Bonnie/Jeremy Hellman on thu 17 jan 02
Lisa and other new businesspeople,
On the surface your questions are straightforward, but anyone asking those
questions probably does not understand business taxes.IMHO it could be a
serious mistake to rely on Turbo Tax to give you tax advice. Certainly for
this first year of operating your store, you would find it would be
worthwhile to hire a local CPA (who likes working with new, small business
clients and who has familiarity with artists and galleries) to discuss tax
aspects of your business. Even if you still prepare your own tax return(s),
you should have that person review the return(s) before you file.
I will answer your questions.
1. Yes, you should send 1099s to any non-corporation whom your business
pays $600 or more during a calendar year. You can give them a 1099 for less
than $600 if you feel like it. (In addition, you will be remitting the
original red copy of the 1099 and a transmittal form 1096 to the IRS, due by
Feb 28th.) The only exception you are likely to run into, is that you are
supposed to give lawyers a 1099 even if their firm is a corporation,
according to the instructions for the 1099. I find that the instructions for
the 1099s, which are available from the IRS or online are not hard to
understand.
2. The amounts you pay the artists are for purchases of inventory. You
don't get to deduct this expense until you actually sell the inventory. You
are a retail operation, a store. Your IRS business code is 453920 Art
Dealers. (BTW there is an IRS manual for their auditors that is available
from their web site. It makes interesting reading, as it tells IRS auditors
where they think art galleries are likely to cheat.) The amounts you pay the
artists are part of your cost of goods sold.
If you are selling only your own work, you can be use the code for
Independent artists, writers & performers 711510. As an artist whose
business is selling only your own work, you are not required to have
inventory and you can expense (write off) all purchases.
3. If you are running a gallery, selling the work of others, you will have
inventory. If you are selling on consignment, you don't own the items you
are selling, and they are not inventory to your business. The disadvantage
(for tax purposes) of being a business with inventory is that you cannot
deduct the cost of your inventory until it is sold, and also you need to do
an end of tax year inventory valuation (at your cost) of some sort.
Now that I've answered the questions you asked, let me remind you that
especially in the first year of a business, you are making decisions that
impact your taxes in all future years. Although you are making choices with
long range implications, you may not be aware you are making those
decisions, or what the choices are. Turbo Tax is a great tax program, and I
use it all the time, but it will not substitute for experienced tax advice
nor does their interview guarantee that you will make the best choices for
your business. There is just no substitute for an experienced advisor.
One such example of long range implications is when a business owner
operating out of his/her residence has to decide whether or not to deduct a
home office/studio, assuming he/she qualifies to do so. Once you deduct a
home office/studio, that pro-rata portion of your home is no longer a
residence, and if the house is sold, that pro-rata portion of the gain on
the sale of the home is subject to capital gains tax. The rest of the gain
on the sale of your primary residence (up to $250,000 for a single taxpayer
and $500,000 for married filing jointly) is not subject to federal
income..The rules on home offices/studios have changed every few years, and
you can no longer return your home office/studio to be your residence by not
deducting expenses for a few years. This is just one example of a decision
you make today that has long range implications. Some of my tax clients
decide to deduct the home office because they expect to die in their houses
(i.e. never sell) or because they don't expect a lot of appreciation when
they sell the house. Some decide not to deduct their home office, even
though they're eligible, because they are already sitting on a lot of gain
from owning their house or they believe their houses will appreciate a lot
in the future.
Lisa, I know that you are capable of reading and learning to understand how
things work, question by question, but it's penny wise, pound foolish to NOT
get professional advice, particularly for the first year of business. The US
tax code changes all the time, and in reality your time as a businessowner
is better spent tending to your business than in keeping up with rules and
changes that affect your business and the form of organization for your
business.
Also, if your business is anything except a sole proprietorship I would
strongly urge you to have a CPA prepare your taxes because there are a
number of other issues that apply to partnerships, S Corps and LLCs with
multiple owners.
I hope you realize that my goal is to give you the best advice I can. I am
not giving you a sales pitch, because I'm not looking to prepare your
return. I believe you will be better served by a local CPA, one familiar
with NC's tax code. There may also be local tax code that you need to
comply with.
Perhaps a good analogy would be a gas kiln. I don't personally own a gas
kiln and I've never fired one. However if I decided today that I wanted to
own one and fire it I could read books (and in fact I have read books) and
clayart where we are fortunate enough to read messages from some of the most
experienced, finest ceramic artists alive today. I could buy plans and
probably build one. Or I could follow advice of others and buy a ready made
gas kiln. However, if I didn't consult with someone who could personally
advise me, based on my individual situation, I wouldn't know if I'm making
the best decision in my choice of build or buy, and I'd probably mess up
something when I went to fire it. Wouldn't I also be smarter to consult with
that expert who could hold my hand through the first firings?
It's the same thing with taxes. Turbo Tax is a great program, and I use it
myself. But I don't depend on their generic interview to prepare tax
returns. I make those decisions, based on how I want the finished returns to
look. This is my 20th year preparing tax returns for others, and I had some
very good teachers.
I'm not trying to scold you for trying to save money. I am trying to save
you money in the long run by making good tax choices in this first year of
your store. There are opportunities out there in your first year of being in
business. Don't waste them by thinking you're going to save a few dollars.
