Finding out that your tax return has been selected for examination is never a pleasurable experience. Even those using professional help worry they may have inadvertently screwed up. Since you file a business return for your arts or crafts business, you have the additional concern of worrying about business records as well as personal. Here are my tips to managing your arts and crafts business records and expenses so that you’ll consider an audit a minor irritation rather than a horrifyingly stressful event.
1. Keeping Good Records for Your Arts and Crafts Business
Records (aka source documents ) are all those paid customer invoices, paid vendor bills, business bank statements or any other documents substantiating your arts and crafts business income and expense. Make sure you can prove figures on all lines of your tax return with verifiable, complete records.
One problem my clients complain about is those cash register receipts that fade with time. They are vexing, however most stores do use them. You can't collect a bunch of fading receipts in a file and hope they'll be good enough in the event of an audit.
Here’s how to handle that problem: copy them two or three per page – however many that will fit on the copier glass - and staple the original cash register receipt to the back of the copy.
2. Handling Travel and Entertainment Expenses with Care
I once had a client operating under the misguided impression that every meal from breakfast to a midnight snack was business related. In order to deduct travel, meals or entertainment expenses there has to be a bona-fide business purpose supporting the expenses. The expenses also have to be reasonable and ordinary for your type of business.
For example, it is reasonable and ordinary for an artist or crafter to travel around the country attending arts and crafts shows. In this case, the best evidence you can keep to prove the trip relates to a business purpose is proof you paid booth fees and the brochure handed out to attendees showing your booth location.
3. Tracking Vehicle Use by Using a Mileage Log
Regardless if you use the actual cost or standard mileage rate, you need to keep a mileage log. Just about every one of many clients bitterly complains about the imposition. You know what - I have to keep one too and it’s not that big of a deal after you get into the habit of keeping one. Get a notebook, keep it in your glove compartment and note your mileage when you use your car for business use.
At the beginning of each year, note the beginning mileage per your odometer. Then note the odometer reading at the beginning and end, every time you use the car for business. Add what the business purpose was such as 'visit with client XYZ' or 'mileage to store to buy office supplies', and you're done. It takes but a minute.
4. Inventoring Arts and Crafts Supplies Not Yet Used
Most of us buy our basic arts and crafts supplies in volume to get a discount. Regardless if you use the cash or accrual method to figure your income, any supplies left over at the end of the year are not a cost of goods sold expense, they are an asset until you use them to make a product. Make sure you reduce your cost of purchases by any supplies you have not yet used at the end of the year.
5. Using Office in the Home Prudently
This is a sole proprietor rather than a corporate issue for the many artists and crafters operating their business out of their home. To be able to write off the cost of your home office on the Schedule C, the area has to be used regularly and exclusively as your principal place of business. Just because you have arts and crafts supplies spread out in every spare nook and cranny of your house doesn’t mean you can write off your entire house.
6. Hiring a Competent Tax Return Preparer
A good preparer won’t blindly enter figures on your tax return. They will ask you questions about your business and follow up on answers that appear unusual or non-deductible. They won’t just blindly use the same dollar amount as what was on your tax return last year because it looks good.
If it doesn’t appear your arts and crafts business generates enough business to support your standard of living they should follow up on this and ask how your are covering your personal living expenses. Ditto if it appears you really have an arts or crafts hobby rather than a business. Remember, while the person doing your return signs it as the paid preparer, you are signing it as well, attesting to the fact that the figures shown on it are accurate and in accordance with tax code.
