LINDA BLOSSOM on tue 7 jan 97
Hello folks,
I am sure that I am not the only one with a new desk on the living room
floor with all my receipts and papers everywhere while I try and
outmaneuver our mutual uncle. This field, unlike other crafts and arts,
has a high rate of loss. From cracked and crazed to tried and failed
glazes and designs we have a high loss and r &d costs. Now it seems to
me that big corporations have quite a budget for research and development
and if they can claim it, so can we. How do the rest of you account for
the losses, failures, and research and development? And does the government
have a say in how much we can experiment. (The lifeblood of my studio is
experimentation.) My inventory of raw materials and items on hand/sold are
always out of wack because of this need to "find out what will happen if.."
Linda Blossom
2366 Slaterville Rd.
Ithaca, NY 14850
blossom@lightlink.com
http://www.artscape.com
607-539-7912
Jeremy/Bonnie Hellman on thu 9 jan 97
Linda-
If you are asking how to account for losses and experiments on your
income taxes, they are not deducted as an expense item. What happens is
that you do not deduct the cost of your ending inventory. You did take
your year end inventory, didn't you? And you did make a written record of
your work, didn't you?
Your year end inventory consists of your "ending inventory" of supplies
(clay, glaze inegredients, glazes) and work in process (unfinished
pieces) and finished but unsold pieces. On your tax return, these costs
are subtracted from your beginning inventory (last year's ending
inventory) and purchases. You are left with a dollar amount representing
the cost of all the materials you actually used during the period.
Effectively, everything that is used up, whether in making items you sold
or pots you trashed, IS deducted as a "cost of goods sold".
If you have a high percentage of cost of goods sold because you did a lot
of R & D (or just lost a lot of pots due to failures, experiments,
damage, etc) you can list these as a separate line item calling it
damaged goods not sold or something to indicate that you had what an IRS
auditor might think is an unusual expense. The question of whether your
cost of goods sold is too high, I leave to full time potters.
However, your risk in any business that does not generate significant
profit or perhaps generates a tax loss, is that the IRS will not believe
that you are doing this activity with a profit motive in mind. If you are
not a "real business" ie don't have the intent of making money, you are a
"hobby" and can only deduct expenses to the extent of income. In other
words, if I sold $1,000 of my ceramics (gross receipts not including
sales tax collected) I can only deduct $1,000 of expenses, even if I
really spent more money, because I have a hobby not a business.
What is important is to keep the best financial records that you possibly
can. IF your return is selected for audit, the big question is, "Will you
be believed when you tell the truth?" In other words, do you look
believable? Can you document what you are claiming?
So the quick answer to your question is that when you compute your cost
of goods sold, you are already deducting your losses and R & D costs.
Bonnie (CPA in Pittsburgh, PA)
>I am sure that I am not the only one with a new desk on the living room
>floor with all my receipts and papers everywhere while I try and
>outmaneuver our mutual uncle. This field, unlike other crafts and arts,
>has a high rate of loss. From cracked and crazed to tried and failed
>glazes and designs we have a high loss and r &d costs. Now it seems to
>me that big corporations have quite a budget for research and development
>and if they can claim it, so can we. How do the rest of you account for
>the losses, failures, and research and development? And does the government
>have a say in how much we can experiment. (The lifeblood of my studio is
>experimentation.) My inventory of raw materials and items on hand/sold are
>always out of wack because of this need to "find out what will happen if.."
>
>
>
>Linda Blossom
>2366 Slaterville Rd.
>Ithaca, NY 14850
>blossom@lightlink.com
>http://www.artscape.com
>607-539-7912
"Outside a dog, a book is a man's best friend. Inside a dog, it's too
dark to read" Groucho Marx
" " Harpo Marx
"Time flies like an arrow. Fruit flies like an avocado" Att. to GM
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