17 – Taxes for Artists with Hannah Cole of Sunlight Tax
Hannah Cole - Sunlight Tax

Laura and Nikki introduce you to Hannah Cole, an artist, educator, and founder of Sunlight Tax. Hannah educates fellow artists about taxes and money because she believes creative people are the empathy builders of our culture and when they’re financially secure and empowered, they can make bigger, bolder work that will fix our broken world.

Her flagship program is Money Bootcamp, a membership which builds financial skills and fosters a healthy relationship with money and power so that artists can get back to changing the world with their important work. She teaches practical valuable life changing money skills in an art-centric and approachable style.

In this episode, we begin by hearing Hannah’s Startist story, and then dig into some really useful tips artists can use as you work through your taxes this season! Although the general information she provides will apply to many artists, please note her tax expertise is focused on US taxes.

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a Topics discussed

  • Hannah’s Startist story (1:59)

  • Balancing art and taxes (6:39)

  • Managing her productive time (8:44)

  • About Hannah’s art (10:01)

  • Tax advice for artists (13:42)

  • How the IRS identifies businesses vs hobbies (14:22)

  • Tracking expenses and income (21:36)

  • Separating business and personal finances (23:16)

  • Should you become an LLC? (27:59)

  • Deductible expenses (29:31)

  • Can artists write off donations of art? (42:39)

  • How much money do artists need to set aside for taxes? (45:50)

  • Profit First (46:52)

  • Sales tax (49:10)

  • Hannah’s message to artists (56:28)

Laura

0:07
Hi this is Laura.

Nikki

0:08
And this is Nikki with the Startist Society, inspiring you to stop getting in your own way and start building an art biz and life that you love.

Laura

0:17
We are artists who believe strongly in the power of community, accountability, following your intuition, taking small actionable steps and breaking down the barriers of fear and procrastination that keep you stuck.

Nikki

0:31
Follow along with us on our creative business journey as we encourage you on yours.

Nikki

0:39
Laura, who are we talking to today?

Laura

0:42
Well today we’re talking to Hannah Cole. Hannah is an artist, tax expert and the founder of Sunlight Tax. She educates fellow artists about taxes and money because she believes creative people are the empathy builders of our culture and when they’re financially secure and empowered they can make bigger, bolder work that will fix our broken world. Her flagship program is Money Bootcamp, a membership which saves artists money, builds their financial skills and fosters a healthy relationship with money and power so artists can quit being distracted by being broke and disorganized and get back to changing the world with their important work. She teaches practical valuable life changing money skills in an art-centric and approachable style. Although the general information she provides today will apply to many artists please note that her tax expertise is focused on US taxes. Welcome to the Startist Society, Hannah, we’re so glad that you’re here!

Hannah

1:40
Thank you so much for having me, I’m really honored to be with you both.

Nikki

1:44
We’re super super excited to have you here! So we want to get started by talking about your Startist story. We want to talk about which came first, the art or the taxes. Can you tell us how you got started with each?

Hannah

1:59
Sure. So I’ve been an artist for 17 years and so art definitely came first. I knew I wanted to be an artist from the time I could hold a crayon.

Nikki

2:08
Same.

Hannah

2:11
And I’ve been a professional artist, I graduated from my MFA program in painting in 2005, so that is a while ago… and yeah I’m still active, I didn’t start Sunlight Tax and stop being an artist, you know; just a couple weeks ago I went and picked up my work from The North Carolina Museum of Art where I had had a show and curated something a couple months ago and so I’m in the trenches for sure. And taxes came very organically. Honestly, just like as an artist, because I operate the same way most artists do, which is with many different threads and strands, you know like a little bit of commission income, a lot of painting sales – maybe not as much as I’d like – commissions, grants occasionally and then maybe like gig work or even teaching income. You know I had all those different threads like many of us do…

Nikki

3:07
Right, like we all do.

Hannah

3:09
And I felt really confused about how to put them all together, how they interacted with each other and I could not find an accountant, really, who thought that I was a valuable enough client to sit down and actually talk to me about it. And so I had really miserable experience with accountants when on occasion I could afford to go to one and so I just got mad. I would read books, I would learn as much of the law as I could. I got myself as educated as I could and then at a certain point like talking to accountants I realized like, oh I actually know the rule as well as they do, but they’re telling me the most conservative possible answer just to cover their own butt. They’re not actually familiar with what a working artist’s life looks like and they are not able to speak to my situation because they really have no idea what a valid artist’s deduction would look like or what kind of my daily life looks like or what counts as a true work expense for an artist. So that was organic and ultimately the kind of decisive moment in my life. I had a day job as a project manager at an interactive design firm in New York City, a job that I really loved honestly and my boss was great, he hired really talented people. But they were not keeping their books up-to-date and they didn’t really have great accounting practices or know enough about the financials of the business and one day I lost my job because the company collapsed.

Nikki

4:45
Oh no! And then you realized, oh wait, this financial stuff really is important!

Hannah

4:52
Yeah! I’m out of work now because the business I was working for wasn’t an on top of its financials and they didn’t realize that it was completely out of money and so that was a real crystallizing moment and so literally I was out of work and I was like, well what am I going to do now? And so at that point I was like, well I know the business I should start and so I just went back to school for accounting. Here I am about a decade after that and Sunlight Tax is the result.

Laura

5:22
Amazing! I mean you sound a little bit like Nikki and I in that you are both left and right brained. So do you feel that that’s really helped you in both sides of your business?

Hannah

5:33
Oh definitely. Yeah, first of all I just want to say that I think most artists are really, I mean I don’t subscribe to the idea of the artist stereotype where we’re you know completely one-sided beings who aren’t capable of like tying our shoelaces or showing up on time and I think artists do amazing things all the time.

Nikki

5:54
Absolutely.

Hannah

5:54
But yeah for sure, I’m definitely like you know I love using my brain in all the ways, so I’m really happy to operate left brain/right brain. I’m also, if you look at my paintings, it’s really obvious that I’m a little bit OCD and detail oriented.

Nikki

6:10
Yeah, for sure.

Hannah

6:12
Which is exactly what you need in taxes, so it’s actually a really good fit for me personality-wise.

Nikki

6:19
So how do you balance those two very different types of businesses, like even though the tax side is geared towards artists it’s definitely a very different kind of business. How do you make sure each area gets the attention and prioritization that it needs?

Hannah

6:35
Yeah that’s a great question and it’s a hard one.

Nikki

6:37
Because I’m struggling with that all the time.

Hannah

6:39
I know! Well I mean it’s already hard to balance your life with your work to begin with and then artists it’s even harder because sometimes the financials are so grinding for us. My trick is to work seasonally, so I don’t try to integrate the two at the same time. I just have my tax season and then I’m flat out just working on taxes the whole time. My whole brain is in it. I’m 100% invested in that and I’m not losing any cognitive time from contact switching between you know art and taxes. I think my nerd is showing here, but…

Nikki

7:19
Yeah, but your business really lends itself to that because taxes definitely have a season. Although there are things you have to do throughout the year, it’s minimal the rest of the year compared to tax season whereas some of us are balancing businesses that you can’t separate like that.

Hannah

7:37
You can’t do all your work for the year and in three/four period.

Nikki

7:41
Right. Ooh I wish I could.

Hannah

7:44
It was one of the things that attracted me about taxes that I was attracted to that seasonal thing because it personality-wise I just find it so much easier to just like close the door on taxes and then go to the studio and now i’m an artist.

Nikki

7:57
Oh yeah. But you have a year round program, right?

Hannah

8:02
I do, yes, called Money Bootcamp.

Nikki

8:05
So how does that work?

Hannah

8:07
Well I will tell you it’s basically as my business is growing it’s getting harder.

Nikki

8:11
Yeah

Hannah

8:12
I did hire my first two employees this year so now part of…

Nikki

8:16
Congratulations!

Hannah

8:17
Thank you. It’s a big move. Part of hiring them is helping me actually stay in the studio, like it’s a really big priority for me to stay an artist not to be a former artist.

Nikki

8:31
Yeah

Hannah

8:32
So I hired an operations manager, so you know we’ll see, but that’s my hope is that I get to stay an artist.

Nikki

8:41
Well, we’ll check back in with you after May 17.

Hannah

8:44
Yeah right. I mean I’m very aware of kind of times of day that I’m really productive or good with certain kinds of work and so I do my hardest, most concentration requiring work in the beginning of the day and then my energy tends to sort of dissipate and I get more distracted towards the end and so what I’ll tend to do is I’ll do whatever is my primary work thing in the beginning of the day then after that, I don’t even check email until like after 3pm because I find email just like a total time suck.

Nikki

9:16
Oh, I wish I could do that.

Laura

9:20
I still check all during the day ,i’m really bad about that so…l

Nikki

9:22
Let’s work on that.

Hannah

9:23
Someone said to me once, email is somebody else’s to do list for you.

Nikki

9:29
Yes, it’s totally that, for sure.

Hannah

9:33
It is. So I have to be really disciplined about email for sure. But in my studio time, a lot of what I do is I’ll do my studio work like 9 to 3pm and then 3 to 5 I do Sunlight Tax stuff. So I stay in it year round, really but that’s my secret.

Nikki

9:53
Okay so we definitely want to get into talking about taxes for artists, but before we do that I want to spend just a little bit of time talking about your art.

Hannah

10:01
Cool.

Nikki

10:01
So I took a deep dive in it a couple days ago and looked at everything on your website and all the social media. And I want to read just a little bit from your artist statement from your website about what you choose to paint.

Hannah

10:15
Sure.

Nikki

10:16
So you said “I paint the daily surroundings that normally go unnoticed. A glimpse of pavement, the pattern on a drainage grate, the weeds peeking through the crack in the sidewalk.” I love that, and when you look at your work, it’s not just a glimpse, it’s an intense study. Because like you said, definitely you can see a little OCD in there. It’s really, really detailed. And yet, it’s kind of a little bit loose and detailed at the same time, which I think is really fascinating. But I want to hear a little bit more about why you paint what you choose to paint.

Hannah

10:54
Hmm. Well, I think some of the magic of art to me is about finding beauty where no one else does. Showing people things they thought they knew and you know, like giving someone the experience that well maybe you haven’t really looked. You know, because that deep looking is kind of that’s our realm as artists or at least iss one of them.

Nikki

11:17
And I I watched your video about slowing down to look, which was brilliant. And we’re going to share that in the show notes. Because I think that really speaks to what you’re saying right now.

Hannah

11:29
Mm hmm. Yeah, in that video – that was from a PechaKucha talk that I gave, you know, one of those six minute 20 seconds per slide. And I did one of my paintings, there’s a photo of the whole painting, and then a close-up and then a really detailed close-up. And it’s like three different, completely different things ’cause there’s so much detail in there. It’s a very OCD painting for sure. I actually did have an OCD when I was a little kid. So I’m not just saying that randomly. It’s kind of true. It’s mostly under control these days, but kind of my painting is my outlet for it.

Nikki

12:08
I love it. I love it. And I mean, I’m kind of the same obsessive detail.

Laura

12:15
But Hannah, I love your work. I’m attracted to detail as well, which also I think goes well with numbers.

Hannah

12:21
For sure.

Nikki

12:23
Laura’s background is in finance for major airlines. So she’s got that side too. And I used to work for IBM, so…

Hannah

12:33
That’s incredible, I love that.

Nikki

12:36
We both have that left brain/right brain thing. And like you were saying, I think that everybody does, but I think a lot of artists traditionally don’t develop that side as much. Not that they don’t have it, but they don’t focus on it.

Hannah

12:51
Yeah, yeah, I find it, I was told by some people in art school like not to do that. And I have to tell you, I am such an easygoing person. But the one thing that makes me not easygoing as someone telling me what I can’t do.

Nikki

13:05
Oh, hell yeah.

Hannah

13:07
Oh, hold on. So, it’s almost like an instruction for me to do exactly what I was told not to do. So I think it’s part of why I’m really into like teaching women how to have like, women and femmes, how to have economic power, because it’s like, there’s nothing that makes me more angry than the patriarchy being, you know, the sort of idea that Oh, you’re not supposed to have power. And I’m like, oh, okay, hold on.

Nikki

13:34
Fuck that!

Hannah

13:37
Exactly, exactly.

Laura

13:39
So let’s get into taxes.

Hannah

13:42
Sure.

