As we enter a the new year, let’s take time to think about the priorities in our arts practices, and in our personal lives. You may roll your eyes at the idea of New Year’s resolutions, but there is evidence that writing down your goals actually helps you achieve them. So grab a pen, and let’s put some intention into 2017.
In my interview with artist Susan Crile about her eight year ordeal defending herself in US Tax Court, there was a lot of discussion about keeping records to prove the profit motive in one’s art practice. It brings up a good question for most of us: how are we doing on our own record keeping? If the IRS sent an audit letter tomorrow, would you feel good about the shape that your records are in? If the answer is not good, don’t panic. Here is a list of what you will need, and some thoughts on how to improve your record keeping going forward.
- Good Bookkeeping. Bookkeeping is important to any business. Without tracking expenses and growth, there is no way to improve your practice. It’s impossible to argue that you are actively trying to turn a profit when you don’t track your income and expenses. Not only is keeping an accurate set of books a legal requirement for your arts practice, but it can help you by generating reports to show you how you are using your resources, and these reports can be the documentation you need to get loans, make budgets, and apply for grants. In short, bookkeeping is worth all the investment of time we put into it and then some.If you have a simple business without a lot of transactions, say, you sell about 10 paintings a year, then a Google spreadsheet may be all you need. But if your operation is more complex, you’ll need something more robust. Before you pick the cheapest software, think about how your business may grow in the next five years, and what you may need. Do you need software that can integrate with a ticket sales system or an Etsy shop? Do you think you may hire an employee? Do you need invoicing? Do you want to do it all yourself, or would you like a system that a bookkeeper or accountant can easily access?Quickbooks is the old standby, but it can be confusing for those without an accounting background. There are lots of alternatives, ranging from free to expensive, and all with different strengths. No matter which you choose, make sure you have a good bookkeeper set it up for you, and give you a thorough tutorial on how to make entries correctly. It is worth some up front cost to have a professional set you up – mistakes in your books are costly and a professional will charge you a lot to clean them up.
I’m personally switching to Xero this year, because I like its clean design, usability, and the fact that it is cloud-based and mobile friendly. It has an invoicing feature with automated reminders, which I’m really excited about. I also think that because Xero is a more progressive, tech-forward accounting software, the accountants who service it tend to be more tech-savvy and millennial-friendly.
If you have a system that isn’t working, pay a bookkeeper to look it over for you, or take a bookkeeping course yourself. Good bookkeeping is a question of habit. So schedule a regular time to do it.
- Saving receipts. The law says that if you can’t produce the receipt to prove it, it never happened, and you can’t deduct the expense. Your bank statements aren’t enough. For meals and entertainment, the documentation requirement is even stricter: the receipt must be accompanied by the name of the business contact you are meeting with, plus the reason for the meeting. A receipt alone will not suffice. Personally, if I don’t grab a pen and jot these things down at the moment I am handed the receipt, I will never do it. So that has become my personal habit – I write directly on my receipts, and the save them in a file folder.
Some people are handy enough with their phones that they snap a picture of every receipt (many accounting softwares integrate a receipt-saving feature like this, and there are stand alone apps dedicated to it). I am not fast enough with my phone for this to work for me, but if you are, it is a great method for keeping your receipts.
- Tracking mileage. I went over the details of mileage tracking in my Miami travel expense post. But here’s a New Year’s tip: go out and record your car’s odometer reading right now. And while you’re at it, set an alarm on your calendar to do this the first day of every year. Because tracking your business mileage means not only tracking the number of business miles you drove this year, you also must record your total miles for the year. By recording your odometer on day one, you have both your ending mileage for last year, and your beginning mileage for this year. Two birds. One stone.
- Keeping a calendar. In the days of Google calendar, you probably have one that is pretty good already. But you might not realize that this can be an important document to show your business activity in the event of an audit. Your calendar can be used to show the amount of overall time you spend on your arts practice — and that means everything from making the actual work to networking, marketing, and bookkeeping. Your calendar can also show who you met with and for what purpose. This may corroborate other parts of your documentation, from travel expenses (your calendar shows the meetings you had set up in your travel location), to your meals expenses (meeting the strict substantiation requirement of who you met with and for what purpose).
- Maintaining important correspondence that shows your effort to grow your career. You may still snail-mail out old-school introduction packets to museums (and be sure to save those receipts if you do!), but you almost certainly reach out to art world people over email. In the days of searchable email, this is a lifesaver. If you use an email folder system, consider saving this correspondence into one place (ie. “gallery + museum correspondence 2016”), so that in the event of an audit, you can produce this important evidence of your businesslike intentions quickly and without having to rely on your memory.
- Maintaining your arts inventory. In Susan Crile’s drawn-out audit, her professional inventory system weighed heavily in her favor to prove that she was a professional artist and not a hobbyist. How do you track your art inventory? Having an up-to-date document that shows what you’ve produced and where everything is is an important tool in your arsenal.
While looking at record-keeping goals for our work lives is important, I think it’s even more important to look at the complete picture. Where do we want to have an impact in the larger world — in our personal lives, and in our communities, both near and far? If donating money to good organizations hasn’t always been your habit, consider making it a goal this year. There are many organizations whose work will blunt the impact of the Trump agenda — doing work from good journalism to addressing income inequality issues and more. This is important. Give some thought to the world you want to help shape, and take a moment to write down your charitable giving goals for this year. It feels good, and it reduces your taxable income if you itemize your deductions.
And lastly, remember that we need to budget more than just money. Time is the most limited of all resources – so consider budgeting time to be mindfully present with friends and family, and time for civic engagement. It may end up being the most valuable contribution you make to the world this year.
DISCLAIMER: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone.