Hannah Cole is a tax expert who specializes in working with creative businesses and artists. She is also a working artist and a tax and money columnist for Hyperallergic. Hannah is the founder of Sunlight Tax, which specializes in empowering creative people to set up for long-term success and take control of the financial side of their careers through her year-long artist-centric membership, Money Bootcamp. If you’d like to get a free visual guide to artists’ tax deductions and a 3-day Money Challenge, you can find that here.

As the end of the year draws close, it’s a good time to take a look at the business side of your art practice.

Organizing your practice doesn’t need to be hard—and it can really help it run smoothly, keep your admin time down so you can be in the studio more, and keep you well protected if the IRS sends you one of those heart-sinking letters.

So grab a pen, and let’s get organized.

In my recent 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 the business side of 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 art 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 ten paintings a year, then a spreadsheet may be all you need. If your operation is more complex, you’ll need more robust software. Before picking 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. Xero is a cloud-based accounting software that has a clean design, is user-friendly, and works on mobile. You can also keep track of your income and expenses in Artwork Archive, and send professional invoices in seconds. 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 upfront cost to have a professional set you up because you’ll be basing business decisions on the numbers in your books.  Bookkeeping errors can lead to costly mistakes not to mention the hefty expense of having a professional clean your books up.

 

Good bookkeeping is a question of habit.

So, schedule a regular time to do it. This is why the design of my Money Bootcamp membership for artists includes quarterly bookkeeping co-work sessions. The point is that you need to establish the habit of sitting your butt down to do your books at least every quarter.

If you owe more than $1000 in taxes in a given year, then you are also required to pay estimated tax payments quarterly. This is another reason that bookkeeping at least quarterly is recommended.

 

Save 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 or credit card statements aren’t enough. For meals, 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 then save them in a file folder. You can also pair the receipt with an entry in your calendar that states who you met with and what the business purpose was.

Some people prefer to snap a picture of every receipt (many accounting software integrate a receipt-saving feature like this, and there are stand-alone apps dedicated to it). This is a great method for keeping your receipts as well.

 

Tracking mileage.

Generally, when you use your own car, you can use one of two methods to track your business usage:

You can track and deduct the actual expenses you incur – meaning, you save your receipts for gas, insurance, tolls, repairs, new tires, etc. and then allocate a percentage of your total usage to business. 

Or ... 

The “mileage” method, which allows you to use the government-set yearly mileage rate ($.56/mile for 2021). Instead, you track your total number of business miles traveled (you must keep a log with the date, mileage, business reason, and destination), and also report your yearly total mileage. Before you make a mental note that this sounds too hard, be aware that there are inexpensive apps that can automatically track your mileage. I like MileIQ, but there are many others. This method almost always gets you a bigger tax deduction and doesn’t require you to track receipts. And when you automate your mileage log with an app and get a huge deduction because of it, it’s a no-brainer.

Here’s a bonus mileage 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 on the first day of every year.

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 era of digital calendars, 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 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 [current year]”), 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? Of course, Artwork Archive is a great professional inventory-tracking solution. Having an up-to-date document that shows what you’ve produced and where everything is is an important tool in your audit-proofing arsenal.

While looking at record-keeping goals for our work lives is important, 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? If donating money to good organizations hasn’t always been your habit, consider making it a goal this year. There are many organizations doing important work—from good journalism to addressing income inequality issues and more—that could use your support. 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.