Laura

13:42
You talked at the beginning a little bit about how you got into it, because really, you weren’t having great experiences yourself. And so you started offering that, especially for artists, you know, coming from that artist perspective. So let’s get into some advice for artists on how to get their taxes done. We’re coming up on that season. And whether it’s sort of hiring someone like you or doing it themselves, there are things that you have to know, and everyone wants to know what they can deduct, for example. So what are the basic things that artists and other creative business owners need to know about their taxes?

Hannah

14:22
Sure. I think first and foremost, what artists really need to know is that, to get all the good stuff in the tax code, you have to be running a business, not a hobby. So that is the critical thing for artists to know. And what does the IRS mean when they say business versus hobby? There’s actually a really clear definition, which is, do you have a profit motive? A business has a profit motive, a hobby does not. A hobby can still make money. So you can run a hobby that occasionally makes money. But if you are not trying to make money, like explicitly trying to make money, then you are not a business according to the IRS. It’s really important that artists get comfortable with the idea of trying to make money. And I think, you know, what a lot of accountants don’t understand, and that is so clear when you are an artist, is that we develop all these bad cultural narratives around art and money. And how, you know, artists, we speak in very cagey terms about money, like I would never go to my gallery in New York and be like, Look, Irina – Irina is my gallerist there, Look, Irina like I want to, I’m gonna make my next show, I just want to make sure that it sells out. And, you know, like, what can I do to sell out the show? Is there like a size that fits over people’s couches really well? What’s a popular color? Is it blue? should I make all my paintings blue and shiny because that’ll sell better. I mean, I’d be kicked out of the art world for speaking like that, right? It would be crazy

Nikki

15:48
Even though we all know in the back of our minds that you want to sell out, and they want you to sell out, because we all wouldn’t exist, but we can’t talk about it.

Hannah

15:59
But you can’t say it out loud or you’re laughed at and treated like you’re not a real artist. You’re treated like your work is not as good, right? So, that whole idea of artistic integrity being at odds with profit motive is very damaging to artists, because what it means is that those of us who have self-perceived highest levels of integrity are the ones getting screwed by the tax code. So it’s really important. I’m not telling anybody to stop behaving like an artist, and like you speak to your curators and gallerists however works for you and works in that situation. I’m not saying to change that. But if you speak to the IRS, you have got to code switch, like you actually need to speak the language of oh, yeah, like, I’m trying to make money. This is to increase sales. This is my marketing, you know, and it tends to help if you know some of the language of business. I mean, not really hardcore language, but just like, this is a marketing effort. And you actually call it that, whereas the art would say to you never call it marketing.

Nikki

17:04
Right. So I just want to interject for a second. So, our audience is a bit mixed between fine artists, and even myself, I’m both fine artist and more of more designers. So we have a lot of like surface designers, and illustrators, and also fine artists, and I personally am doing both. So on the design side, it’s no problem talking about marketing. And talking about getting hired for specific jobs. So yeah, so we don’t worry about that too much. But I love the term profit motive. I’ve never heard that one before I listened to your last talk, which is how I found you. I mean, that’s a great way to think of it because you don’t necessarily have to be making a profit, but you have to be working towards making a profit.

Hannah

17:59
Exactly. And that’s a fine line distinction that’s really important. In fact, a lot of accountants don’t even get that. They think that if you don’t have a profit in several years, that automatically it means you’re a hobbyist, and actually the case law is very clear that that is not true. A lot of accountants are not reading the artist case law like I am, but it’s not true. The fact is, and it’s supported in these tax law cases with artists who had a lot of losses that in fact, it’s hard to be an artist that, yeah, it can be really hard, you can actually put in maximum effort and still not make a profit. I would like to change that too, but..

Nikki

18:37
Yeah.

Hannah

18:38
But it’s possible to do everything you can to make a profit and still not. And it doesn’t mean you don’t have a profit motive. So that second word motive is key.

Nikki

18:47
But when does the… when does the IRS start looking at you and going, look, you haven’t ever made a profit? This isn’t a business. Do they do that?

Hannah

18:57
They do. Yeah, they do. I mean, the whole reason that they go after people who have losses is because a loss creates a tax shelter. So it is something that a savvy taxpayer can actually abuse. A lot of artists have no idea they’re walking into that trap, but they are. You know, if you have a $5,000 loss in your painting practice and you have a day job where you earn $50,000, you will not pay tax on $50,000, you’ll pay tax on $45,000. The loss is actually subtracted from your other taxable income. So that is called a tax shelter, doing that. And so if you use a tax shelter like that, it’s meant, generously, to help you stay in business through hard periods. And in the startup phase, which is known to be difficult and requires money before your business generates its own money. But you know, if you’re using a tax shelter every year for 20 years, they’re gonna look. They’re gonna ask, you know? And it’s a legitimate question. If you’re running a business that never makes a profit, it is a legitimate question to ask, do you have a profit motive? I mean there’s nothing more profit motive proving than having a profit. The difficulty comes when you don’t have a profit.

Laura

20:12
Yeah.

Hannah

20:13
Yeah. But there are things that you can do to prove it, so like, an artist really would do well to document all the things you do, basically everything you do you hate, document that because that’s proof that you’re a business. Hobbyists don’t do marketing. Hobbyists don’t do networking. Hobbyists don’t meet with accountants and lawyers. Hobbyists don’t have an advertising campaign or budget or maintain a MailChimp mailing list. So all that stuff is proof of your profit motive.

Nikki

20:41
Okay, so even the non-money stuff can prove that you’re trying to make money.

Hannah

20:49
Absolutely! Yeah are you marketing? Are you advertising? Are you applying for grants? Are you corresponding with people in a position to sell your work?

Laura

21:01
So if you were to ever be audited you would be able to prove all of those things basically.

Hannah

21:05
Exactly, you would show those things.

Nikki

21:08
Okay that’s interesting because I would have thought to just show what I’m spending and when I’m bringing in, not the other things that prove that I’m trying.

Hannah

21:18
Yeah it’s the effort, you wanna prove the effort. And of course if the only effort you’re showing them is the money that is not coming in successfully, you’re not gonna win. I want you to win.

Nikki

21:29
Well first you want us not to get audited.

Hannah

21:33
Ideally, though you can’t always control that. But yes.

