Alright, you’ve determined your creative endeavor qualifies as a business: you’re pursuing profit; you’ve got a way to track your sales and expenses that involves more than stuffing receipts in your glove box; and, most importantly, you’ve got the right attitude. You are committed to the success of your new venture.
So, what kinds of expenses do you track? The specifics will vary depending on your medium, but in general, the same rules apply. Anything you purchase that represents the cost of carrying on your trade or business is a potential deduction.
You write? My bet is you also print. Lots. Paper, ink, toner, or money spent at the local copy shop all counts. Maybe you’re old school and its legal pads and pens. Photography? You’ll need a camera, lenses, software and a computer.
For common items, like office supplies, make sure you can prove that the purchase is solely for your business. The batteries I buy for my camera flash, I keep in a drawer in my office. They aren’t in the kitchen so my son can dig them out and use them for his Wii remote. One is personal use, the other business. I suppose you could track each battery and assign a cost, but if you have an urge to do that, I’d suggest a good mental health counselor.
Bigger items like a computer or camera and lenses, will count as Fixed Assets. These are a bit beyond the scope of this post, but their value is deducted over an extended period of time. (Although, when you first open a business, these costs can be deducted in full that same tax year). Also, since they are not consumable supplies (thus ‘Fixed’), they add value to the business. That value depreciates over time at a set rate. Again, this is why we need accountants.
Another thing to track is mileage. Lots of times people ignore this deduction because they simply don’t want to mess with it. Its a mistake, because those miles do add up. Last year for instance, I put on 1390 business related miles. For 2012, this added up to over 500 dollars in expenses.
Just like supplies and other items, the miles have to be for business purposes. (I’m assuming you’re using a personal vehicle for these trips – buying a vehicle solely for your business is a different matter entirely.) A writer’s conference, the trip to the store to buy your printer, camera, etc., checking your business P.O. box (if you have one, another legit expenses), swinging by the UPS store to mail your manuscript (along with the postage, printing and everything else) even trips to my crit group are part of business – feedback from crit partners has been crucial to my published works!
The hardest part is getting in the habit of recording the data. All you need is date, destination, brief purpose statement and the start and stop from your odometer. I have a legal pad I take with me on all such trips and I record the information there and later enter it into my financial software. Even easier, you could start notes on your phone, or even email it to yourself. However you do it, do it in such a way that at the end of the year, adding it all up isn’t a pain in the ass.
When you report business miles, you’re expenses will be based on the latest IRS mileage rates. You’ll also need the total miles, personal and business, driven in that vehicle for the entire year. This, you will give to your accountant so they can mutter arcane sayings and consult the Book of Codes. (It involves depreciation on the vehicle and lots of mumbo jumbo that will send creative types into a coma – did I mention, find a good accountant? If you’re convinced you want to DIY, heres a link to the MACRS Depreciation Chart. I rest my case.)
Tracking all of this isn’t only good financial sense. It all further proves that you are engaged in business. Some expenses are especially helpful for this purpose – printing business cards, training (all those writing seminars and conferences), advertising (shamelessly, here’s my blog) and it adds to time spent engaging in the endeavor apart from simply writing (or other creative pursuit).
Keep in mind, this isn’t an open license to run off and buy a new computer, laser printer, and plane tickets to New York so you can go door to door peddling the Great American Novel. Remember, the goal is to make a profit. So you have to balance it with the income your business generates and always have an eye on the black. If you stay in the red too long, you’re drifting back into hobby territory. But also keep in mind, while the IRS makes the guidelines, YOU decide whether it is a business or not!
One other deduction I haven’t gotten into is the Home Office deduction. It’s tough for creative types because it requires a high level of discipline. You need a space set aside that is ONLY for your business, nothing else. You may then deduct a percentage (based on the office size compared to home size) for utilities, home improvement and other expenses. So more detailed records and greater restrictions. Often, people warn against it because it ‘sends up red flags at the IRS’ to which I’d say, only if you’re doing it wrong.
I’ll shoot for a bit about income next, from a writerly perspective. Should be much shorter…