"I must create a system, or be enslaved by another man's."
- William Blake
When I first started the art festival guide I had a somewhat clear organization and, once I decided on the main points to cover, I kept to my outline more or less faithfully. During the course of art festivals, I would think of bits and pieces and almost all of them fit neatly into my chapters...almost. Another phenomenon that occurs in art festivals is that some of us get a lot of visits from artists that want to entertain the idea of embarking upon the art festival adventure. Most of them ask the obvious questions but some pose a few practical and sometimes not so obvious questions. There is so much more to know!
On an average year, whatever that may be, I figure I spend about 30% of my time making art, 30% selling art, 30% on the various business tasks and 30% taking care of the home front. If you notice, that adds up to 120%, not counting sleeping and eating, which is the appropriate amount of time to dedicate to making a living as an artist. Seriously, I have never worked so hard or so long on anything, although the rewards of making a living as a living artist are without question worth every minute of every day and the minutes in between. Nobody said it was going to be easy!
While you are starting out and still not knowing who to ask, I will just answer the most frequent questions that came pouring to my booth and my website and that logically made me fashion this last chapter as a summary of Frequently Asked Questions. They are arranged in no particular order; I simply jotted them down as people asked both in person and online although I guess I tried to address them in order of importance or at least relevance to the business. You might call them tricks of the trade, nuts and bolts, tips from the experienced or frequently asked questions. I will also try to answer them succinctly since I have already explained most points in the previous chapters. Well, I might throw in a story or two, but that's to be expected by now. So here are my loose ends, whatever didn't neatly fit into the previous chapters, I kept for this last one. Now you can't say nobody told you!
Do I need a business license?
Everywhere you go! As a business you will undoubtedly need a business license to operate a business in your own state. Every state is different so the best course of action is to head on over to the website of the Department of Taxation or Department of Revenue for your own state and find out what the licensing requirements are for your particular situation. I know that sounds scary and complicated but most states will simply not let you conduct business without a license and really, aside from paying a fee and the initial application, it's not so bad.
Doing business outside of your own state will often if not always also require a temporary permit or a temporary vendor's license, often for the state, county and/or city. Many of us carry out of state business licenses for every state we work in and renew them yearly. Some are free, some require a nominal yearly fee. The bottom line is that you cannot do business anywhere without a license or permit and playing around with tax authorities is not my idea of fun.
The promoter of the show is usually the best source of information for the required licensing and tax requirements of each show. Many promoters will require a state license number with applications, some will include the county/city license fee with the application, others do not. Ultimately it may be up to you to investigate and obtain the proper permits and pay the proper taxes, which neatly leads me to the next question.
Will I have to collect and/or pay taxes on my sales?
You better believe it, and remember that there are two flavors of taxes: income taxes and sales/use taxes. Every city, county and state will require you to collect sales tax on every transaction conducted within their jurisdiction with the exception of very few states. The proper governing body will then require you to forward the sales taxes collected to them; you are merely the middle man collecting sales tax for the state. It is a royal pain to keep track of all the diverse regulations, but usually just more annoying than truly complicated. Most state filing forms just want you to report income and where you got that income so that the state can forward the tax collected to the proper city or county.
Again, your best source of information is the promoter and whatever paperwork you received when you applied for the show or checked in. The amount of sales tax you collect will be different in every state and some times, different depending on the city you are conducting business in. Sometimes the state will forward the taxes to the city, sometimes the city will require you to pay them separate taxes, sometimes all this is included in the booth fee. It is a great idea to find out and keep your taxes paid up after every show.
I happen to file sales-use tax yearly in the state of Arizona, so I calculate sales taxes after every show I do in Arizona and deposit that amount in the bank. The money goes into a savings account and when the end of the year comes around I have my little tax-nest-egg ready to forward over to the Arizona tax authorities. Every state is different, and, in my opinion, the best system is to pay state sales taxes at the end of the show and be done with it. That way I am always caught up with sales taxes for states, cities and counties.