Laura

21:36
So let’s talk a little bit about tracking expenses and income. So we don’t want to be audited, that’s for sure, but if we are we need to be making sure that we’re doing all of these things – sort of crossing our t’s dotting our i’s and what do you recommend, Hannah, for that.

Hannah

21:49
Well first of all the basic rule is you need a receipt. So the IRS has a right to look… the whole thing is like if you’re an employee somewhere if you have a w2 then your employer reports what your wages are and you confirm that report by sending in your copy of your w2 that they already sent to the IRS. If those two documents match in the IRS computer, those people never get audited. There’s absolutely no need because you have a third party verification built in. Now businesses, not just artists but any business, is self reporting, right? We’re saying I spent this, I promise. I promise it’s real. Just think about that, they have to check and it’s not because you’re evil or terrible or doing things wrong, it’s just legit that they should check up on some portion of us right. So your proof that you actually did what you said you did is your receipt. So you want to keep receipts generally. Another thing that I think is the quickest way to calming down your finances as an artist is to keep a separate bank account for your art practice. That alone will help your tracking unbelievably because…

Nikki

22:58
I’m so bad at that. I set up a separate account, but then I buy things abd mix personal and business. It’s terrible. Bad habits.

Hannah

23:08
If you want me to tell you something scary to make you stop doing that, I can do that.

Nikki

23:12
Oh yes, do. Tell us something scary. Scare us!

Hannah

23:16
It’s not my favorite way to go but, so if you mix your business and personal stuff, for one thing you’re showing you’re not a business, right? So like, businesses, like a standard business practice is to have business finances separate. So it’s part of that proof I was talking about before, is actually using a separate business bank account. But furthermore, for liability stuff, like those of you who have started LLCs. I don’t know if you know the function of an LLC, but it is to create a legal shield in between you the person and you the business and it’s great, what it means is if somebody sues you over the course of your business, they can successfully sue you for your business assets but it stops at your personal assets and most people’s personal assets are where their wealth lies. So personal assets are your 401k ,your home, your car, your kids college fund, right? Those aren’t business assets, so an LLC creates that shield that legal liability protection for you. If you mix personal and business accounts, if you spend money out of your business account on groceries and rent or do business expenses out of your personal, a court of law can actually subpoena those bank records and they can invalidate your LLC. So what it means is you get sued you can actually get your personal assets taken now because you have failed to uphold the separation.

Laura

24:44
Oh wow.

Hannah

24:45
That separation is help, it’s proof that you really are running a business that is separate from you the person. Was that scary enough?

Laura

24:53
So I actually formed an LLC this past year and I do have a separate credit card I’m trying to isolate all my purchases to one credit card and I have a separate bank account, so I’m trying to do that but when you talked about receipts and keeping receipts like I might go purchase supplies on Amazon for example, and I use that credit card for it but am I supposed to be like downloading and keeping all of those receipts somewhere?

Hannah

25:17
Yeah I mean a digital receipt is still a receipt, so I mean what I recommend to people is that you just keep that, you know a file air quotes a file in your email where you just put all the receipts for that year, so as soon as you get that confirmation from Amazon that email confirmation receipt, just stick it in that 2021 taxes folder in your email, then you have it, then you have your receipt.

Nikki

25:41
So what if you’re a sole proprietor, which is what I am, so I have not formed an LLC and there’s some expenses that have to be mixed because half of my house is my workspace. I have a home office, home studio, so there’s a lot of things that I pay for that you know like for my taxes I have 45% of my home is my office, so there’s really no way to split some of that stuff.

Hannah

26:13
Yeah and that’s okay. You’re bringing up a really good point. There are some things that are mixed between business and personal, so where you can separate it you want to separate it.

Nikki

26:23
Supplies, I could be better about separating, for sure.

Hannah

26:27
Yeah, so for like your home office, you know you’re going to pay your mortgage, you’re going to pay your rent out of personal as you should, that’s the proper thing to do, but you actually on your tax return get to take a portion of it as a business expense, so that’s okay and that’s a sort of understood category where there would be, you know, you’re not going to split your rent on two different cards, typically.

Nikki

26:48
But art supplies and office supplies should definitely be separate.

Hannah

26:52
For sure, for sure yeah. Well an important thing to know is there’s a whole category of items that you might have in your tax return called listed property and that’s the accounting term for something that’s mixed use between business and personal. There’s this whole group of things, like cars typically, camera equipment, computers, where you actually say what percentage of your use of that item is for business and what percent is for personal. You’re acknowledging upfront this whole thing isn’t a business expense, but this part of it is.

Nikki

27:21
Right, a good example of that is my internet is the same as my cable tv.

Hannah

27:29
Totally, yeah. Yeah, your phone, I talked to tax clients all day every day in tax season but that doesn’t mean I don’t call my mom on the same phone, so I have a percentage of that phone for business and a personal…

Nikki

27:44
Is there a standard percentage or do you just kind of guess?

Hannah

27:48
No, because it’s based on what your actual use is, so your use could be totally different from mine. You know I’m chatting for eight hours a day on the phone and you might not be…

Nikki

27:59
Only when Laura calls me. So back for a minute, back to the LLC. Do you recommend that most people do that or…

Hannah

28:13
No, not necessarily no.

Nikki

28:15
How do you know when you should go from sole proprietor to LLC or any other kind of entity.

Hannah

28:21
Well, an LLC is a legal entity. It actually is not a tax entity at all. This is very confusing for people, I get questions about it constantly. So an LLC is about liability protection. I told you what the benefit is, it’s shielding your personal assets from your business in case of lawsuit. So basically it’s about your liability risk. Like how likely are you to be sued? That’s why you get an LLC.

Nikki

28:45
Right

Laura

28:46
Yeah, cuz when I filed my taxes this year I still filed my taxes basically the same way I did before even though I just formed the LLC, it all wraps in together right?

Hannah

28:56
Yep, that’s right. And an LLC is actually called, the IRS calls an LLC a disregarded entity, because they literally disregarded it. It has no bearing on your taxes.

Nikki

29:10
All right, interesting.

Laura

29:13
So what are some of… you mentioned office supplies, art supplies. We’ve talked about a few categories and cell phones and perhaps utilities and things for your space, but what are some of the different things that artists should be deducting.

Nikki

29:27
Especially the ones that they don’t even realize they can deduct.

