It’s that time of year again. I don’t think anyone really likes it – tax season. Partnership and S Corp tax returns are due next week, and individual and C Corp returns are due on my birthday, about a month later. I have good news for you though! This post is full of useful and practical information regarding taxes and your photography business. I hope you find it very useful!
What are the most critical things you need to do?
- Keep the filing process as simple, effective, and fast as possible.
- Proactively minimize your tax liability to the greatest extent possible.
How can you do this? Here are some tips.
(1) Use Accounting Software – PLEASE
My preference is Xero. It’s relatively inexpensive and easy to use, and intuitive, particularly for those who do not have an accounting background. It uses live bank feeds to pull in your bank transactions, and you can “teach” it to remember how to code transactions, so that in a lot of cases, all you have to do is click a button and your transactions will be properly categorized. Dedicate 15-30 minutes per week, and your tax preparation will be simple, effective, and as fast as possible, whether you’re doing it yourself or providing your information to your tax preparer. You can use Excel, but I guarantee you will save time (remember, it’s your most valuable asset) and effort with Xero or another accounting program. And you will be less likely to miss transactions, aka tax deductions.
Did you know that if you have been using a separate bank account for your business, it’s not that difficult to go back to January 2017 and pull in and categorize all of your transactions for the entire year? If you haven’t done anything in terms of your accounting, please do consider this option.
If your transactions are co-mingled in your personal account, first, please stop that right now:) Second, you’re going to have to spend time and effort to pull out your business transactions. It’s your responsibility and no one can really do it for you. Set yourself up for an easier time in 2018!
(2) What Is My Taxable Revenue?
This sounds obvious, right? However, for photographers, it can be less simple than it seems. Here are the questions you need to ask yourself?
- Do I take deposits/retainers?
- If so, are the deposits/retainers non-refundable?
- Am I a cash basis or accrual basis taxpayer?
Most of us do take retainers and are cash basis taxpayers, and most of us make these retainers non-refundable in our contracts. If that’s the case, the answer is fairly simple. Take me for example. For weddings I take a 35% retainer upon contract signing, and collect the remaining 65% two weeks before the wedding. So, for a wedding in October 2018 that I booked in December 2017 for $4,000, I would collect 35% ($1,400) in 2017 and the remaining 65% ($2,600) in 2018. Even though I had the $4,000 contract signed in 2017, I would recognize $1,400 of revenue in 2017 and $2,600 of revenue in 2018, for tax purposes. This would be true even if I were an accrual basis taxpayer.
If the retainer is refundable, however, which I don’t think is often the case with photographers, you don’t have any control over whether or not it’s due to be refunded, and you’re an accrual basis taxpayer, the retainer would not be included in taxable income when received. If you’re a cash basis taxpayer, it would be included.
What is cash basis versus accrual basis? It’s a box you check on your business tax form (i.e., Schedule C, 1120S, 1065, or 1120). Cash basis means that you recognize income and expenses when received or spent. Accrual basis means you recognize income when earned and expenses are matched to earned revenue.
In summary, for most of us that receive non-refundable retainers, include the income in the year it is collected.
(3) Deductions – Equipment (Not Just Your Camera)
Equipment deductions can really add up and reduce your taxable income. Assuming you make the proper election, you can deduct as an expense, any equipment purchases OR ANY EQUIPMENT YOU ADDED TO THE BUSINESS DURING THE YEAR, under $2,500. Equipment is technically a capital asset (meaning it would go on your balance sheet and be depreciated over time, based on the estimated life of the asset), but tax law allows you to deduct equipment as an expense as long as it’s under $2,500.
That said, even if it’s $2,500 or more, you will still most likely be able to deduct it using Section 179, depending on your overall tax situation. There are some restrictions on the overall Section 179 deduction you can take, and more restrictions around certain assets such as automobiles, but you can use that depreciation deduction in most situations applicable to photographers. Just remember that Section 179 cannot create a loss. Any loss created would be carried over to the next year when there is taxable income from which to deduct it.
Please notice the capitalized words in two paragraphs above. I want to remind you to deduct any personal assets you use in your business, that you may have purchased prior to starting your business, e.g., your computer, monitor, cell phone, keyboard, mouse, SD cards, cables, SD card readers, tablets, etc. If you use these items for both business and personal use, you should only be deducting the business use.
(4) Deductions – Automobile Expenses
There are lots of rules around deducting vehicle expenses, but that shouldn’t stop you from deducting what you’re allowed to deduct. Basically, you can deduct the expenses attributable to your business, and you have two methods of doing this. You can deduct actual expenses by tracking all of the expenses such as fuel, oil changes, any maintenance and repairs, etc., as well as the depreciation associated with the vehicle. Or, you can take the simple approach and deduct the standard mileage rate multiplied by the business mileage you drove over the course of the year. I like this method because I like to keep things as simple as possible.
