Tax Tips for Artists > What makes one artist a professional and another a hobbyist in the eyes of the IRS? The distinction determines what expenses you can and can’t claim on your federal tax returns.
By Daniel Grant
It’s all well and good to say that artists need to be businesslike rather than bohemian, but those who want the Internal Revenue Service to accept work-related deductions (price of materials, studio rent and insurance, travel expenses, advertising and promotion, photography, postage, shipping, and other costs) on their federal tax returns don’t have a choice. Because if the IRS believes someone is just a hobbyist rather than in business, those deductions won’t be allowed.
“The IRS has rules about hobbyists versus professionals,” says New York City accountant Steven Zelin. “Basically, they want to know if the taxpayer intends to make a profit as opposed to just make art.” Artists are in business as soon as they earn money from their work, whether it’s in the form of sales, grants, or fees collected from giving a public demonstration. All it takes is some sort of transaction; if there is no money, there is no business. Of course, a business may still be a hobby. But how it’s conducted determines whether expenses may be deducted.
There are nine criteria the IRS applies to separate professionals from hobbyists:
• Is the activity carried on in a businesslike manner?
• Does the artist intend to make the artistic activity profitable?
• Does the individual depend, in full or in part, on income generated by the artistic work?
• Are business losses to be expected, or are they due to circumstances beyond the artist’s control?
• Are business plans changed to improve profitability?
• Does the artist have the knowledge to make the activity profitable?
• Has the artist been successful in previous professional activities?
• Does the activity generate a profit in some years, and, if so, how much?
• Will the artist make a profit in the future?
PROOF OF INTENT
The artist need not answer yes to every question in order to legitimately deduct business-related expenses, and spending more money than one takes in does not disqualify someone from claiming to be in a real, profit-oriented business. “In every business, you expect to have losses in the first few years,” says New York City accountant Todd Thurston. The IRS demands proof that an artist make a genuine effort to earn a profit in three years out of a five-year span. If an artist has had three consecutive years of losses, the federal agency will want to see some sort of profit in the next year. “Losses that an artist has already taken won’t be challenged” if an audit takes place, Thurston says, “only losses claimed going forward.”
Zelin notes that creating a business plan — something a company or sole proprietor would need when applying for a bank loan — is useful if the IRS needs proof of an artist’s profit-making intent. This document might feature an executive summary (the nature of the business and the expectation of earnings), a description of the business operations (the studio, how much time is spent in the studio every day or every week, how artwork is transported to one site or another, the website, exhibition venues, and how payment is accepted), staffing and management (a studio assistant or a business manager), revenue forecasts, marketing plan (how the artwork produced will be made known to prospective buyers), expected expenses, and expected milestones (exhibitions, grant awards, prizes).
The IRS doesn’t define what makes an artist a professional, but certain elements help in the determination of whether there is a serious intent to earn a profit. “Having a BFA is something, having an MFA is more,” says New York accountant Susan Lee. “Having a website helps, especially if it’s set up for making sales, as is having a separate business credit card and business bank account. Using the services of a lawyer or an accountant in setting up or running your business shows you’re serious. Belonging to an artist organization, subscribing to an industry-related magazine, or going to professional conferences is helpful, because it builds a picture of you doing everything you can do to be on top of the market.”
Editor’s Note: Always check in with an accountant to get the latest information and professional, personal guidance. And, get more art business advice at our sister site, ArtMarketing.com.
