My clients often ask me for advice on how to handle their business expenses. How to do it the right way is important to them for three reasons:
- Entering transactions into a small business accounting program such as QuickBooks: I'm always happy when clients use a computerized system to organize their arts and crafts business income and expense. This is because it gives the owner of the arts or crafts business the ability to run profit and loss statements and other accounting reports frequently - providing an early warning if revenue or expenses are out of whack.
- Making sure expenses are written off properly: Some costs of doing business can be written off immediately and some have to be expensed over time. In addition, just because you've made a cash payment, it doesn't necessary follow that you have an expense for your arts or crafts business. For example, when make a payment on a loan the principle portion of the payment is not a business expense - only the interest portion.
- Checking that business expenses aren't inadvertently omitted: You can't write off any expense that is personal in nature expenses. However, you have to make sure to include any legitimate business expense as a deduction against gross receipts. If you don't, you'll have an inflated impression of how well your arts or crafts business is doing. You'll also be paying more in taxes then necssary.
Three Major Expense Categories for Arts or Crafts Businesses
These categories are not unique to arts or crafts businesses. However, the expenses contained in each can certainly differ from other types of business. They also will vary depending on what type of arts or crafts business you operate. For example, if you don't travel to craft shows out of your local area, you probably won't have a significant amount of travel expense.
- Cost of Goods Sold: If you make an arts or crafts product you can deduct the costs you incur to make it from your gross receipts. Keep in mind you also must keep track of any inventory you carry from year-to-year, donate or use personally.
- Sales: You'll have sales expenses if you employ sales representative or outsource this function to contractors. For example, many arts or crafts businesses pay individuals to represent them at craft shows outside the area in which they are willing to travel. It's standard to pay these reps a percent of the sales they make. Depending on the arrangement with the rep, the business may also be responsible for the rep's mileage back and forth to the craft show and meals.
- General and Administrative: These expenses aren't directly tied to any particular item or product line - for example shop or office rent, telephone expense, business licenses, postage and office supplies. Salaries and wages for employees that aren't involved in making the product are general and administrative expenses too.
Expenses that Are Never Deductable
Finally here are some expenses that are never deducted regardless of your type of business: dues paid to business or social clubs, lobbying expenses, penalties or fines you pay to any government agency and political contributions.
If you operate as a sole proprietorship, charitable contributions made by your business are not deductible as a business expense although you can deduct them on your Schedule A. And, don't forget - sales tax you collect from your customers is not a business deduction. However, sales tax you pay for expenses related to your arts or crafts business is.