Hannah

29:31
There are some really good ones that people don’t realize. The IRS rules say that you can deduct any expense that is ordinary and necessary, that’s irs wording, in the course of business. So what that means is if you kind of take a look around to other businesses like the one that you have – and you can look up the ladder and I highly recommend you do so what is Kara Walker deducting? Like you might be kind of operating at a very minimal level as an artist and you might not like, go out and have a photoshoot and professional headshots taken, but Kara Walker probably does, therefore that would be fine as an ordinary and necessary business expense. So I do recommend that people don’t just look at people exactly like themselves, but kind of look up the ladder in the art world to see what, you know, someone showing in museums might be doing.

Nikki

30:22
That’s a great tip.

Hannah

30:24
Also, a lot of categories that people don’t realize are deductible. One is meals, meals is a great deduction and mileage is another, both of them.

Nikki

30:33
So when can you deduct a meal?

Laura

30:35
Yeah, it’s not just like, I’m going out to lunch today, I’m deducting it, right?

Hannah

30:38
No. So basically, a meal is deductible when you are meeting with someone over food or drinks. And yes, alcohol is fine. In fact, it’s like practically the American way of doing business.

Nikki

30:54
Thank the God I don’t believe in for that!

Hannah

31:00
How many deals in the art world happen over cocktails or beers, you know? I mean, it’s like…

Nikki

31:07
I mean, this podcast wouldn’t happen without bourbon.

Hannah

31:12
Nice.

Laura

31:13
And there it is, folks. We have to get one mention of bourbon.

Nikki

31:18
I know, I just realized after recording the last one, I didn’t say bourbon at all.

Hannah

31:22
Oh, come on.

Nikki

31:24
Bourbon, bourbon, bourbon.

Laura

31:26
You’ve made up for it.

Nikki

31:28
All right. So let’s get back to actually talking about what we can deduct. Bourbon.

Hannah

31:32
Yes, if you share it with a friend. So it has to be…

Nikki

31:36
…a friend that we talk business with.

Hannah

31:38
Exactly, exactly. So you have to meet with someone over drinks or a meal for some business purpose. And you actually, the important thing is because this is such an abusable category, and yes, highly audited for that reason. A receipt is not enough on its own. So you actually need to keep the receipt and also document who you met with and what the business purpose was.

Nikki

32:02
Oh, right.

Hannah

32:03
You can just jot that on your calendar as you make the date. And then if you keep the receipt, you locked up that requirement.

Nikki

32:09
Perfect.

Hannah

32:09
So yeah, you know, if you’re meeting with a colleague to talk about a collaboration you want to do, if you are meeting with a gallerist to propose a new show, um, taking a studio assistant out for lunch as a thank you, those things are all deductible as meals.

Nikki

32:25
And then also the mileage going to those meetings, right?

Hannah

32:28
Absolutely. Yeah, so mileage is a really great actually really big deduction that a lot of people don’t realize…

Nikki

32:35
Yeah, it adds up!

Hannah

32:35
It adds up so much. There’s two different rates you can use for mileage. You can either use actual expenses, where you actually have to document, keep all your gas receipts, etc, etc. No one ever documents that stuff well enough, and then you only still, like I said, that listed property thing, you only get to take that proportion that was actually business travel. The better deduction for almost everybody is the mileage method. This is a government set rate. 56 cents per mile this year, that tends to change every year a little bit, but it’s close to 50 cents a mile. Yeah. Yeah. And that rate is incredibly generous. It’s based on the average US fleet vehicle, so it includes depreciation. It includes gas, repairs, insurance, wear and tear. And, you know, if you drive anything fuel efficient or small, then you’re getting a bigger deduction than what you actually paid. The average US vehicles are pretty big. But you have to keep a mileage log in order to do the mileage method. That’s the requirement. So don’t skip the mileage log.

Nikki

32:39
Right. And I use an app called MileIQ.

Hannah

33:43
Cool, that’s the one I use, too.

Nikki

33:45
Oh, yeah. It’s great. It’s on my phone, and it automatically tracks mileage. And I don’t know how it knows that I’m driving and not riding my bike, but it does. And then…

Laura

33:59
Do you have a bike, Nikki?

Nikki

34:01
I do. It’s right here in my studio with me. And I ride it. But I love it, it’s like dating apps, you swipe one way for business one way for personal. And then it syncs with my accounting software, so that it keeps track of my mileage right in FreshBooks.

Hannah

34:22
That’s awesome. Yeah, basically, you should download a mileage app today, MileIQ or a different one. It saves so much money. It’s really great.

Nikki

34:32
They’re great.

Laura

34:33
So you mentioned FreshBooks just now Nikki. And so when we’re talking about these deductions, and receipts and tracking things, so should people be doing this through some form of software? Do you recommend, Hannah or an Excel sheet or how should this be tracked?

Hannah

34:50
Great question. You can do books in one of two ways. You can do a really simple method using just a spreadsheet, like that still counts as keeping your books. I actually in my Money Bootcamp program, I have a whole spreadsheet I developed which is actually my own artist spreadsheet with my formulas in it that tracks to the Schedule C deduction categories. So a spreadsheet is absolutely fine. It has some limitations, you can’t run reports. So you can’t see what your profit is in real time with it, you can make mistakes, which is, you know, it’s nice to use software because it will catch mistakes. And you can’t do more complicated things, like you can’t be running payroll or tracking inventory. So that’s kind of important to know is the limitations. Software is great, because you can do all those things I just said you couldn’t do with the spreadsheet. And the other magical thing about software is, once you open a separate business bank account, then you deposit all your business income into that one, and you do all your business expenses out of that, then the bank statements and/or credit card statements for a dedicated business credit card become the basis for your bookkeeping. So you can actually hook up an automated bank feed from that business bank account to your software. And it will actually pull in all the transactions. And then all you have to do is sort them, you just sort them into the right categories. That’s kind of the magical moment.

Nikki

36:11
Or if you’re bad, like me, you have the software, bring in all of your things because you’re not keeping it to one credit card or one bank account. And then then you go in and delete the ones that are personal and categorize the ones that are business.

Hannah

36:28
Well I think you’re illustrating right there with the magic is of keeping, you know, this is another of the magical pieces of keeping your accounts separate.

