My little artsy enterprise was audited a couple of years ago. It was not fun. A couple of articles I read suggested the IRS was targeting artists and musicians because many take deductions for losses related to the creation of their art. But then they do not make enough of a profit to be considered a business. (Yeah, let’s throw an audit on top of losing money to make us REALLY feel professional!)
Why do I bring this up? Because you need to keep GREAT records in order to “win” an audit. I was, thankfully, able to prove every expenditure was legit, and that it wasn’t just me and my mommy who think of me as an artist. Here is what helped me prove my case.
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NOTE: THIS IS NOT LEGAL ADVICE or an endorsement of any product- please consult an attorney/tax guru for tax advice and do your own research about database programs.
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1. Keep every receipt for every expenditure. I did NOT have a scanner at that time (but I sure as heck do now!) Don’t count on those receipts being legible after a month of two…the ink fades. So scan them as you get them and file a copy in a safe place in your computer or back-up drive.
2. Keep a record of every product you create and what materials you used to create it. In my case, I have a “portfolio” of releases – the actual disc. Even if it was just a small repress of 50 or 100 CDs for promotional purposes, I kept one copy of the actual disc and one set of the entire promo piece.
3. Track the costs of all physical items – use a database. At the time of my audit I had a PC, and I used a program called Art Affair to organize all my data about physical products. It helped me figure exactly what items went into making and packaging piece of “art” (like a promo disc.) So I was able to tie every plastic bag or biz card or one sheet or disc hub to the promotion. I could also break down the actual cost of one individual package that would go to an individual retailer, for example, and could tell you what materials were left over in inventory.
4. Print copies of reviews, press coverage, your web sites, and web sites of others who sell your music. My idea was to prove that, not only do I consider myself a business, but others do, too.
5. Prove your actual income earned from all sources related to your music. Even if you didn’t make a profit for the year, there should be evidence that proves you tried to make a profit.
6. Be organized for your meeting with your auditor. Don’t waste their time. They are people, too – mine was actually very nice.
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A great article explaining the IRS/ Creative Artist situation is at the Chicago Artists Resource web site.
Songwriters are America’s Smallest Small Business: Nashville Songwriters Association