It's that time of year again. If you haven't been keeping up with organizing your arts and crafts accounting records, there is no time like the present to get started. Since I know that many arts and crafts business owners hate this part of running their business, I've written a series of articles with quick and easy DIY instructions to organize your business accounting records.
The first article in this series discusses using an off-the-shelf accounting software program such as QuickBooks. It also introduces using a spreadsheet program such as Excel. The second article introduces using an Excel spreadsheet. I walk you through the first few columns in spreadsheetin that article.
This article addresses the next few columns in the sample spreadsheet (go back to the second page to review the sample spreadsheet if need be). You learn about fixed assets, education expenses and meals and entertainment.
Fixed AssetsJust about every business will have office and computer equipment that is used for more than twelve months after purchase. In addition to office and computer equipment, arts and crafts businesses will have another class of fixed assets - those tools we use to make our handcrafted items. Some examples are woodworking tools, looms, sewing machines and flexshafts. Plus, you may also have a vehicle you use to drive back and forth to arts and crafts shows and other events.
Expensing fixed assets is somewhat thorny issue for arts and crafts business owners. You should never assume you can totally write off the cost of a fixed asset when you buy it. Although, based on other criteria, expensing the fixed asset 100% in the year of purchase can be a possibility.
For now, record the purchase of any asset you reckon you'll be using for more than twelve months in the fixed asset rather than the arts and crafts supply column. I'll be discussing writing off the cost of your arts and crafts assets in a subsequent article in this series.
I record the participant fee of any arts and crafts classes I attend in this column. I break education out separately because it substantiates some of my travel and M&E expenses. There are years I don't have the chance to attend any classes. In that case, I don't include the column on my spreadsheet.
M&E (Meals & Entertainment)
This category includes any arts and crafts business-related meals or entertainment. It's important to break this category out separately from travel as M&E is allowed at 50% rather than 100%.
In my experience as a CPA, this is one expense category for which my clients miss the record-keeping mark. First, you have to make sure the expense qualifies as M&E. Meals have to be incurred by yourself either when you are in arts and crafts business travel status away from your tax home or if you incur reasonable feeding or entertaining expense with clients/legitimate business contacts and you discuss business either before, during or after the M&E event.
An example of unreasonable would be renting a skybox for a sporting event rather than purchasing tickets on the arena floor. If for some reason you do this (I've never had an arts and crafts client that did) you can write off 1/2 the cost of regular box ticket instead of what you laid out for the skybox.
Additionally, to comply with substantiation requirements, you have to notate the Four Ws of the expense: who, when, where and why. I usually write this on the back of the credit card receipt from the restaurant while I am settling my bill. For example:
WHO: Gallery Owner ABC
WHEN and WHERE: This is usually evident from the credit card receipt. Otherwise, notate the when and where on the receipt.
WHY: With the 'who', the big deal about substantiating this expense. For example, 'discuss placement of my artwork in the owners' gallery'.
It doesn't take but a second, but for some reason my clients regularly fail to do it. It's not embarrassing to do this in front of a client or business contact. It shows that you are a savvy business-person that has a handle on how to effectively run a business.
The next page in this series of articles wraps up the rest of the expense columns (travel and misc)and recaps using a spreadsheet to organize your arts and crafts business expenses.