Nikki

36:34
This is “do as we say, not as we do”

Hannah

36:36
Hey, it’s taken me years to get where I am. And I’m where I am, because I made all the mistakes, including doing my taxes with a highlighter, like going through my personal bank statements with a highlighter trying to find oh, was that trip to Staples business or personal?

Nikki

36:53
Yeah. Yes. Yes, take Hannah’s advice. Don’t do what I do.

Hannah

36:59
Don’t do what I used to do, do what I do now.

Nikki

37:05
What other deductions are there that people don’t think about?

Hannah

37:09
Um, another really good one, still on the meals thing, is a per diem meals expense. So I was describing meals business meals where you meet with someone, anything that’s local has to be with another person to do business. But when you’re traveling on business, then you can be having your meals alone, because you can do a business trip by yourself. And the per diem meals expense is a really cool thing. It’s another government set average rate, and all you need to track is the number of days you were in that location and what the location was, and then you look up the government set rate, and then you can take that number as your meals deduction for the day.

Nikki

37:49
Oh, I think doing that wrong.

Hannah

37:51
It’s pretty cool. It actually, especially because artists tend to be so frugal, I often find with my clients that the per diem meals expense gives them a higher deduction than what they actually spent. So it’s one of those little…

Nikki

38:04
I’m pretty sure I’m not that frugal.

Hannah

38:07
It’s the bourbon.

Nikki

38:10
It’s the bourbon. No, I’m like that with food too.

Laura

38:17
So if you also have a day job, and let’s say that your business is on the side, can you do all these same deductions?

Hannah

38:23
Absolutely, you can. What’s important is you have an independent profit motive inside the business. So I will say this, side hustles are the great American way. There’s probably 10 businesses you could name right now that started as side hustles. And there’s nothing about that, that makes it not a business. So go ahead, totally fine. You just have to determine like, genuinely, do you have a profit motive? If the answer is yes, then absolutely, you get to do all this stuff.

Laura

38:51
Cool.

Nikki

38:52
What about things like workshops that you take, like if somebody signed up for your Money Bootcamp? All of those things are deductions, too, right?

Hannah

39:02
For sure, they absolutely are. Professional development counts for sure as a business expense, Money Bootcamp, for sure counts as business expense. Accounting, spending money on accounting actually counts as in this sort of beneficial zone of artist deductions, because it perhaps profit motive in and of itself. A hobbyist doesn’t meet with an accountant, but a business does.

Nikki

39:23
Right, right. That makes sense.

Hannah

39:25
Another one of those beneficial categories is advertising, because businesses advertise, you have to say you’re doing what you’re doing. Whereas a hobby doesn’t right, thoroughly advertise. So.

Nikki

39:35
Right, that makes sense. What are some other ones that people don’t generally think of? Ooh, reference materials, that’s one of my big categories.

Laura

39:44
Books!

Nikki

39:45
We buy way too many books, but they’re all but they’re all reference materials.

Hannah

39:50
Sure, reference materials are great. I mean, whatever you’re doing to keep current in your field is generally deductible as a research expense. You want to be a little bit careful with that category. Anytime you get greedy and try to take 100% of something you’re doing, where definitely some of it is personal, you can get caught easily. Okay, so if you take 100% of your tickets to movies, I’m fantasizing in COVID world about the world where we get to go to the movies.

Nikki

40:21
Remember movies? Remember leaving the house for movies?

Hannah

40:27
You know, so if you were to deduct every movie you ever went to that would not look okay. But, if you’re a filmmaker then some of that is definitely research, as is honestly your Netflix account as well. But I would just be showing a portion, some of it is personal.

Nikki

40:42
Yeah.

Laura

40:43
So it’s interesting when you’re talking about reference materials as a category, there’s that miscellaneous or other expenses section on the IRS form. And when I get there, I always never know how to fill it out. Like, do I put little things separately? Like if I took a big course? Do I put the course separately? Or do I call it all training? Or does the IRS care about that?

Hannah

41:02
Well you know what’s funny, is the IRS, as far as I understand, the IRS can’t actually see that, like the computer cannot actually see the broken out pieces in that category. They can only see it once they audit you and you show them the return, the physical..

Nikki

41:17
Oh, interesting.

Hannah

41:18
It’s really, it’s an odd thing.

Nikki

41:20
Strange, yeah

Hannah

41:21
There’s a little strategy piece that I use as an accountant there where I tend to keep things out of that category as much as I can. I tend to not want that category to be too big.

Nikki

41:30
Okay.

Laura

41:31
Oh, then I’m in trouble this year.

Hannah

41:32
Well, this is real fine tuned strategy. This is not you know, I mean, I don’t think a lot of accountants know that particular detail about how the IRS computers see the return. And I’ve seen, I see other accountants’ work, of course, most accountants do, because every person who comes to me I see their last tax return. So I’ve seen a lot of accountants just shove everything into that miscellaneous category. It’s not a great idea. Because if you have an enormous invisible $10,000 expense in that category, sometimes they might audit you just to see what it is. So.

Nikki

42:05
Yeah, that makes sense.

Hannah

42:06
To me if I could break that out into categories that are elsewhere that will describe themselves like, this one’s advertising, this one’s meals, this one’s something else, then that is helpful, because it keeps it clear from the get go. And nobody has to audit us to see what that is.

Nikki

42:21
Awesome. That makes total sense.

Laura

42:23
Online courses though. Where do those fall in the? Are those in miscellaneous?

Hannah

42:27
Those would generally be professional development, which yes, is typically miscellaneous.

Laura

42:31
Okay. Yeah, that’s my, my number was so big.

Nikki

42:36
We spend a lot of money on courses.

Hannah

42:38
Well, I hear you.

Nikki

42:39
So what about… I’m asked all the time to donate my work to nonprofits, for fundraising, for auction? Can I deduct anything for that?

Hannah

42:51
This is a good question. And I have a terrible answer for you.

Nikki

42:54
I was afraid of that.

Hannah

42:56
So, it actually makes me really mad when organizations hold it out as though you’re going to get a tax deduction, because you basically don’t. There basically is no deduction and here’s the reason why. So when you donate your own artwork, it is what is called a self-created asset, because you made it. So the cost of that artwork is not the retail price of that artwork, the cost to you, the creator is just the materials, you do not get to include labor in that. So when I donate a painting, it may be a painting that took me three months to make and is, you know, would retail at $15,000. But the cost of that painting to me is the cost of gesso, like a half a tube of cadmium red and some canvas. What is that, $30? I mean…

Nikki

43:40
That’s ridiculous.

