Since I am an accountant by education and by trade, I thought with tax season on everyone’s mind, I’ll share a few tips or answers to the frequently asked questions from other photographers that I get on a regular basis in my role as a photographer who’s also an accountant. If you’re a full time pro, or live outside of the United States, you might as well ignore this post because what I’ll share applies mainly to part time photographers filing tax returns in United States, who earn majority of their annual income through means other than photography. But let me first put a proper disclaimer on this.

What will follow are the tips that are considered to be general tax knowledge and do not represent official interpretations of the tax law found in the Internal Revenue Code, regulations and rulings. My views also do not represent the views of my employer, and this blog is not affiliated with it in any way. Everything that is written in this post was not intended or written to be used, for the purpose of avoiding U.S. federal, state or local tax penalties.

Why You Should Be Concerned About This?
If you made any income from your photography, you need to declare it on your tax return, even if it’s known only to you and your neighbor who paid you cash for shooting his dog. Worse yet, if you’ve been issued Form 1099-Misc by a magazine who bought your photo for publication, IRS already knows about that income since the form issuer sent a copy of it to the IRS and the IRS will be looking for it on your tax return. The quickest way to trigger an audit and tax penalties of your tax return is to not to report all of your income.

When Can Photography Loss Be Claimed on Your Return?
You must declare all income you get from photography, and you may offset it with your expenses if it is a business. In the eyes of the IRS, it is a business when it is ran with for-profit motive. The test that is typically used to determine whether it is a hobby or a business is the level of profitability. If the business has been profitable (generated more income than expenses) for 3 out of the last 5 years, it is a business, and if in the current year taxpayer has a net loss when items of income are netted against expenses, that loss can be used to offset other income. If you do not meet the test, the IRS considers your photography a hobby, and deductions allowed will be rather limited. Please see this IRS publication for more information.

What if I Just Started My Photography Business? Can I still Deduct that Nikon D3x?
Yes. But here is something to consider. Very few businesses are profitable in the first few years of its operations, and it is expected. If you just started your photography business, bought a nice new camera and a bunch of lenses, of course you’ll likely not generate more income in the first year than you just spent on the equipment. But you have to have a plan in mind of how you will turn it into a profitable enterprise in the next few years if you’re deducting your equipment in the first year. If after five years all you do is write off new lenses and cameras on your tax returns without becoming profitable, you should expect for the IRS to come in, open your old tax returns and disallow the deductions, assess penalties and tax owed on all the past tax returns where you claimed these as deductions.

What are the Risks of Claiming a Loss on Your Return?
This is the biggest issue to consider. Filing Schedule C, and especially using expenses or a net loss to offset your ordinary income is something that frequently triggers an audit of your tax return by the IRS. You simply should expect to get a letter from the IRS or from your state asking you to provide documentation and evidence for the positions taken on your tax return. With budget deficit projected to reach the level of $10 trillion, we’re expecting that the tax audits of individual returns will increase considerably in the coming years, since someone has to pay for it all. In addition, some returns get selected for audits at random, and it is always a good idea to have your tax files in good condition before you actually file the return. For example, good luck to you if you’re a photographer trying to make a living in Utah. Finally, declaring that you’re a business may trigger other collecting agencies, such as state or local tax authorities, to go after your income. A friend of mine recently received a notice that informed him that there is an annual business fee that all businesses pay in his city, and it is in the range of several hundred dollars.

What are the Filing Options?
It all depends on how you run your business. The easiest option is to file as a sole proprietor (which doesn’t require your business to be incorporated) by filing Schedule C with your 1040. The next popular option among the photographers is to form a Limited Liability Corporation (LLC) for the business. Generally speaking, forming an LLC is not too hard to do, but it does require payment of fees during incorporation and if it has more than one owner (if say, you add your spouse or an assistant as a member) it carries extra tax compliance burden every year. The main difference between being a sole proprietor or having an LLC is the level of liability protection. LLC option provides limited liability protection to its owners. In other words, if you’re being sued by your former client, whose wedding you messed up, that former client cannot go after your personal assets if you operate it as an LLC, whereas as a sole proprietor, all of your assets are at risk.

What Expenses Can You Write Off?
Whatever expenses were necessary to run your photography business. Photo equipment is allowed to be deducted over its useful life (typically, 7 years or full amount deducted in the year of purchase as an election available under Section 179). Other duductible expense inlude such items as flashes, tripods, computer software, training fees, membership fees, travel costs (for example, car mileage of traveling to the location and back) and so forth – again, whatever you need as a photographer to run your business.

What Evidence Should You Keep?
You should not be claiming any expenses on your tax return that you do not have a proper documentation for. Keep all the receipts (that’s why buying things online and using easily searchable email account, such as Gmail, can come handy when you need to find them quick), keep a detailed record of mileage with dates and miles traveled detailed for each trip, and overall, approach documentation with full expectation that one day an IRS agent will audit it. In general, the IRS is suspect of photography businesses when they are not main sources of income for taxpayers, since most people these days own a digital camera. You should consider opening a separate bank account for your business, keep accounting books in proper software (check out free Microsoft Accounting Express, for instance), have a web-site that promotes your business, and approach it like you would approach any for-profit business. You’ll have to prove to the IRS you’re serious about your photography business.

What’s the Safest Way of Properly Deducting the Photography Expenses?
The safest way is to hire a CPA to prepare your tax return, who can sign that return as paid preparer. This will ensure that the return is properly reviewed and filed. But this isn’t always the cheapest option. If you prepare your own tax return, TurboTax might be your next best option, as it is somewhat intuitive, and it does all the math for you. If you do not understand your own tax return when you look at it on paper, I do not recommend you attempt to fill out Schedule C on your own. As with most professional services, you get what you pay for, and savings generated by professionally prepared tax return can be significant and well worth paying little extra.

If you have other questions related to this topic, please feel free to leave them either in the comments, or by contacting me directly through the contact page.

This entry was posted on Tuesday, March 24th, 2009 at 9:44 pm and is filed under Business of Photography. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.