The chance of an audit is usually fairly low – only about 1% – but you can increase your chances
of an audit if your tax return contains these red flags.
- Hiding Income. Cash income, “missing income” are common in certain industries, including “very small sales-oriented” businesses. If your business “profile” fits an IRS watch list, you will have an increased chance for an audit.
- High income. More than 8.5% of “high income” taxpayers are audited by the IRS, compared with less than 1% of all other 1040 returns.
- Missing Income. Failure to report income for which you receive third-party paperwork (like a 1099) is the easiest way to get a letter from the IRS.
- Mixing Business and Personal Expenses. Excessive expenses, or expenses that don’t look “real,” are audit flags. If you try to deduct personal expenses (particularly travel, entertainment and dining) you increase your chances for an audit.
- High Deductions. If your deductions exceed the profile for your industry, the IRS will look more closely at your return.
- Losing money for more than 3 out of 5 years. If you show a loss more than 3 out of 5 years, or more than 3 years in a row, the IRS will presume that your business is actually a hobby, and will deny your deductions. This is called the “Hobby Loss Rule.”
- Home Office Deduction. You can deduct up to $1,500 ($5/square foot) for business use of your home. You must be able to prove that you have a dedicated office space (not just a corner of the kitchen table).
- Business Use of Your Car. You can deduct mileage or expenses (not both) for the business use of your car. You must keep accurate records to prove your deduction.
- Mistakes. Watch for careless errors – incorrect social security numbers, using a different name from one year to the next. The IRS uses computers to compare basic information and run math checks – if you have common errors on your return, it will be flagged for follow up and may result in an audit.
- Underpayment of Estimated Taxes. As a sole-proprietor or small business, you may be required to make quarterly “estimated payments” of taxes. If you fail to make these payments (or miss a payment), the IRS will send you a letter and may flag your account for audit.
“Art Business” is not an oxymoron. Artists can plan to make a living doing what they love, with
some simple business tips.
- Be Visible. Whether you work out of your home studio or have a place in a gallery downtown, your artwork must be visible – and you should be, too. Plan to have “gallery hours,” when they are open to the public. Participate in the community shows where you can both display your art and demonstrate your process.
- Be Accessible. Have business cards, photo cards, and flyers, and place them everywhere that will let you. Make your name (or your business name) easy to remember.
- Be On the Internet. Have a website. Register a domain name. Even if it is a free blog-style site, put yourself and your artwork on the Internet. Many artists sell more work online than from a studio. Investigate eBay and other online sales portals as a way to display and sell your art to the world. Document your daily art routine, complete with pictures. Your patrons will be more likely to purchase your art if they can witness the creation.
- Be Involved. Join art groups to both network with similar artists and to become known in the art community.
- Be Charitable. Strategically donate art for worthy causes. If you can get exposure for your art at an event, and if the “final product” results in a prominent display of your work in a public space, use this opportunity as “free” advertising.
- Be Festive. Participate in local fairs and festivals that encourage artists to display and sell works. [Note, however, the difference between “professional” and “amateur” events, so you are not mistaken for a talented amateur instead of a paid professional.]
- Be Instructive. Supplement income and build a following for your art medium by teaching classes. This gets your name in the community, as well as examples of your artwork displayed.
- Be a Partner. A business partnership with a like-minded or aligned artist can increase your visibility and patron base while allowing you to more effectively leverage your business dollars.
- Be Realistic. Artists can have great creative ideas but might need a reality-check on a risky business idea. Find a friend who can help you weigh the pros and cons of new ideas before you invest, and be sure you have a plan to overcome obstacles.
- Be an Artist. Don’t forget why you started your business – don’t get so wrapped up in the “business” that you forget to MAKE ART!
A business plan can not only help you find clarity in your small business but is essential to forming professional partnerships, securing a loan, or working with investors. Here are ten tips to writing a business plan that will be taken seriously.
- Find a Suitable Template. Buy a book, take a class, research online, check out the Small Business
Administration (Central Indiana Small Business Development Corporation) for guidance on drafting a
- Prepare a Complete Business Plan. Include all necessary elements in a compelling format that is enticing
to the reader. Your business plan should include sections for: Mission or Vision Statement, Target Audience, Business Profile, Economic Assessment, Feasibility, Cash Flow Projections, Marketing, and Expansion.
- Research Your Industry. Compare your industry to business plan templates you have found. What is special about your business? What element might require more focus? Do you provide a product or service? Know how a business plan will work with your business.
- Have a Clear Mission or Vision. Clearly, emphatically, and succinctly state your goals for your artwork and your business. Don’t make an investor hunt (or guess) at why you exist; they don’t care that much and will lose interest quickly.
- Be Realistic. Don’t overestimate income or underestimate expenses. Make sure your sales goals are achievable. Break down “sales units” into component parts. If it takes you 1 hour to book a session, 4 hours to shoot a session, and 12 hours to proof the session, what is the entire package worth?
- Give yourself time to succeed. Don’t expect profitability in the first few months (or years). Your business plan should reflect both a reasonable timeline to profit and a supporting cash inflow while you are waiting.
- Don’t undersell yourself. Be sure you understand – and charge – what your time is worth.
- Review and Change as Needed. A business plan is not a one-time document. As your business grows and evolves, your business plan (like your resume) will change. Review your business plan at least annually, so when you need to provide it to an investor or bank it will not require a lot of work and research.
- Be Professional. A well-drafted, appealing business plan says a lot about you and your business. It tells investors and bankers that you think about your art as a business and you have the data to prove it. Don’t forget punctuation and grammar! A professional-looking business plan can make the difference between a “maybe not,” and “YES.”
- Know your Plan. Be thoroughly familiar with your plan, and be able to summarize it into an elevator speech. If you can hook your audience in 60 seconds, you will have time to go into more detail later. If you can’t say it in 60 seconds, work on it until it is smooth, engaging, interesting, and SHORT.
A Financial Control Policy creates checks and balances within the organization to ensure complete accountability for finances. This sample policy sets forth 10 common financial controls to protect the nonprofit.
To download the policy, click here. This material is for your use, but while the author of this document is an attorney, she is not your attorney. The author recommends that you (a) review any forms carefully and modify them to suit your particular circumstances and (b) have your attorney review the materials before implementation to be sure that they are legally appropriate for your organization.