Hannah

43:41
And…on top of that, when you donate it, if you’ve already deducted those art supplies to begin with, as any good artist is going to have done. You can never double deduct something. And so if you’ve already deducted it as a supply, you instantly get nothing. So basically, the answer is no. No deduction at all. So I like to….

Nikki

44:01
IRS, are you listening? Change that!

Hannah

44:03
I know, it really feels unfair? If you and a friend want to buy each other’s work, and then donate it, you can you donate it for the retail price, the price you paid?

Nikki

44:15
Okay, Laura. If we’re asked to donate things? Let’s do that. Let’s do that.

Hannah

44:22
I tend to, I tend to want artists to like, because I think that it can start to feel abusive, and it can start to wear on your sense of goodwill when you’re asked to donate things so constantly. I like to recommend that people just set a donation budget for themselves. Just say, you know, this depends on the kind of work you make obviously for everybody that will be a different number. But you can say like, I’m going to donate X number of small paintings per year. Once I hit that amount, my answer is no for the rest of the year. And then your answer can be, I’m at my budget for this year. You can ask me next year. It’s not a hard no, it’s a soft no.

Nikki

44:57
Well, and then another thing that I’ve done occasionally, depends on the situation, is say I will donate half of the profit of the sale of it, instead of the whole thing, instead of just giving you something, I’ll donate half the profit or whatever percentage.

Hannah

45:13
I think that’s great, I think it’s great because if an organization is running itself by taking all of the money from a sale and the artist gets literally nothing and this is an artist generally not probably making enough money in a lot of ways to begin with, I think it’s so much more just respectable and good practice to share the profit with that artist who is doing so much to fund your organization.

Nikki

45:39
Yeah I mean I would love to be making enough money that I felt perfectly comfortable donating work for free but i’m not to that point.

Laura

45:50
So how do I know how much money I need to set aside for taxes?

Hannah

45:54
That’s a good question. You need to set aside, I mean the thing that really bites a lot of artists in the butt is that they don’t realize or even know about self employment tax so it’s very important to be aware of self-employment tax. Self-employment taxes a 15.3% tax on all your profit from your creative business and that comes on top of your income tax. So a lot of people realize they owe income tax but they forget the self-employment tax so you might be in a 10% income tax bracket, you’re gonna owe 10% of your art profit in tax, but you also owe 15.3 in self-employment tax so that’s a 25.3% tax rate.

Laura

46:36
Yowza.

Hannah

46:36
Yeah, I mean it’s going to pay your Social Security and Medicare, in theory, that’s a benefit you get back at the end of life, so long as we all you know fight hard and make sure that doesn’t get taken away because we pay so much into it, all of us.

Nikki

46:50
Yeah for sure.

Hannah

46:52
Yeah

Nikki

46:52
Do you know about Profit First?

Hannah

46:54
I’ve heard of it, for sure yeah, but do you use it?

Nikki

46:57
So I am trying to implement it. It’s difficult for me because of my not separating business and personal as much as I should. But just real real briefly, the concept is that you do this exercise to figure out like what percentage you should set aside for different things but any money that comes in you immediately separate it into, profit first… This percentage for profit, this percentage for taxes, this percentage for operating expenses, this percentage for owners compensation and so that you split it up that way. Let’s see if I can get this equation right. So the typical way of thinking for accounting is that your profit is your income minus your expenses. And the Profit First way is that your expenses are your income minus your profit. So you take your profit first and then you have this much left to spend.

Hannah

47:55
I like that a lot, yeah.

Nikki

47:56
Yeah, so I’m trying to do it, I’m trying to do it. It’s definitely a big adjustment but I love the concept, because if you wait until all your expenses are done, you’re not likely to have a lot of profit, but if you take that profit first and then you’re like okay, this is how much I can spend.

Laura

48:16
Yeah, you think backwards about it.

Nikki

48:17
Yeah, so I really like it.

Hannah

48:19
Yeah, I might revise it a little to retirement first. But it is that, I mean your retirement fund is you paying yourself.

Nikki

48:30
Yes and it definitely has savings built into it too. I mean like to do it the way that he prescribes is to have five different bank accounts.

Hannah

48:41
Oh, that’s complicated.

Laura

48:43
Oh that’s a lot.

Nikki

48:45
But you know what, once you set it up it really isn’t. You can have it all in one bank, although he says to have your taxes in a different bank so you’re not tempted to pull out a bit, but I have them all in one place and everything comes in through one account and then just divvied out.

Hannah

49:03
Great.

Nikki

49:04
I don’t know .

Laura

49:05
You’ll have to tell us later how that works for you.

Nikki

49:07
Yeah I’ll let you know, i’m working on it.

Laura

49:10
So, we’ve talked a bit about sort of federal taxes but I know a lot of artists have questions about state taxes and that meaning not just state income tax but state sales tax, right? So as an artist, do I need to collect it? The rules are super confusing because of all these new nexus laws in terms of what happens in my state, what happens if I sell things and other states, do I owe them tax money? What if I am on a print on demand site and that site is or is not collecting the tax for me, am I still responsible for paying that tax? Like can you give us a little information about state sales tax and how artists can approach that?

Hannah

49:51
Sure. I can’t give any specific advice because there are 9,998 different sales tax jurisdictions in the United States and I don’t know what locations …

Nikki

50:01
Just a real general idea?

Laura

50:04
You don’t have all those memorized?

Hannah

50:08
It’s dangerous to talk about in a mixed audience and anywhere but at a local setting because you don’t know where somebody’s listening from. And their rules could be completely different from the rules you happen to be thinking of when you say it, but basically, sales tax is complicated. It’s a whole separate system from income tax. So there is state income tax, that’s an easier answer.

Nikki

50:30
Not for Laura.

Laura

50:31
Texas.

Hannah

50:31
You’re in Texas. Ah hah.

Laura

50:33
I just pay really high property tax instead.