The other tax issue is income tax. Your business will have to file monthly, quarterly or yearly depending on the tax laws of your state. Income taxes are separate from sales taxes, so make sure you fully understand tax laws and abide by them. You only have to pay income taxes in your own state, where your business is located, unless you live in the great state of Nevada where there is no state income tax at all. Much information about taxes, both local and federal, is available in publications at your nearest library or in the vast knowledge expanse of the internet.
And, of course, you will have to file yearly income taxes with the Internal Revenue Service (IRS) on any income gained in your art business. Funny story about the IRS...well, not so funny, really. Let me finish this tax thing and then I will tell the story. Here I am treading dangerous waters and will default to the standard advice: "Seek an accountant" and the standard disclaimer: "I am not an accountant so take my advice with a grain of non-accounting salt." I will elaborate a little on an upcoming FAQ about keeping track of stuff, but many artists just hand over their business accounting, including the yearly/quarterly filing of taxes, to a professional.
Having said that, it is not difficult to "keep the books" of a cash based business, nor is it necessary to burden yourself with the expense of an accountant if you have a good head for math and a good computer program.
The IRS Story
There I was, just like any other afternoon, walking over to the mailbox to gather my daily dose of acceptances to great shows (and junkmail), invitations to great shows (and junkmail), and other assorted interesting pieces of daily mail like trade magazines and supplier catalogs (and junkmail). Unsuspecting and naïve, I frolicked back to the house when suddenly! GASP!!! a letter from the IRS??? Addressed to my business??? Oh no, oh no, oh no (breathe breathe), "it's not an audit, it's not an audit!," I told the cat who ran for the closet. It WAS an audit. Sigh, double sigh. Surely it must be a mistake, surely little old me couldn't possibly get audited, "But I pay! I pay!" I yelled helplessly scaring the remaining cats into the other closet.
I suppose it had to happen some time. The audit in question concerned a claim of a loss on my second year of business. The letter stated that, in essence, the IRS had declared me a hobby and the burden of proof was on me to prove otherwise. Along with the "hobby" designation, as opposed to a business designation, come several very bad things such as not being able to claim many of the business expenses and definitely not being able to claim a loss on any given year and, worst of all, I would also be deemed a hobby for subsequent years.
Wait! WHAAAAAAAAT!!! A hobby?????? Do you think I would pick being an art festival artist as a *&^*%$!! HOBBY??? No, no, no, no no! Hobbies are like knitting sweaters for grandkids and gardening petunias. Breaking my back hauling show supplies and building tents, traveling and staying in cheap motels, being insulted by the general public ten times for every one sale, standing in the wind and cold and heat while smiling at prospective customers that are seeking hot-dogs with much more desire than they are seeking art...THAT is NOT a hobby!
But there was no time for whining, I had to get my act together and call the IRS Agent to make an appointment to defend myself. Having a psychology background, I quickly ran through the 15 stages of outrage, grief and despair to get the emotions out of the way before I desperately started gathering the necessary paperwork for the year in question. Fortunately, I am somewhat more organized than the next artist. Unfortunately, organized people go batty when they can't find something. Needless to say it was stressful to gather every single piece of paper that had a financial bearing on my business for the year audited. Since I file taxes as a sole proprietor and my husband and I file jointly, our home financial records were also relevant (mental note to incorporate one of these years). The way the audit process works, the IRS will basically demand to see all your business records, re-compute your taxes for the year in question (and only that year) and send you the bill. Defending yourself is up to you. Since my future as a business was at stake, I chose to grab the proverbial bull by the proverbial horns and defend myself.
The happy day came. IRS Agent walked through the door and took out his laptop...I took out my laptop...he pulled a single manila folder out of his briefcase and opened it...I brought in an entire file box full of file folders and nervously twitched my fingers on the table as I stared at him squarely in the eyes...the theme for The Good, The Bad and The Ugly rang softly in the background...
