Are you a creative entrepreneur looking to maximize your tax savings? If so, then you’ve come to the right place! As an artist or small business owner, there are multiple tax deductions available that can help boost your bottom-line at the end of the year. In this blog post, we’ll explore some common deductions including home office expenses and travel costs. And then we will go into some industry specific tax deductions. Gearing up for taxes doesn't have to be stressful; with this information in hand and our friendly advice along the way, you’re sure to find filing season just a bit more manageable. So read on - now let's dive into common tax deductions available for creative small business owners!
What are Tax Deductions and how can they help you?
First off, I often hear tax deductions referred to as "free money", and that is simply not the case. What they are though is a discount code. So, no, the money you spend on supplies isn't free, you still have to spend that money!, but the amount of taxes you pay on your income will lessen by a few percentage points depending on your tax write offs.
Tax deductions can be a great tool for artists and small business owners to support the financial health of their business, or even their personal money health if they are a sole proprietor and have what is known as a "pass through entity" where their business expenses are recorded on a Schedule C on their personal taxes. Essentially, tax deductions are a way to reduce your tax liability and lower your tax bill. They are also known as tax write-offs, and they allow you to subtract expenses related to your business or art from your income. This means that you won’t have to pay 100% tax on that money as long as tax deductions are filed correctly. On the other end of the spectrum, I see folks making purchases or financial decisions thinking that these will be write offs, but they aren't actually allowed.
Understanding tax deductions can help artists and small business owners keep more of the money they earn, enabling them access to more financial resources for their art (or their take home pay!)
Let's read on for more important things to know!
Understanding the Ordinary and Necessary Deductions
For small business owners and independent artists, understanding the difference between ordinary and necessary deductions can be a big help in reducing taxes. As defined by the IRS, ordinary expenses are those that are common and accepted in most businesses, while necessary expenses are those that are appropriate for the function of your specific business or trade. For example, a consultant will have different necessary expenses than a fine artist who will have different necessary expenses from an actor.
As an example, here are two common ordinary business expenses.
Home Office/Studio/Off premises studio/office: Do you work out of a specific area of your home? Then this could be written off as a business expense! The important thing to note here is that the area of your home must be exclusively used for business. So, if you work at your dining room table, that isn't deductible. But if you have an office that doubles as a guestroom every once in a while, that is deductible.
Business use of car - Even if you don't necessarily meet with clients, I bet there are still car expenses. Whether it's driving to the pot office, to networking events, or to Staples to buy supplies, this is all mileage that you can write off. standard mileage rate, actual expense
These ordinary and necessary expenses can then be written off on a tax return as deductions to lower taxable income, which means more money for you! Knowing what you can deduct from your income tax is a powerful tool in helping to maximize your profits.
So, now you know what is deductible...it's also just as important to know what is NOT deductible! There are two major categories for this:
Client gifts- you can get around this by putting your logo on it so it is an advertising expense
Charitable Giving- how you can get around this: if your logo or name is on something, it is a promotional. Ask the non-profit or charity whether they could include your logo on a poster, for example, in exchange for the donation.
**A list of common ordinary and necessary deductions is HERE and bottom of this blog post!
How to Document Your Expenses for Tax Purposes
Managing your finances can be a source of stress, and taxes in particular involve a lot of tedious paperwork. Whether you are an independent artist or a small business owner, understanding how to document your expenses properly when it comes to tax time is essential for ensuring you get all of the deductions that you deserve. Being organized ahead of time is the key! Make sure that throughout the year, you keep track of all of your receipts so that when it comes time to file, you have everything in order. Additionally, don’t forget to take advantage of other deductibles such as mileage or travel costs; doing so will help maximize your bottom line come tax season. Keeping these things in mind will make filing your taxes much simpler and less stressful!
