If you are engaged in the production of art and you sell that art for money -- profiting from that endeavor in the process -- then you must usually claim that profit on your income taxes for the year. The process of creating and selling art for money constitutes a business like any other, and is subject to the same tax regulations as any other for-profit business.
General Reporting Requirements
If you produce art as a sole proprietor, there are no particular additional reporting requirements. File an individual income tax return each year by April 15th, unless you file for a deadline extension. If you itemize deductions, you also need to file a Schedule A, to account for the itemizing of deductions. If you have business expenses, fill out a Schedule C, Profit or Loss from Business.
Reporting Income From Art
The IRS taxes you on your net gain from the sale of your art, after expenses. Therefore, it behooves you to keep careful track of the amount of money you spend on everything related to producing, marketing and selling your art. You can generally deduct the cost of art supplies, studio rental, a home office, and anything else you use directly in support of your art business from your earnings, using Schedule C. The instructions for Schedule C walk you through subtracting your expenses from your gross sales. The more expenses you document, the lower your tax bill to the IRS will be.
Hobby Loss Rules
If your art income is irregular, or the amount of income you take from your art is very low, you should familiarize yourself with the IRS's hobby loss rules. If your art production represents a bona fide business endeavor, you can deduct business losses against your income for the year. However, in order to do so, you must show that the business actually shows a profit in three out of the last five years. If your art business has not done so, you may not be able to use the losses from your business to offset other income. In this event, the IRS looks closely at the overall circumstances of your business, the effort and professionalism you put in it, and whether you have changed your methods in the effort to become more profitable.
Deductions for Hobby Activities
If your art business represents a hobby under IRS rules, and not a profit-making enterprise, you do not use a Schedule C to report your expenses. You may be able to report expenses on a Schedule A, however, as miscellaneous itemized deductions. However, you may not receive any benefit from doing so if your overall deductions amount to less than the standard exemption for the year. As of 2011, the standard exemption was $5,700 for single taxpayers and $11,400 for married couples filing jointly.
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