Okay, enough theatrics. In the end, the audit went well but it was a gruesome, stressful experience. I had toyed with the idea of hiring a tax attorney to handle the audit but was glad I didn't. During the course of the interview, the IRS Agent explained two very interesting things:
One, was that once a tax attorney is hired, that is, once the audited party in effect says that they do not want to engage in conversation with the IRS, the issue becomes one of how much the IRS is willing to settle for. There is no further conversation, no proving the case for the business, only how much the business is able to pay and the subsequent setting an appropriate payment plan. I was happy that I was willing and allowed to defend my case on my own merits.
Interesting thing number two, was that the IRS has just opened up and dedicated an entire branch to the sole purpose of auditing small businesses, namely the self-employed, since we report sales on the honor system. Red flags that catch the attention of the IRS are things like excessive traveling or entertainment expenses, reported losses against other income, low reported revenue against high standard of living, and excessive home-office deductions. Of course there is the lottery of being picked "just 'cause" but usually something brings to the attention of the IRS that there is money for them to recover in any given audit. There is no income threshold to be audited, the amount disputed by the IRS in my case seemed completely ridiculous to me since, if the case went against me, I would have only had to pay around $2000. So be warned.
Post-traumatic therapy aside, I was glad that I took on my own defense. There were many questions asked that a tax accountant would not know the answers to, regarding the way I conduct business, the way I advertise and gather new collectors, plans for increasing income in the immediate future and long-term plans, how I choose shows, why I sell what I sell (and not women's shoes, for example), why I lost money and what I am doing to not lose money again ever, how to decrease expenses in my particular business, and so on and so on.
The IRS Agent wanted to know everything, I explained everything. He wanted to see every record, I showed it to him. In the end, I knew I had been honest and given him all he wanted to see (and then some!). Happy resolution in my case resulted: I was declared a business and did not owe any additional taxes. Although relieved and vindicated, I did not take the time to pat myself on the back, instead I vowed to keep even better records and balance my finances monthly come hell or high water.
Without further exciting plots and embellishment, here are some key things that I learned during the course of the audit:
Knowing your own business is essential; if you choose representation, make sure your representative knows everything about how you conduct business as an artist. Be prepared to defend your choice of business, your choice of venues such as festivals and galleries, the business potential for your medium and your marketing ability to profit from it.
Keeping accurate and organized accounting records is a must. Even with my great organization skills I had misfiled a couple of things and had to find them before proceeding. A good accounting program or a good accountant are two ways of keeping good records and keeping them balanced month to month.
Full disclosure to the IRS is essential. The IRS is most concerned with Revenue (it is their middle name!) and will come to your home or office to audit your records. If you have a $100,000 sea-faring boat in the back yard, your income or debt must show that you can afford such a luxury. Be prepared to show bank statements, credit card statements, receipts for purchases, receipts for $2.00 cokes bought while traveling, supply receipts, motel receipts, vehicle mileage records. Anything that was mentioned in the tax return must be proven with a paper receipt or printed record.
Printed materials are required. Lately I have been keeping electronic records and I had to actually go buy a printer in the middle of the audit so that I could print records off my laptop on the fly.
Prove that you are conducting yourself as a business and actually trying to make a profit. Keep databases or mailing lists with customer names, file away marketing materials, keep spreadsheets showing profit/loss for particular shows and trends from year to year.
Prove that you desire to be successful and have a plan for growth, a business plan. Newspaper clippings with your name on them, awards received, competitions won, applications sent and rejection letters. You have to at least be trying your honest very best to succeed on a regular basis and be able to prove that you are trying.
If you claim a home-office deduction and show home improvement or home maintenance deductions, purchased a new Hummer to pull your trailer, or built an addition to separate your studio from the main house, be prepared to prove need. Any deduction you take must be backed up by printed records, receipts and good reasoning (according to the IRS, not you).