Lesson description
Many artists must maintain either full- or part-time employment
in addition to their art activity to earn income. In this case, artists
may find it difficult to claim expenses related to their art as business
expenses because the IRS may consider the art activity to merely
be a hobby. The artist, then, must be aware of the IRS criteria for
establishing their activity as a business. In this lesson, students
will learn what the IRS criteria are and list ways they might be
able to demonstrate that their art activity (present or future) is
actually a business venture.
Concepts
Total revenue
Total cost
Profit/Loss
IRS criteria for operating a business in the arts
Lesson objectives
Students will:
define total revenue and total cost
define profit and loss
list ways that their art activity can be viewed as a business
Materials
Visual 1, Is This a Hobby or a Business?
Visual 2, Be a Business
Procedure
1. Ask students if they would describe their future plans as an
artist as an entertaining pastime or as their life’s work.
Explain that artists may describe their art as their life’s
work – their occupation. However, if they want to convince
the IRS that their art is their business, they must do more than
simply state it as such.
2. Explain that for tax purposes activities earning profits in three
of five years are normally presumed to be businesses rather than
hobbies. Artists who meet this requirement are allowed to deduct
their business expenses when they file their Schedule C, Profit or
Loss from Business, with the IRS.
3. Explain that profit and loss have very specific meanings. Define
total revenue as all of the money received from the sale of a product.
Define total cost as all of the expenses related to the production
of a product. Define profit as the money remaining after total
costs have been subtracted from total revenue. Explain that if a
company’s
total revenue is greater than its total cost, the company has earned
a profit. If, however, total cost is greater than total revenue,
the company has suffered a loss.
4. Remind students that the IRS considers an activity to be a business
if it earns a profit for three of five years. Explain that many artists
may have operated at a loss for five years, and they are concerned
that the IRS auditor may declare their work as an artist to be a
hobby rather than a business.
5. Display Visual 1, Is This a Hobby or a Business? Explain that
according to Jo Hanson, author of Artist’s Taxes, The Hands
on Guide – An Alternative to Hobby Taxes, it is the artist’s
commitment to his art as a business that matters.
6. Explain that to help artists make a convincing case with the
auditor, Hanson and other experts such as Floyd Conner, co-author
of The
Artist’s Friendly Legal Guide, point to the nine factors
the IRS considers in determining whether an artist is a hobbyist
or a professional. The idea is to address each factor based on
the way in which you approach your work.
7. Display Visual 2, Be a Business. Explain each point as follows:
- Do you carry on your activity in a business-like manner? First
and foremost, be sure you have complete records of your business
transactions. Open a bank account in the name of the business. And,
be sure you look like a business. Create a logo for your business
and use it on letterhead, business cards, and brochures.
- Does the time and effort you spend on the activity indicate that
you intend to make it profitable? Record the amount of time you spend
working on your art. The more time you spend on your art business,
the more likely you will be viewed as having a serious dedication
to promoting your business.
- Do you depend on income from your art for your livelihood? An
apparent need for income will support your case. Keep records of
the ways you sought income.
- Are the losses you sustain in your art business due to circumstances
beyond your control? Your losses may be due to heavy investment in
start-up costs.
- Can you change your methods to improve your profitability? You
should review your methods of production and marketing regularly.
Look for ways to acquire your materials more inexpensively, or find
alternative materials that suit your purposes. Seek alternative ways
to market your art, or seek new markets. Consider creating additional
goods that would be purchased along with your art. Goods that are
purchased together are referred to as complements. For example, if
your art includes production of ceramic plates, you might consider
designing stands for the plates.
- Is your art business ever profitable? If you are able to show
that you earned a profit in some years, your claim as a business
is more credible. Is there one particular aspect of your business
that is profitable? Examine each type of product you make to determine
if one or more of your lines is profitable.
- Do you, or your advisors, have the knowledge needed to build and
sustain a successful art business? If your legal and accounting skills
are not adequate, get some help. Entrepreneurs are devoted to providing
their product. It is rare to find entrepreneurs who are skilled in
all aspects of business development. It is important to hire the
services of experts, particularly in taxes and contracts. As your
knowledge in these areas improves, you will need expert services
less.
In some localities, you may be able to find such services free of
charge. Check to see if your community has a Volunteer Lawyers and
Accountants for the Arts (VLAA) organization, a Service Corp of Retired
Executives (SCORE) office, or a Small Business Development Center
(SBDC). The VLAA is a non-profit group in support of the arts. SCORE
and SBDC are supported through the U.S. Small Business Administration.
- Have you been successful in making a profit in similar activities
in the past? Cite teaching, jurying, curating, and writing in addition
to examples of your previous art businesses.
- Can you expect to make
a future profit from the appreciation of the assets used in your
art business? If your sales and selling
prices have increased, then you can demonstrate a reasonable
expectation of future profits. Because an artist’s reputation
typically grows over time, your unsold work should also appreciate
in value.
8. If any of the students in class are already operating as a business,
ask them to explain in what ways they are addressing the items on
the Be a Business list. Place students into groups. Instruct each
group to list at least five things that they could accomplish right
now to give their art the appearance of a business.
9. OPTIONAL: Instruct students to design a logo for their business
and create business cards, letterhead, and/or brochures.
Closure
Provide an overview of the lesson by asking the following questions:
What is total revenue? (Total revenue is all of the money received
from the sale of a product.)
What is total cost? (Total cost is all of the expenses related
to the production of a product.)
What is profit? (Profit is the money remaining after total cost
has been subtracted from total revenue.)
What is loss? (Loss is a shortfall, where total cost exceeds
total revenue.)
What can an artist do to define his activities as a business rather
than just a hobby? (Answers will vary, but students should reflect
on the Be a Business list.)
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