Just remember that a portion of that standard mileage rate, which can change from year to year, is attributable to depreciation. That depreciation should be calculated and tracked so that you don’t continue to deduct that portion after the vehicle is fully depreciated. In my experience, most people don’t actually do this, but that is the rule.
Also, remember that you cannot switch back and forth between the two methods. Generally speaking, once the actual method is used, you cannot change to the standard mileage rate. You can switch from standard to actual.
If you deduct automobile expenses and use your vehicle for both business and personal use, please keep a log of business trips that includes business purpose, date, people involved, beginning and ending odometer readings, and total mileage. If you’re ever audited (which isn’t likely, but possible), you may be asked to produce this log. If you can’t, the deductions may be disallowed, which means you would owe tax, penalties, and interest. You can avoid this by keeping a log. There are lots of great apps out there to track your business mileage. I use MileIQ.
Finally, commuter miles are never deductible. An employee can’t deduct his vehicle expenses when he drives to and from work. A business owner can’t deduct her vehicle expenses when driving to and from her office. That said, if you’re driving to a photo session, you can likely deduct those costs.
(5) Deductions – Home Office and/or Studio
If you have a home office and/or studio in your home (or even your garage), and that space meets the following two requirements, you can deduct it:
- It must be your principal place of business AND
- It must be used solely for your business.
If you have an external office or studio space and your home space is a secondary office, you probably don’t qualify. If you’re like me and you have a desk in your dining room, that doesn’t qualify. However, my upstairs fourth bedroom that is used entirely as an office does qualify.
In terms of what to deduct, you have two options, similar to vehicles. You can deduct actual expenses (including mortgage principal or rent, based on square footage of the office), or you can take the simplified option for the home office deduction ($5 per square foot, with a maximum of 300 square feet). Again, I like to keep things as simple as possible, so I prefer the latter, but if there is a big tax savings in using the former, of course please use it. With either method, you cannot create a loss from your business with this deduction. It would carry over to the next year if a loss is created.
Also, if you own your home, please remember to deduct the full amount of your mortgage interest and/or real estate taxes on your Schedule A, if you itemize deductions. Those amounts are fully deductible regardless of home office status.
(6) Meals & Entertainment
For 2017 and prior, in most cases, you could deduct 50% of business purpose meals and entertainment, including meals you eat while on location and drinks you bought when meeting a potential client at a local coffee or wine shop. In some instances, you could deduct 100% (e.g., company holiday party, or meals on premises for the benefit of the employer, like dinner for staff when they’re working late – not stuff that usually applies to photographers).
Beginning with 2018, entertainment is no longer deductible. What does that mean exactly? That remains to be seen! You can still deduct 50% of your or your employee’s meals while on location or on business travel, but you can no longer deduct coffee shop meetings, lunches, or other meals and entertainment with clients or prospects. We’ll see how this plays out, but that’s the general consensus for now.
If you are deducting meals and entertainment for any year, please keep your receipts and make sure you record the business purpose and who you met with (as well as date, place, and amount, usually printed on the receipt). You can take your dinner receipt, write these items on there, and snap a picture for your records, upload directly to Xero, Receipt Bank, Box, or any storage system that you use. Keep it simple and easy so that you do it.
(7) Deductions – Other Personal Expenses That You Might Forget
You can deduct all or the business portion of the following as part of your business expenses:
- Childcare that you pay for while working
- Telephone – cell and/or land line
- Home utilities (as part of the home office deduction)
- Office supplies – pens, paper, printer toner, labels – All of these items that you might just grab from around your house add up.
- House cleaning (as part of the home office expense). Just remember that there are rules about whether or not your home cleaner is an employee or independent contractor, and you need to make sure you file the correct tax forms based on this.
- Landscaping and lawn maintenance (as part of the home office deduction). The same conditions that apply to house cleaners apply here.
(8) Deductions – The Usual
I’m trying to highlight the deductions you might miss, but please make sure you deduct the usual business expenses as well:
- Business cards
- Advertising and marketing
- Office expenses
- Employee and contractor expenses
- Legal fees
- Accounting fees
- Tax return preparation (If this fee lumped in with your personal return, ask you tax preparer to break it out for you or pro rate it based on a reasonable assumption, and deduct it against your business as opposed to Schedule A – it helps you more if it’s deducted from your business taxable income in most cases)
- Business insurance
- Meals and entertainment (Please see #6 above)
(9) Do you have kids? You might want to put them to work.
My daughter likes photography, takes photography in school, and is old enough and competent enough to be a second shooter on some of my photo sessions. My son is good at math and likes repetitive tasks, and would be good at coding transactions in Xero.
According to IRS.gov, “…Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare (“FICA”) taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child….Payments for the services of a child under age 21 who works for his or her parent in a trade or business are not subject to Federal Unemployment Tax Act (FUTA) tax. Payment for the services of a child are subject to income tax withholding, regardless of age….”
