Bonnie Hellman on tue 31 oct 06
Randy,
This is not new. I went to find a reference on the IRS web site, and =
cannot find the exact section of the US tax code, but about 3/4 of the =
way through Publication 538 Accounting Periods and Methods =
(http://www.irs.gov/publications/p538/ar02.html#d0e2508) in the section =
on Exceptions, you'll find the following, which I have cut to include =
only the pertinent sections. Some requirements of Uniform Capitalization =
(the accounting method that includes the requirement to track inventory) =
did change a few years ago, but the exemption for creative artists is =
not new.
From Publication 538:
"Exceptions. The uniform capitalization rules do not apply to: [cut]
a.. Qualified creative expenses paid or incurred as a free-lance =
(self-employed) writer, photographer, or artist that are otherwise =
deductible on your tax return. [cut]
The article goes on to say:
"Qualified creative expenses. Qualified creative expenses are =
expenses paid or incurred by a free-lance (self-employed) writer, =
photographer, or artist whose personal efforts create (or can reasonably =
be expected to create) certain properties. These expenses do not include =
expenses related to printing, photographic plates, motion picture films, =
video tapes, or similar items.=20
These individuals are defined as follows. [cut]
a.. An artist is an individual who creates a picture, painting, =
sculpture, statue, etching, drawing, cartoon, graphic design, or =
original print item. The originality and uniqueness of the item created =
and the predominance of aesthetic value over utilitarian value of the =
item created are taken into account.
One other clarification to my previous email on this subject (included =
at the bottom of this email) is that the exemption for creative artists =
applies to self-employed artists.
Randy, you cannot change your accounting method the way you have =
proposed. You get to select your accounting method with the first tax =
return that the business files. Accounting method includes cash or =
accrual basis, maintaining inventory, and a number of other elections. =
Once you make the election, it is yours, unless you request the IRS to =
allow a change FOR THAT BUSINESS. Publication 538 briefly discusses how =
to request a change in accounting method.=20
Each business filed on a separate Schedule C or other appropriate tax =
form makes its own elections. That first business tax return is =
extremely important, because there are a number of elections or choices =
you are making with that first return that are not easy to reverse. I =
have advised new ceramics business owners to engage the services of a =
knowledgeable tax preparer, preferably one who is familiar with the =
sections of the tax code that apply to artists. I also suggest that a =
new business owner spends some time with a CPA even before starting the =
business, but certainly as soon afterwards as possible, to get advice on =
record keeping (often called "setting up your books"). I especially =
appreciate clients who come to me before year end to discuss their =
business, and I am considerably more generous with my (non-chargeable) =
time when I am not swamped with tax work.=20
Best,
Bonnie
CPA in CO & PA
As required by United States Treasury Regulations, you should be aware =
that this communication is not intended or written by the sender to be =
used, and it cannot be used, by any recipient for the purpose of =
avoiding penalties that may be imposed on the recipient under United =
States federal tax laws.
----- Original Message -----=20
From: "Randy O'Brien"
To:
Sent: Tuesday, October 31, 2006 8:56 AM
Subject: Re: Taxes- Was: Re: Stockpiles?
> Hi Bonnie,
> Is this a change in tax law or have I been missing out all these =
years?
> I've had several accountants and all have required me to keep track of
> unsold inventory. Let's say I have $2000 in beginning inventory =
(money
> spent on materials) for this year. Can I finally deduct all of this
> from my taxes in addition to everything I spend on materials in 2006?
> Can you give me a tax code or reference that I can refer my accountant =
to?
>=20
> I've got a 3 year old daughter and another daughter on the way in
> December. This would be a great year to finally deduct my stockpile =
of
> yet to be sold materials.
>=20
> Thanks,
> Randy
> http://www.dakotacom.net/~rdobrien
>=20
>=20
> Bonnie Hellman wrote:
>> As an artist you can deduct materials purchased. Artists do not need
>> to keep
>> "inventory". Businesses that maintain inventory cannot deduct the =
cost of
>> raw materials, the cost of materials used in work in progress, or the
>> cost
>> of materials used in unsold items for sale, until those items are =
sold.
>> Accurately keeping the records for a manufacturing business is really
>> not a
>> lot of fun.
>>
>> Because artists can deduct materials as they are purchased, we get a
>> better
>> tax break than businesses that are required to maintain inventory.
>>
>=20
> =
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>=20
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>=20
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