IRS Mileage rate for that year
Based on actual expenses of purchasing and maintaining a specific vehicle
If you do not keep a log, watch out if you are audited
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Home Office
ComplexitiesYou must have an exclusive space for business
It does not apply if you are running a loss
Computing it is not always worth the time and expense
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MinimizingAudit RiskShowing profit in 3 out of any 5 years
precludes an IRS challenge that
you are doing this as a hobby.
The Rule of Thumb is that
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Other ways to
show you are in business to
Make a ProfitKeep a log of galleries you have visited to represent you and record otheractivities not evident from tax return
Hire an artists representative
Establish a separate bank account for your activities
Keep good records!
Register as a DBA doing business as or fictitious name with your state or...
Establish a one-person LLC (Limited Liability Company)
Report any income, no matter how small
Track inventory and work in progress rather than deducting it all right away the matching principle
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ConsiderIncorporationif you have sufficient income to make it worthwhile
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KeepingRecordsI don't need to see every receipt
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Time FramesGenerally, the IRS has three years to audit your returns
IRS has six years if it suspects substantial underreporting of income
No time limit for fraudulent or non-filed returns!
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WhichRecordstoKeep
Anything related to taxable deductions keep records a minimum of threeyears
If you are self-employed, keep records for six years
A lot of stuff can be trashed!
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Financial Record-Keeping
BasicsYou need to have a system that you, or someone you hire, maintains
Reconcile bank statements if you want to catch mistakes yours or theirs
Separate personal and business, no co-mingling!
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Sales Taxes
No, Martha, its Not Your MoneyStates can be especially annoying, and each state has different rules
Internet sales rules: most sales made on-line are currently exempt
Separate billing for services may limit your exposure
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Should I be a
Sole Proprietor,form anLLCor Incorporate?
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Sole ProprietorshipYou are self-employed. There is no separation between the assets of thebusiness and those of the owner. Therefore the owners personal assets canbe used to satisfy business debts and liabilities. You are taxed through yourindividual tax return (Schedule C).
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Cheap!
No structure to maintain
Easy, especially if minimal income and activity
Pros
No legal protection of personal assets
Self-employment tax can be onerous
Tendency to forget to pay estimated taxes
Most likely to be audited
Cons
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Limited LiabilityCompany (LLC)This is a sole proprietor or partnership with legal protection. The proprietor ormembers liability for company debts generally only extends to theirinvestment in the company. The income or loss passes through the LLC and
is reported on the individuals personal tax return.
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Easy and cheaper formation than S-Corp
More flexibility than a c corporation regarding partners and changes inownership
One-person LLC no separate tax return needed
Pros
No difference in deductions or taxability from sole propreitor
No salary and withholding for owner so estimated payments needed
Multiperson LLC needs more forethought and written agreements, and theseare often neglected
Cons
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S-CorporationThis is also a pass-through entity except that it has a corporate structure.Again, your personal assets are generally not at risk. There are somedifferences from a multi-member LLC in terms of operations and taxation.
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It is a set and established structure
Ability to take distributions and limit reach of the nasty self-employment tax
Profits are not immediately subject to self-employment tax
Less likely to be audited
Can be a one-person owner
Pros
May be more expensive to incorporate and maintain
Some owners do not like being on payroll
More rigidity regarding who can be an owner and changes in ownershippercentages
Cons
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Other Entity Choices...
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C-CorporationIf you have venture capital or can afford additional and substantial ownerbenefits this may be an option. However you may be exposed to doubletaxation
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PartnershipMulti-member LLCs are essentially partnerships with more extensive legalprotection. While they have fallen a bit out of favor with the ascent of LLCs,there are some instances where they are still favored.
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Non-profitIf you qualify, have the time and money to invest in setting up, expectsubstantial contributions and grants AND are willing to share control with aboard of directors then this may be a good option.
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L3CNew. Hybrid for-profit and non-profit. Only available in a few states.
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fr
Rich Streitfeld CPA partner at
Aaronson Lavoie
Streitfeld Diaz and CoCertified Public Accountants1604 Broad Street
Cranston, Rhode Island
02905
phone:401 223 0205web:alscpa.com
email:[email protected]
peaceloveandbusinessplanning.com
For a glossary of accounting terms click here
http://www.financeforartists.org/glossary.htmlhttp://www.financeforartists.org/glossary.htmlmailto:[email protected]:[email protected]?subject=Life%20on%20the%20Ledgerhttp://www.financeforartists.org/glossary.htmlhttp://www.financeforartists.org/glossary.htmlhttp://peaceloveandbusinessplanning.com/http://peaceloveandbusinessplanning.com/mailto:[email protected]:[email protected]://www.alscpa.com/http://www.alscpa.com/