Friendly Octopus by Meg Lyman

One of the biggest business questions I’ve pondered recently is: “Hobby or business?” The IRS lets you count art income (and loss) as part of your overall income, provided that you can prove it’s a legitimate business venture. But why do it? And when? Here’s what I’ve learned so far.

• If you don’t make a lot from art, it’s counted as a hobby. You don’t necessarily have to claim your income, but you can’t deduct your expenses.
• If your art income gets large enough, you’ll have to start paying taxes on it eventually. They’ll find you.
• If it is your intent to grow your art business into a profitable endeavor, and perhaps make it your only source of income, it’s good to get the tax part started a year or two beforehand.
• This is why: switching from an undocumented hobby to an official business when your business is still starting, struggling, and in the red means you can deduct your expenses from your day-job income, using a Schedule C.
• Eventually you’ll make a net profit each year, at which point you’ll have to pay more taxes than you did with just the day job, and it’ll be beneficial to ditch the Schedule C and incorporate.
• In order to accomplish all this, you’ll need several things. First, excellent records for at least the past year. Second, proof (if the IRS demands it) of intent to increase profit. Finally, a good accountant.

I have done those last three things and decided to make the switch for 2007. I started keeping detailed records in mid-2006, so I have all of 2007 documented. The records include sales, expenses, training, travel, and mileage. My “proof” of intent includes art show attendances and a shiny new business license. I got it earlier this month. It doesn’t do much of anything except make the business legitimate in the eyes of the IRS, but it only cost me $85.

I’m still really new at all this, but if anyone has questions, fire away!