Chapter: Is Selling Your Art a Business or Hobby?Once you start selling your work, you have officially entered the realm of earned income. It would be wise give some advance thought to this subject. Do you want to start a business with your sales, or do you wish to keep your art sales as a hobby endeavor?
Both hobby sales and business sales are considered earned income by the Internal Revenue Service. Earned income will need to be reported on your tax returns. This is when the business or hobby distinction becomes important. Generally speaking, if you sell art as a hobby, you may only deduct related expenses up to the amount of income you receive on hobby sales. If you opt for a business structure, you will have more latitude on how tax issues are handled (deductions, depreciation schedules, etc.)
You can start with a hobby and later upgrade to a business structure of course. However, if your ultimate desire is to be in the business of selling art, your focus and intentions (and thereby your likely results) will be more clear if you choose that path up front.
If you decide to that starting an actual business is for you, it would be a good idea to start off right. That means a nice chat with a quality CPA. He or she will likely suggest that you keep separate records for all business-related transactions. This includes a separate checking account for the business. Your CPA will be the best source of business/tax advice, though I will mention a few main topics to consider here:
Business StructureThere are a number of ways to set up your business structure. Probably the most common business structure for artists is the Sole Proprietorship. This is the simplest means of moving forward for the business. As a Sole Proprietor, you are the business. Another common and fairly simple business structure is the LLC or Limited Liability Company. These are not terribly complicated to set up. In most states you can do it yourself. An LLC gives you the liability protection of a corporation with the simplified tax return requirements of a Sole Proprietorship. Corporations are much more complicated and expensive to setup and manage. Most emerging artists do not choose to incorporate due to the time and financial considerations involved.
Business LocationDo you want outside studio space, or do you want to work out of your home? Renting studio space can be very exciting, as it creates a dedicated creative atmosphere and can be very helpful in separating one’s personal life from one’s work. Landlords and rental agreements vary greatly, so make sure to read all of the fine print before signing. Also, advise your future landlord of any unusual aspects about your creation process–sounds, smells, etc. Any disturbance of other tenants can be grounds for eviction, and honest communication with the landlord is priority one.
If you plan to work out of your home, as many artists do, think about setting up a separate space that will be entirely devoted to your work. Not only is this helpful at tax time (you can’t take a home office deduction unless the space is used only for business), it also gives you a sacred creating space. Most creative people find that their work flows more freely when they have personal and other considerations locked out for a while. You might want to consider a separate phone line for your business. This is not a large expense, and it can help you project a professional image to your clientele.
Business LicensesVendor’s License
In most locations, you will be required to have a vendor’s license in order to make sales. This involves collecting sales tax on in-state sales, and then filing a sales tax return monthly or biannually. Contact your county auditor’s office for an application. If you are planning to do art festivals and travel to other cities or states, check with the show officials about the vendor license requirements. A short term permit or license for the duration of the show will likely be required. Many shows now require proof of a vendor’s license before you will be permitted to exhibit.
While the process may sound a bit intimidating at first, sales tax returns and vendor’s license applications are generally easy tasks. Just make sure you have some system set up to track your sales. This will also make your life easier at tax time. Your system can be as simple as keeping paper copies of all sales receipts. Though an accounting program like Quickbooks, or at least an electronic spreadsheet, will make your life easier going forward.
Some local municipalities require that businesses, including in-home businesses, obtain a permit. If you reside in a condominium or belong to a home-owners association and plan to work out of your home, check the bylaws and/or CC&Rs for business restrictions. While a few art sales will fly under most radar screens, you will draw attention if you start receiving large supply orders or have customers coming to your place of residence.
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