Art & Tax: When does your hobby turn into a business?

For many new and upcoming artists, they are concerned about the tax consequences of their new venture. You need to maintain your full time position as a computer programmer to pay the bills, but you have always had a desire to take your artwork on the road and create interest. For many of you this activity, in the view of the IRS is considered a hobby, and not a business. You must include, on your federal and state annual tax return, income from your sales of artwork. The IRS claims if you do artwork for recreation and pleasure it is a hobby, not a business. The IRS states “Hobby expenses are limited to Hobby income.� Deductions for expenses related to the activity are limited. They cannot total more than the income you report, and can be taken only if you itemize deductions on Schedule A (Form 1040). In other words if you are not able to itemize, then all of your sales from your artwork will be taxed as ordinary income.

Well when does your artwork become a business venture? Simply, if your motive is to create a profit from your artwork – then you have a business. The general rule is an activity will be presumed to have been for profit if it results in a profit in at least 3 out of 5 consecutive tax years. It is possible that the IRS may treat you as engaged in a profit – making activity, even if you do not have a profit for 3 or more years. The IRS determines the activity's status – for profit or as a hobby – by considering the facts and circumstances surrounding the case. Some factors that will be considered include the following:

• The manner in which you carry on the activity.
• The expertise possessed by you.
• The time and effort you expend in carrying on the activity.
• Your history of income or loss with respect to the activity.
• The amount of occasional profits, if any, that you earn through the activity.
• Your financial status.
• Elements of personal pleasure or recreation.

Once you have met the IRS guidelines then the next step is to determine what type of structure your business will be. Forms of ownership includes, sole proprietor, partnership, corporation, LLC or LLP. Another area to consider is where you sell your artwork? Will you attend out of state shows? Will you use a gallery? Or sell online? The main question to consider here is sales tax.

Our CPA firm specializes in individuals or groups considering a new business, how to get started and reporting requirements. We can explain the steps involved and assist in creating your business. Please send us your questions or call us at (412) 798-3157. The first email or call is free (minus any long distance charges) for EBSQ members. For more information about our firm please visit www.CompleteBusSvc.com.

Michael J. Dell, CPA
mdell@CompleteBusSvc.com