Here are three favorite methods I have for documenting your expenses:
A platform like Quickbooks Online is great if you have several thousand in expenses. A perk is that you can often import these reports directly into a service like TurboTax
An excel worksheet (link to a template here)
Keeping a folder of all receipts organized by type of expense
My preference is to use a platform like Quickbooks, but at the very least, a spreadsheet that you update regularly is extremely helpful. Otherwise, you are counting up and logging your receipts just once a year at tax time and that is quite the burden.
Common Small Business Owner Deductions - Office Supplies, Furniture, Technology
Common small business deductions can help offset costs from office supplies, furniture, and the latest technology. Don't be scared to document everything you need to make your home or work space comfortable and productive -- these investments could be worth hundreds to thousands of dollars if filed correctly. Make sure to talk to an accountant or tax professional so you don't miss out on this cost-saving part of having a small business or pursuing art!
Artist-Specific Deductions - Materials and Supplies Deduction
For artists and small business owners, materials and supplies are a necessary part of making their art or running their business. Thankfully, the IRS allows them to take advantage of the deductions available for such expenses. The Materials and Supplies Deduction can cover items like mannequins, sculpture mediums, paint brushes, clay, as well as any other materials used in creating a product. These deductions are an excellent way to offset the cost of supplies needed to build your craft or business from the ground up - maybe even enough to save thousands of dollars come tax time.
Other Types of Tax Deductions to Consider
If you're an artist or small business owner, there are tons of deductions you can take to save money on taxes! In addition to the standard business expenses like office supplies, equipment, and travel expenses, don't forget to look into any professional development or training costs you may have incurred. You might be able to write off things like continuing education classes or conferences related to your profession. You can also deduct certain professional services like accounting and legal advice as long as they pertain to running your business. It's a good idea to keep track of any payments made throughout the year for these kinds of items--you never know how much those deductions can come in handy during tax season!
All of this can seem overwhelming at first, but putting a little bit of effort into understanding the different tax deductions for artists and small business owners will set you up for success in the long run. Learning how to document your expenses can be immensely helpful and allow you to save money on your taxes. Although there are some general deductions that many small business owners take advantage of, it's important to keep an eye out for those artist-specific deductions as well if you want to spend less on taxes in the upcoming season. Try making organization a priority and staying aware of any changes in the tax code so you can get to keep more money in your pocket over time. Good luck on your tax journey!
Common Ordinary Business Expenses:
Home Office/Studio/Off premises studio/office
Business use of car - standard mileage rate, actual expense; even if you don't drive to clients, perhaps you drive to the post office, networking events, etc
Business use of telephone/internet
Business retirement plan contributions
Advertising and promotion: website hosting fees, themes and plugins that you purchase, google ads, email marketing software, CRM system, etc
Legal and professional fees
Business meal deduction (50%)
Education: Industry specific books, workshops, etc
Insurance
Business licenses and permits
Cost of goods sold (COGS)- most service based businesses do not have a high COGS if any (think career coaches, freelance writers, etc). The exception is if you have a product associated with your business. For example, a photographer is in a service based business, but they may print an album for a client, which is a product. The costs to produce that album would go under COGS. Think: raw materials (actual album), labor (album designer)...inventory that is sold (you can't write off inventory that is still sitting on the shelf as that is considered an "asset")
Bank fees and loan fees- monthly bank maintenance fees, atm fees, overdraft fees, etc
Credit card processing fees- if you use a service like stripe, paypal, etc, you are paying a percentage in fees.
Depreciation, if applicable on large purchases.
Continuing education (must be industry specific)
Consultants
Subcontractors- virtual assistant, web designer, photographer for headshots, etc
Interest on business loans
Postage and shipping
Rentals
Travel expenses
Office Expenses: Equipment, software, supplies
Common Necessary Expenses for a Photographer:
Photography equipment
Microphone & webcam for client meetings
Camera bags
Repair costs
Home Studio costs, such as props and client wardrobe
Non Deductible Expenses:
Client gifts- you can get around this by putting your logo on it so it is an advertising expense
Charitable Giving- how you can get around this: if your logo or name is on something, it is a promotional. Ask the non-profit or charity whether they could include your logo on a poster, for example, in exchange for the donation.