Taxes, and all that other mess..

[Mary Sparrow]

I need some serious help in the "business" side of all of this. I'm SOOO unorganized. I have a mental block against keeping all of my reciepts and the such together. I have technically been "closed" for business for the last couple of years being a mom. Now Im ready to get back to real work, and I guess that means getting organized is going to have to go along with that. Does anyone know of any FABULOUS software, or specific daytimers, actually ANYTHING that is geared towards artists to help me keep track of everything?

Also, we spent a small fortune converting a room off the back of my house this year into a studio for me. Can I write that off? Do I write it off this year, when I technically have been "closed" for business?. Do you know how much I can write off each year for using this space solely for my work? Other than art supplies, what else should I be keeping track of as tax write offs.

Thanks
Mary

[Cynthia Daniel]

I'm assuming your mental block on receipts is because you don't know what to do with them and if you had a solution, that would help the mental block?

Here's what I do with receipts. I have an accordian file labeled with categories such as:

office supply
computer related
postage/shipping

...and so on

The first year as you're learning, you can label the sections as you get receipts and they are defined for you. I'm sure you would have a category for "art supplies & materials". At the end of the year, I take those receipts out and put them in an envelop labeled with the year and reuse the same accordian file for the next year.

I use Quicken for my checking and I enter everything in there, including things related to business where I used cash. For cash items, I set up a yearly cash account called "2001 Tax Related", for example. So, I enter these into Quicken before the receipt gets filed. I'd suggested having a basket or envelop for unentered receipts and once they are entered, file them into the accordian file.

In Quicken, you can "split" transactions. So, if you went to the grocery store and bought mainly groceries, but picked up a copy of American Artist magazine at the same time, you can notate that one item as a business expense in your entry.

You'll want to get a separate business account and deposit any business income in there. Tie that in with your personal account electronically and then you can transfer money from your business into your personal account, which you would also have set up in Quicken and also set up for electronic processing. That saves tons of time and balancing your two checking accounts is a breeze. All you do is download the transactions electronically and normally it's balanced just liked that.

When your two accounts are set up electronically, you can also pay your bills through this, from either account. I can't tell you how much time this saves! It's wonderful and well-worth the small monthly fee.

I can't give you any advice about deducting for the creation of your studio last year, but I'm sure there's a way. I would recommend asking a professional accountant on that.

[Chris Saper]

Dear Mary,

I am going to print out Cynthia's response for myself (Cynthia, your tech-xpertise continues to astonish me!) because I am still doing the "receipts- in-a -box" April marathon.

Mary, you need to first be certain that you have state and any necessary local business licences in place. Tax laws are different in every jurisdiction, so you need to know what applies to you.

Portraiture is a relatively non-complex type of business to run as a one-person enterprise; however, with things like studio write-off, you really need to get an accountant's advice. Once you know how to calculate the studio square footage, and how to properly allocate overhead expenses, it is very simple to keep up. However, you do need to find out about the implications of depreciation recapture, and a few other tax-oriented issues so you understand what it ultimately means to you if you move. Your accountant will explain whether things are capital expenses, equipment or suppies. If you have someone who helps with your personal tax returns, that's a good place to start.

It is very important to keep accurate records, as it will enable you to track your expenses, and to see where there are opportunities to reduce them, without compromising your revenues. There is a great deal to be said for bulk purchases and standardized materials.

Good luck!
Chris

[Cynthia Daniel]

What I forgot to mention is that as you enter each transaction, the tax category gets assigned to the item at that time. And, Quicken even memorizes these. So, if you enter Pearl Art Suppy, Quicken remembers the last category you entered for that and automatically puts it in for you. Of course, you're allowed to change the category for that transaction if needed.

I have categories and sub-categories, such as Computer:Hardware, Computer:Software, Computer:Repair.

At the end of the year, I just run the reports for all the categories after verifying all expenses are entered.

Many credit cards have the ability to download into Quicken also, but I never fully got into that. Instead, I handle my business expenses on a credit card like a cash transaction by entering it into 2001 Tax Related account that I set up at the beginning of the year.

I realized a long time ago that to try and split the actual payment I made on a credit card into specific transactions was too mind bending...it just didn't always fit. I also keep a separate credit card for business and try to use that only for business.

Thanks for the compliment Chris. Maybe I should put up my art filing system.

[Stanka Kordic]

When I first started as a freelancer several years ago, I followed the categories listed in the Schedule C tax form. I set up my file cabinet with a folder for each category, and filed my receipts accordingly as i got them. Each quarter, I enter these transaction in a ledger (with a monthly heading), as well as what's in my checking acct. that I may not have had a receipt for. All this I feed into my Quicken program that computes the totals, and gives my CPA an organized record. It seems like a lot of work, but I like having a paper trail, as well as a computerized one. It only takes me about an hour tops each quarter to do this.

I too would recommed using a professional accountant if time is a premium for you. I am also a mom and don't want to fiddle with figuring out all the details of every business trick a self-employed person needs to know. My CPA is great for that. I hope this makes sense!

[Cynthia Daniel]

Stanka,

For a while, I followed the Schedule C categories, but then I felt the need for a greater breakdown of my expenditures. For example, I wanted to know how much I spent on computer hardware vs. computer software. So, when I enter in Quicken, I use categories and subcategories. So, I would enter as follows - Computer:Hardware, Computer:Software.

I think Legal/Professional is a Schedule C category. So, I would put Legal-Prof:CPA, Legal-Prof:License, etc. This way I had the tax category, but still had the breakdown that I desired. More complex, but it's what I needed.

[Stanka Kordic]

Dear Cynthia,

You're right adjusting Schedule C categories to fit your needs. I think that's the key: starting there, and fine tuning the system. For me, those categories work fine (they are slightly different in Quicken). In addition, I add insurance, mileage, sales taxes, etc. Again, having the CPA around helps me because she calls and reminds me when taxes are due, and we touch base about how the year is going income wise. (and her fee is tax-deductible!) You've got a great system though. I bought Quicken after you recommended it in the ASOPA magazine a while back - thanks!