When considering taxes for artists, there are differences in the tax treatment of art businesses and art hobbies. One particular difference is that on an individual return businesses losses can offset other income, but hobbies can not. Therefore it is important that an artist determines the correct tax treatment of their activity. They must know whether to file their activity as for profit or not for profit.
First, to consider your activity a business, it must have a profit motive. You do not necessarily have to make a profit, but you do need to continue efforts to further the interests of the business. If you are painting or drawing primarily for personal pleasure or recreation without the expectations of making a profit, then it is considered a hobby. If you can’t determine whether you are starting your activity for profit or not for profit there is a way to postpone profit determination, but there can be a down side to this. I recommend you not try this by yourself, but seek help from a tax professional.
There are certain rules to consider whether an activity is considered for profit or not for profit. Generally, the IRS considers the activity to be for profit if it has been profitable three of the past five years (including the current year). However, this is not an absolute law cast in stone. For example, if you have the required profit motive, your activities may have profits fewer than three years out of five and still be a for profit business. There are nine different profit factors based on the facts and circumstances of each case whether an activity is engaged in a business or not. Without going into great detail, the nine profit factors are:
- Business like manner
- Expertise
- Time and effort
- Expectation of appreciation
- Success in other activities
- History of income and losses
- Occasional profits
- Dependency on income
- Element of personal pleasure
Is this confusing enough for you? As artists, we just want to paint and draw and be creative. Don’t bother us with the details…right? Sadly, as we begin to make sales and earn income from our activity we need to be diligent and responsible.
The tools and supplies we need to continue our activities are expensive. It is possible for a talented person to begin painting as a hobby, and, in time, start to earn income. At this point, they may decide to make the hard decision to go into art as a business, something they never expected when they first began. It is time to definitely seek professional tax help when this happens.
Question: If I am an artist that started my activity as a not for profit hobby, can I take my expenses off my taxes.
Answer: You can deduct hobby expenses, but these expenses cannot exceed the hobby income reported.
The purpose of this article is not to go into great tax detail, but to create enough interest to realize there are answers to any tax questions. I recommend you seek a tax professional’s help if you are unsure how to get set up properly.
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