You have just filed your taxes and you breathe that sigh of relief. It’s over for another year. Or is it? The answer is no, or at least it should be, because tax season is just about to begin. That’s right. The organization it takes to make the most of your taxes begins now.
As artists it is essential to understand that regardless of your current income, if you actually intend to make money from your craft, there are ways in which you must treat it like a business. There are two critical concepts you must become familiar with to be fully prepared to do your tax return. Without them, you are not running a business—you are engaged in a hobby—and should never expect that hobby to be financially profitable. The first is you must be organized. Organization means being sure you have all the documentation you need and that you have a place for everything and have everything in its place. You might find that a computer-based program, such as Quicken or Quickbooks, is the answer to keeping all your records in order. If you are more comfortable with paper then be sure to get a paper organizer that is efficient and easy to use. Actors have an enormous resource in a company called Holdon Log. They provide both computer programs and carefully designed log books that allow actors to record everything from auditions and callbacks to expenses related to creating and maintaining your professional image. Find tools that work for you and use them throughout the year to keep the records you need to efficiently and effectively file your taxes.
The second important concept is to keep your business finances separate from your personal finances. Have one bank account for each business you have and use this account to pay all your business expenses. This is a professional way to conduct your business affairs and it is a good way to keep your records in order. Again, remember that your acting, photography, writing, or any other creative career is a business and should be run out of a separate bank account. If you do not have funds in your business account then loan your business some money and keep careful track. The business can pay you back when times are better and in the end you will know that your business paid its own way.
Become familiar with the tax system and how you can maximize your return. One way is by starting a home-based business. You can earn money and with the deductions you will have, such as a portion of your rent/ mortgage and your utilities, you will be able to keep more of that money in your pocket. You can even write off your losses against other sources of income. The best thing to do is hire a tax professional to handle your taxes, someone who will be able to maximize the amount of money you can save. Remember, you have to spend money to make money. There are, for example, accountants that focus on preparing tax returns for actors and/or other entertainment industry professionals. An accountant that specializes in filing returns in your area of expertise may be your best choice.
Finally, there is an avenue that is available to explore, yet is something you may not be aware of, may not have considered, or simply may not believe is even possible. This are tax advantage investments, such as retirement plans, self-directed IRAs, and real estate. I know you may be thinking this is crazy, you hardly make enough money or you don’t know anything about investing, but if you take it one step at a time and do your homework, there are ways that you can actually have your money start working for you.
The key is to know your options, be organized, and conduct yourself in a professional manner. A very helpful resource to understand taxes better is the book Lower Your Taxes—Big Time! Wealth-Building, Tax Reduction Secrets from an IRS Insider by Sandy Botkin, CPA, Esq. You will find valuable tips and rules explained in a way that completely non technical people can understand. The chapter entitled How to Shield Yourself from the IRS Weapon of Classifying a Business as a Hobby is absolutely critical and will pay you back for the cost of the book many times over.
Whatever you do, do not leave your tax preparation until mere weeks before your return is due to be filed. This will cause you an unnecessary amount of stress and may cause trouble for you with the IRS if you do not have your documents in order. It may also cost you money you can’t afford to pay.