If you operate as a sole proprietorship, report your arts and crafts gross income in Part 1 of the Schedule C. Calculate it by subtracting your cost of goods sold from your arts and crafts business revenue.
Even if you hire an accountant or tax preparer, it's a great idea to know how to do this calculation. Organizing your books and records can serve to reduce your year-end accounting fees. Additionally, as an arts and crafts business owner you really should have at least a rudimentary understanding of how income and expenses affect your business net income and business taxable income.
Defining Arts and Crafts Gross Receipts
Gross receipts is all the money you’ve earned selling your arts and crafts products. Interest income on your arts and crafts business checking account or any other type of income you’ve made that’s not related to selling your arts and crafts products is not considered gross receipts. It’s other income, which I discuss later in this article.
Clients often wonder if they should include sales tax with gross receipts. I’m indifferent on this topic. If it’s easier for you to include sales tax collected from customers as gross receipts, make sure you also deduct it as an expense.
Explaining Arts and Crafts Sales Returns and Allowances
These two items are technically revenue even though they reduce your amount of gross receipts. In accounting lingo they are called contra-revenue items (just in case you’ve heard your accountant use that phrase and you weren’t quite sure what it meant.)
An arts and crafts business will have sales returns when customers decide they made a mistake buying your product and return it for a refund. Depending on your business’ return policy, you might not accept returns – that totally your prerogative.
Allowances are discounts you give to customers. For example, you're exhibiting at an arts and crafts show and you give a customer with a big order a 10% discount on their entire purchase. Record this on your books as a sales allowance.
Figuring Arts and Crafts Business Net Sales
This is the easy part. Gross receipts less sales returns and allowances = net sales. It’s entirely possible for gross receipts to be the same dollar amount as net sales. So don’t worry about your tax return looking weird or raising ‘red flags’ should this be the case.
Net sales is reflected in line 3 of the partial Schedule C shown at the bottom of this page.
Calculating Cost of Goods SoldCost of Goods Sold (COGS) reflects every direct expense you incur making your product. This includes the labor cost for your workers assembling the product, materials and supplies and miscellaneous other costs that directly relate to crafting the product from start to finish.
Definition of Arts and Craft Gross ProfitAnother easy calculation. Gross profit = Net sales less COGS.
Dos and Don’ts for Arts and Crafts Other IncomeInclude any other money your business made that is not related to selling your product in this section of the Schedule C. Here are some examples:
- Interest or dividend income on company investments
- Profit when selling a company asset you no longer need like a flex shaft, pottery wheel or loom.
- DO NOT record loans you or anyone else made to the company as other income. Loans are not income because you have the obligation to pay them back.