Hannah

50:35
Got it. You gotta make it up somewhere. For sales tax, really what I recommend there’s a sales tax software that I like a lot called TaxJar. And you can use it as a software, it’s a really good software. So it’s worth paying for and using so that you can look up your own nexus rules. And I trust, it has a really good blog where you can look up, you can do a state by state lookup. And I really trust their info to be up-to-date, because they have to comply with the law in every state. And so they’re generally up to date. So I like that, of course, you can go to your State Department of Revenue, Department of Sales Tax to look up the rules locally as well, you can actually get on the phone and call those people they’re, you know, often happy to help you pay your taxes. But it is something that is really tricky. And most accountants cannot keep up with all the jurisdictions, and so it actually is a place where software is really good, because it can. After 2018, there was a Supreme Court case, Wayfair versus North Dakota, and the Wayfaire decision created a new kind of Nexus called internet Nexus for online sales. And all these different states, most states, I would say, change their Nexus rules after 2018. So this is like a very quickly evolving area. And one state internet Nexus rule will be different from the neighboring state’s internet Nexus rule. So it’s just a thing where you have to look it up local, you know, you look up your local rules and then look up the rules where you’re selling to. So it’s complicated.

Laura

52:15
Got it.

Hannah

52:16
So software, and I would typically say like start with the rules where you are located, sales tax tends to be layered, so it’ll be state, and then there might also be county and then city layered on top. So you can pay up to like three layers of sales tax at the same time.

Nikki

52:31
I know that in in my city, it’s not sales tax, but I have to have a business license. And it takes a very small percentage of what my income is, too, for my business.

Laura

52:44
Interesting.

Nikki

52:46
Okay, so um, I know we’re running short on time, but I want to get really briefly I know you have a program we’ve mentioned called Money Bootcamp, which is part educational, and then also has an option of you doing taxes for artists. Can you tell us a little bit more about that and how people can learn from and work with you?

Hannah

53:07
Sure, yeah, Money Bootcamp is a program that I built and designed based on my experience doing the taxes of artists and seeing where they make mistakes and don’t understand things and where they’re, you know, not saving enough for themselves as many artists don’t. We are a generous people, we tend to think of others before ourselves. So this is, it’s funny, the profit first thing actually really plays into this, I tend to like, you got to fund your own accounts first, before you go pay your crew really well and like spend unlimited amounts of money on your supplies, fund that retirement account. So Money Bootcamp is a program I developed, which just teaches you, it kind of goes through a framework where you start with mindset and just basic understanding and grow through these layers of like, okay, then getting organized, then to planning and then it starts getting more forward looking like to maximizing your tax savings, taking advantage of current tax rules, all the way up to investing. And I know that sounds scary to the uninitiated. But investing is where the real power is. And that’s where you start to gain real power and money. And you know, investing is, the point of it really, is that you live in a body and that you deserve to have some rest.

Nikki

54:20
Ooh, what’s that?

Hannah

54:21
I know, I know. And so…

Nikki

54:26
So, is Money Bootcamp open to join at any time or do you just is it available certain times of the year?

Hannah

54:33
Yeah. So I have launches throughout the year. It is generally open most of the time so you can just go to my website, sunlighttax.com.

Nikki

54:42
Okay.

Hannah

54:42
And you can join Money Bootcamp anytime. You can always like send an email to ask me questions if you have questions about it before you join. But yeah, it’s open and it’s basically a year-long commitment. And the point of that is that it takes about a year to get all these things underway. It is a group program and it’s self directed, but It’s got monthly check-ins from me, it’s got monthly checklists and a lot of stuff where there’s built-in accountability. We have group Zoom work sessions, where we do our books together before the quarterly tax deadline so that you’re kind of developing this habit muscle to do for yourself what you should be doing every year. So yeah, you can join it anytime just go to sunlighttax.com to learn more about it.

Laura

55:26
And I think you also have a, we were talking about deductions today, I think you have a free download available on your website as well.

Hannah

55:33
If you just go to sunlighttax.com, and you go to the bottom of the page where there’s a newsletter, sign up, if you sign up for the newsletter, you will get right away my free visual guide to artists deductions. So it’s this beautiful graphic that I designed with a really good graphic designer, where we show what all of the deductions are and kind of what you probably call them as an artist. And then we map them over to the Schedule C deductions and what the IRS calls them and what category you need to be putting them into.

Laura

56:03
Okay, I’m gonna go get that now.

Nikki

56:05
I downloaded it, and I highly, highly recommend it.

Hannah

56:10
You can just go get it right now, print it out, stick it on the wall in front of you as you sit there with your tax software, and it will help you.

Nikki

56:19
Nice.

Laura

56:19
Awesome. Well, thank you so much for being here today. This is like super helpful. Is there anything else that you wanted to share today?

Hannah

56:28
Well, I think the thing I wanted to say to everybody is, you know, at this moment, and in our country, it can feel like things are really divided and like we have forgotten to talk, you know, like forgotten how to communicate with each other and have empathy. And I just want to say to everyone listening that I think the solution is you. I mean creative people are the empathy builders of our culture. You’re the ones who show other people how to have experiences they’ve never had, how to see the world through a different set of eyes. And we’re also the visionaries who show people what better world is possible. So I just want to say what you are doing, the work you are doing is so, so, so important. And I want you to have the power to keep doing it for as long as you want to.

Nikki

57:13
Thank you. That’s beautiful. So it’s been so awesome having you here and getting to know you. And we really, really appreciate you taking the time out in what we know is the busiest season of the year.

Hannah

57:28
Thank you so much for having me. I love what you’re doing. It’s really awesome and really nice to talk to you both.

Nikki

57:33
Thank you. Also, we didn’t even mention that you live in Asheville, which Laura and I love Asheville.

Laura

57:42
I love Asheville.

Hannah

57:42
Wonderful.

Nikki

57:42
We’re coming to visit at some point.

Laura

57:49
Yeah we are. To learn more about the podcast and read today’s show notes, head over to startistsociety.com/sunlighttax.

Nikki

57:57
And if you’ve enjoyed today’s episode, follow Startist Society and leave us a five star rating and review so we can reach more startists like you.

Laura

58:06
Thanks for listening, and we’ll see you next week.

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Join the Startist Society in our Facebook group where we go deeper into the topics from each episode, share more about what we are working on in our creative businesses and help keep each other accountable.

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