Thursday, May 31, 2007
Tax Time Tune-Up
Developing healthy accounting practices throughout the year will save you when tax season begins
Know Your Deductions
In theory, you have a trusted tax expert who keeps you in tune with what you can write off. But if not, familiarize yourself with some basic deductions unique to artists and crucial for lowering taxable income. For all industries, the IRS has basic guidelines that dictate what constitutes a deductible business expense:
• It must be incurred in connection with your trade, business or profession.
• It must be ordinary and necessary.
• It must not be lavish or extravagant under the circumstances.
• Travel And Meals: You can deduct expenses related to overnight business travel, including meals (50 percent), hotel and lodging, tips and phone calls. Travel also can cover expenses associated with gallery visits, show openings and artwork delivery.
The line blurs when a trip mixes vacation and business. The IRS stipulates that as long as the trip is primarily business, you can deduct. Say you're visiting family, but a major portion of time is spent taking portfolio photos. Expenses associated with that part of the trip can be written off.
The IRS “meal allowance” is a good way to keep track instead of dealing with receipts. The amount varies, depending on your location. For most small localities, it was $39 per day in 2006. For major cities and other “high-cost” areas determined by the IRS, the amount goes up. Last year, the rate was $64 per day in Los Angeles and New York City. The allowance includes all three meals and incidental expenses for the day. Travel for spouses and dependents aren't allowed unless they're employed by your business.
Automobile And Vehicle: In many cases, this is an artist's largest deduction. A common way of figuring out this expense is by using the standard mileage rate, which was 44.5 cents per mile in 2006. You can write off trips taken to galleries, museums, art supply stores, classes, etc., without needing receipts—just records showing the miles driven and the business purpose of the trip. Another method is to write off direct expenses by depreciating the vehicle's cost and then adding up all of your receipts for gas, repairs, insurance, etc. That amount becomes the basis of your expense. No matter which way you choose, go with the one that gives you the highest reasonable deduction.
Equipment: You can expense up to $18,000 of equipment in a given year. You can write off supplies like CDs, inks and cleaning supplies in the year of purchase. But most of the major equipment, such as cameras, lenses and computers, are depreciated and written off over the course of five to seven years as defined by the IRS code. The expensing allows you to accelerate the deduction into one year instead of waiting for seven years to do it.
Home Studio: If you use a room or multiple rooms in your house exclusively as a studio, you may be eligible for the home office deduction. The formula is based on the square footage of the studio to the total square footage of the home and applies that percentage to all related costs. Those costs may include rent, mortgage interest, real estate taxes, utilities and insurance. Just keep in mind that the home studio only can be used for your business, and the IRS has been known to be scrupulous about examining this deduction.
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