What does this mean? If you’re a sole proprietorship or a partnership with your children’s other parent, you can save up to 21.3% (15.3% FICA and 6% FUTA (FUTA can be reduced if you pay state unemployment tax)) on the wages you pay your children (less the deduction you would get for the employment tax deduction, which depends on your tax bracket). If you paid your child $5,000 in wages, that’s $765 – $1,065 in tax savings (less the deduction you would get for the employment tax deduction, which depends on your tax bracket).
Furthermore, your children may be subject to income tax withholding, but when they actually file their tax returns, they are likely to have no tax liability and get all of that back. At the least, their tax rate is most likely lower than yours. In addition you could contribute their wages to a traditional IRA, Roth IRA, or 529 college savings plan, and potentially reduce income taxes that way. Those options should be evaluated for your personal situation to see which options are best.
Please just make sure your child is actually working for you and that you have a record of the hours and work done. According to the US Department of Labor, there are no age restrictions on minors working for their parents (except in certain hazardous jobs).
(10) Hobby Loss Rules
I must caution you on taking a loss, meaning you lower your overall taxable income based on a taxable loss, from your photography business. The IRS has something called Hobby Loss Rules. They are somewhat vague and often hard to determine when you are just starting out, but basically the IRS doesn’t want you reducing your taxable income from an activity that may be a hobby as opposed to a business engaged in for profit. Unfortunately, photography is one of those businesses that could be easily interpreted as a hobby. If you’re reporting taxable income, there’s no problem. If you reported taxable income in three out of the past five tax years, there’s no problem. But if you’re in your first or second year and have a loss, please consider the Hobby Loss Rules.
Let’s take me as an example again! In my first full year of business as a photographer, I had a loss from my photography business. I had every intention of profiting from this business in the long run, wanted to make it my primary source of income, had a website offering my services for sale, advertised, and received payment for my photography services. All of those factors contribute to showing that I was operating as a business seeking to make a profit. But I did several portfolio building sessions and weddings for no fee, had travel expenses, bought equipment, and my overall expenses were more than my income. My photography business didn’t support my living expenses and I had a full-time, unrelated job that provided my financial support. All of those factors support my photography being a hobby. The truth is, we wouldn’t know for sure until I earned a profit in three out of five years, but how could I be certain about that in Year 1? I couldn’t.
What should you do? It’s a judgment call and you should discuss it with your tax preparer. Much has to do with your intentions and where you are when you actually file your tax return. In my case, I was no longer at my full-time job and was much more focused on my photography business, on track to make a profit in Year 2, by the time I filed my tax return. I would lean towards taking the loss in my case, but again it’s a judgment call. If it were Year 2 or Year 3, I still had my full-time job, and was still showing a loss from my photography business, I might not make the same choice.
There’s another option as well, Form 5213, that essentially allows you to postpone the determination for the first five years of your business. However, there is argument over whether or not this is a good option, that I don’t want to get into it in this post. Just know it is an option that should be discussed with your tax preparer.
So that’s it – hah hah! Taxes are complicated. They can be frustrating. The best things you can do to help yourself are to use accounting software and keep things as simple as possible. I understand that you may want to file your taxes yourself and avoid the cost of paying a professional, but please consider using one if you don’t have the background in tax work. You could save yourself a lot of money in the long run.
Here’s my favorite tax savings story. I had a friend who asked me to review his tax return after he completed it. This isn’t something I typically do, but he was in a unique situation and I agreed. I wound up saving him about $25,000 in taxes with a quick review. He had sold a house that was a rental at the time of the sale, but that he had lived in it in at least two of the five years prior to the sale. That meant that the primary home sale capital gain exclusion applied in his case, and he didn’t realize that. He had a large capital gain on the sale, and thought he had to pay tax on it. As it turned out, he could exclude up to $250,000 of the gain, and that saved him about $25,000 in his case. He was ready to click send on the efile and would have paid about an extra $25,000 in taxes. That’s not something the IRS would likely catch and refund.
Also, one last piece of information to consider if you don’t think you made enough money to be required to file a tax return. Even if that’s true, you may want to file anyway. Particularly if you have dependents and file as head of household (and even if you don’t), you may be eligible for some refundable tax credits, which means you get a refund even if you don’t have a tax liability. It’s worth filing to get those credits.
I’m here if you have questions or need help, and happy to talk to you! And I DO NOT charge by the hour:)
DISCLAIMER: All data and information provided on this site and in this blog post is for informational purposes only. The owner makes no guarantee as to the accuracy, completeness, timeliness, suitability, or validity of any information and will not be liable for any errors, omissions or delays in information. It is also not a substitute for legal or professional advice. In addition the information is geared towards federal tax law. State tax law can be different and can vary from state to state.
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All Photos Taken by Kim Crouch