Learn how to meet the criteria for the specific tax deductions available to visual artists.
Converting your hobby into a bona fide business means you can deduct a net loss from other income you earn, such as wages and salaries. How does the IRS determine whether your activity is a hobby or a for-profit business? The IRS publications discuss these nine criteria:
1. whether you carry on the activity in a businesslike manner
2. whether the time and effort you put into the activity indicate you intend to make it profitable
3. whether you are depending on income from the activity for your livelihood
4. whether your losses from the activity are due to circumstances beyond your control (or are normal in the start-up phase of your type of business)
5. whether you change your methods of operation in an attempt to improve the profitability
6. whether you have the knowledge needed to carry on the activity as a successful business
7. whether you were successful in making a profit in similar activities in the past
8. whether the activity makes a profit in some years, and how much profit it makes
9. whether you can expect to make a future profit from the appreciation of the assets used in the activity
The primary determinant is your ability to make a profit at what you are doing. If your efforts result in a profit in three out of five consecutive years, your activity is presumed not to be a hobby by the IRS. If you don’t meet the three-out-of-five-years profit rule, is all lost? Not necessarily. If you can prove to the IRS’s satisfaction that you’ve made a genuine effort to earn a profit and that the reason you aren’t successful is related to special circumstances, the IRS might agree that your art is, in fact, a business. This is often true for individuals engaged in the arts, where profits and successes are difficult to achieve.
Peter Jason Riley, CPA, is president of Riley & Associates, P.C., located in Newburyport, Massachusetts. He’s also the author of the new (second edition) book Tax Guide for Writers, Artists, Performers & Other Creative People (Focus Publishing, 2009). You may e-mail him at firstname.lastname@example.org with simple questions or visit the firm’s website for more information at www.artstaxinfo.com.
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