Legal Eagle
A Tax Primer For The Photographer

Besides dropping a lens and leaky batteries, few other things scare a photographer more than preparing for April 15th. Without question, taxes are a necessary part of good government. We all want good roads, schools, and police. Unfortunately, each year the tax code gets a little more complicated, and thus filing accurate tax returns gets more difficult. Oftentimes, these errors result in the taxpayer paying too much.
The good news is that by learning a few basic concepts of tax preparation, every business owner, free-lance photographer, or hobbyist can file more accurate tax returns, thus reducing overpayments and avoiding audits.

Without question, the most important fundamental of tax preparation is good record keeping. A job or assignment is not complete until it is paid and all revenue and expenses are recorded.

Thanks to the advent of modern computers, accounting has never been easier for small businesses. From Peachtree to QuickBooks, there are innumerable accounting packages available. At the end of the year, these packages will produce simple financial statements. From these statements, you or your accountant can fill out all your tax forms in a fraction of the time it took the old way.

Furthermore, it is crucial that all receipts are kept, regardless of value. Each year more taxpayers lose deductions because of lack of documentation than for any other reason. Contrary to popular belief, canceled checks do not count as receipts, nor do diaries. Receipts are third party documents.

The IRS may not require a business to keep receipts for items costing less than $75. This has been increased from the traditional amount of $25. However, more than likely, the deduction of an expense will be forgotten about if receipts are not kept. Ten lost $25 cab receipts is a missed $250 deduction.

In addition, it is considered poor business practice to pay for goods with cash. Although it is perfectly legal, auditors tend to question why a business has an excessive amount of cash on hand. Because of the greed factor, individuals who get paid with high amounts of cash tend to understate their income. Think about it. How many normal people pay their electricity and water bills with cash? All cash received for work should be deposited in your business' checking account and recorded as income.

The question of how long to keep receipts and other documentation is determined by how long you can be held liable for not having it. Most IRS audits typically cover a period of three years from the date the tax return is filed or due, whichever is later. This period can be extended to six years given certain circumstances. If a taxpayer commits fraud, there is no statue of limitations.

Therefore, it is generally recommended that you keep all records for a period of at least six years. Both business and personal tax returns should be held onto for the life of the taxpayer plus at least three years past the date the estate is settled.

For individuals who are pursuing photography as a sideline, a major tax issue is whether any losses sustained from the sideline are the result of a business or a hobby. Hobby losses are not deductible, whereas, business losses are.

Generally, the main school of thought for determining hobby vs. business is very simple. Businesses are run with a profit motive, while hobbies are not. Thus, the most basic litmus test is, "Does the entity make a profit three out of every five years?" If it does, then, more than likely, any losses the business incurs will not be disallowed by the IRS. However, there are many businesses that have been very active for countless years which could not pass this test. So what gives?

If an entity cannot pass this test, it may be up to the taxpayer to prove to the IRS that the entity is being run with a profit motive although it shows several years of losses. This is done by proving intent to succeed. For example, the losses are the result of events beyond your control. The venture is run as a true business (e.g., the business has a federal identification number, its own checking account, etc).
Besides the question of hobby or business, another key area in filing taxes is accounting for the decline in equipment value on the tax return. This yearly decline in value is called depreciation.

For tax purposes, cameras and electronics are considered to have a five-year depreciable life. Thus, in each of the five years of a camera's life, an expense is recorded on the tax return for the decline in value. This expense reduces the taxes owed. If you have an equipment intense business, it is probably best to use computer tax software. This software can set up your deprecation schedules and automatically calculate your deduction.

As with all rules there is an exception. For depreciation purposes this exception is Section 179. With Section 179, a qualifying business owner can deduct up to $19,000 of expense for fixed asset purchases immediately from the tax return. This is a huge advantage because with the other system, if you bought a camera today it would take you five years to realize the full tax benefit.

However, 179 does have some major limitations. If a business has a loss, Section 179 cannot be claimed. In addition, the business use of the item must be at least 50 percent. There are some other limitations, so use of this exemption should be researched carefully.

Another important deduction for photographers is the home office deduction. Typically, in years past, the home office deduction has been limited to taxpayers whose "primary place of business" was almost 100 percent at home. For example, a studio photographer, whose studio was within his/her home, would qualify for the home office deduction. A journalism photographer, on the other hand, who tends to travel from assignment to assignment, would not. The good news is that as of January 1, 1999, generally all businesses, who do not have another fixed location and who perform their administrative duties within a unique specified area of their home qualify for the deduction. The biggest key is a unique, specified area. For example, if you pay the business' bills and go through all your slides on the kitchen table, you cannot deduct the kitchen. If you, however, have a room set aside just for your business activities, you will most likely qualify for the deduction.

Now that you know you qualify for the deduction, there are several types of expenses you may be able to deduct, like home insurance premiums, utilities, allocated depreciation, real estate taxes, mortgage interest, etc. At this point, it is best to involve a tax professional. They will be able to advise you of what is deductible and how you should fill out all the necessary forms.

Finally, after completing all the tax forms and accounting for everything correctly, you find yourself owing, and you owe more than you can afford to pay. What happens next?

For individuals in this situation, the first thing to do is to file any returns which are due, regardless of if you have the money to pay them or not. Once the returns are filed on time, many of the harsher penalties go away. At this point, the IRS will also believe that your intent is to be a good citizen. This is good news, because typically when you deal with the IRS in good faith, the agency will usually set you up on a payment plan. If you ask, they will also help you correct the problem that caused the deficit to begin with. But if you fail to file, good luck.

Oftentimes, business owners fail to communicate with the IRS if a problem arises. When this happens, hefty penalties are assessed. It is the taxpayer's responsibility to file tax returns on time, check their progress, and respond promptly to any letter, notice, or bill. Be sure to keep all communication lines open and to file all forms on time.

Ultimately, the most important part of filing accurate tax returns is preparation and education. Do not get caught in the trap of believing tax preparation begins the night of April 14th. The real truth is that it begins today. What you do today, will save or cost you money next year when you file your return. Also, if your return gets too complicated, do not be afraid to call in a tax professional. After all, would you want an accountant photographing your wedding?

Note: Because April 15th falls on a Saturday this year, taxes are due on April 17th. This gives two extra days for preparation.

Disclaimer
The advice contained herein is intended for informational purposes only. There are no claims or guarantees to its accuracy or usefulness. Everyone's tax situation is unique, therefore any and all tax strategies and tax filings should be done with careful coordination between you and your tax adviser.

References And Web Sites

· What the IRS Doesn't Want You to Know, by Martin Kaplan, CPA and Naomi Weiss. This book is a must read for any small business owner. It will give you new insight into your taxes, and could save you hundreds off your tax bill.

· J.K. Lasser's Your Income Tax, by J.K Lasser Institute. A good general guide to taxes. This book covers almost every conceivable situation.

· www.irs.gov One of the greatest accomplishments of the IRS. This site contains not only valuable tax information, but also has almost all the forms needed to file any type of tax return.

· 1-800-Tax-1040 is the telephone number to the IRS's help desk. All of the agents are extremely professional and helpful. It is an invaluable resource to anyone filing taxes. One word of caution, toward April 15th expect busy signals and long wait times. Also, be sure to write down the name and number of the agent you talk to.

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