BTW often your CPA tax preparer will be able to offer you good advice in
running your business, so if you have questions, bring them to your initial
meeting with the CPA. Asking those questions and listening to the answers
may help you get a good feel for whether or not you want to work with the
CPA.
BTW it's a good idea to make your appointment ASAP. The later it gets in tax
season, the more pressured and stressed most CPAs who prepare tax returns
get.
Best wishes and continued success in your new business,
Bonnie
Bonnie D. Hellman, CPA in PA and CO
PA work email: oliviatcavy@juno.com
PA home email: mou10man@sgi.net (that's the number 10 in the middle of the
letters)
> --------- Forwarded message ----------
> From: "L. P. Skeen"
> To: CLAYART@LSV.CERAMICS.ORG
> Date: Tue, 15 Jan 2002 16:58:05 -0500
> Subject: It's tax time again.......
> Message-ID: <001001c19e0f$b7edd640$46c70340@0018015993>
>
> and since I have this new situation here, I thought I'd ask other
> folks in the same boat how they're doing their taxes.
>
> 1. Do you write 1099's to artists who sell more than $400 per year?
>
> 2. Under what category does the % you pay to the artists fall? (i.e.:
Cost of Goods Sold, Items Purchased for Resale, etc.)
>
> 3. Do you show inventory and if so, do you have to inventory all the
work in the gallery, or just YOUR PERSONAL work?
>
> TIA - I'm sure I"ll come up with more questions later. Just got the
Turbotax installed......
>
> L. P. Skeen www.living-tree.net
> Living Tree Studios, Summerfield, NC
L. P. Skeen on fri 18 jan 02
----- Original Message -----
From: "Bonnie/Jeremy Hellman"
Subject: It's tax time again.......Long answer
> Lisa and other new businesspeople,
> Also, if your business is anything except a sole proprietorship I would
strongly urge you to have a CPA prepare your taxes because there are a
number of other issues that apply to partnerships, S Corps and LLCs with
> multiple owners.
How does one find a CPA that knows about artists? I have asked around and
everybody seems to be having their mother do their taxes!
Thanks for taking the time to answer my questions.
L
Olivia T Cavy on mon 21 jan 02
Hi Lisa,
Your "local" CPA might not be in your back yard if you don't live in a
city.
I'd check the your state's CPA group on the internet, and email or phone
them for a list of nearby CPAs working with small firms. You can find
NC's CPA society through the AICPA web site. Most of the state societies
seem to have toll free phone numbers for use within the state. Larger
CPA firms tend to have a lot of overhead and therefore higher billing
rates, and like larger companies as clients (on the theory that they're
willing to pay more for CPA services). You want a CPA who works in taxes
and who wants small business clients, for a good match. You also want
someone with enough experience to offer you good advice. How much is
"enough"? You'll get a feel when you speak with the person, especially if
you ask about how they deal with artists vs galleries.
In your situation, where you've been working as an artist for a number of
years but only recently have become a gallery owner, if both businesses
are sole proprietorships, you'll want to discuss whether or not to file 2
separate Schedule Cs or merge the 2 into one Schedule C. There could be
advantages to each approach and you'll want to evaluate which would be
best for you, if applicable.
You could also check your yellow pages under Accountants, Certified
Public. Make a bunch of phone calls and ask if they like working with new
business owners, and if they have any artists or galleries as clients.
When you get a name and speak with that person, tell them that you're a
new business owner (a sole proprietor, a partnership, an S Corp, an LLC
taxed as ............), this is what you do, and like most new business
owners money is tight. However, you need someone to either prepare your
tax return or review a return that you prepare using Turbo Tax. Ask for a
price up front, or a ballpark price. Ask about their experience in
taxation.
I'd still continue to ask other ceramics people in your area if they use
a CPA, and if so, who they use. Try asking on clayart........
Hey, folks, those of you near Lisa, do any of you have a CPA who talks to
you to educate you, and explains your tax return clearly to you?
Sometimes there are CPAs like me who have a day job in taxes (mine is as
financial person for a company that owns low income housing projects) who
have a small tax practice on the side (my night job). We don't advertise
in the yellow pages, so you have to know someone who recommends us.
Bonnie
(sending this to clayart and to you privately)
On Fri, 18 Jan 2002 08:25:02 -0500 "L. P. Skeen"
writes:
> ----- Original Message -----
> From: "Bonnie/Jeremy Hellman"
> Subject: It's tax time again.......Long answer
>
>
> > Lisa and other new businesspeople,
> > Also, if your business is anything except a sole proprietorship I
> would
> strongly urge you to have a CPA prepare your taxes because there are
> a
> number of other issues that apply to partnerships, S Corps and LLCs
> with
> > multiple owners.
>
>
> How does one find a CPA that knows about artists? I have asked
> around and
> everybody seems to be having their mother do their taxes!
>
> Thanks for taking the time to answer my questions.
> L
>
>
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>
Bonnie D. Hellman, Pittsburgh, PA
PA work email: oliviatcavy@juno.com
PA home email: mou10man@sgi.net (that's the number 10 in the middle of
the letters)
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