Audit issues

All posts in the Audit issues category

COMMON AUDIT ISSUES FOR ARTISTS & GALLERIES

Published August 12, 2019 by Gail Daley Writer & Artist

By the Practical Artist

Information for this blog was taken from REG 121584-05 page 523 http://www.irs.gov/businesses/small/article/0,,id=254019,00.html– 77.3KB

 

Probably the one agency that terrifies Americans the most is not the NSA, but the IRS and being audited by the IRS ranks up there with being on some mobster’s hit list. The best way to avoid being audited is to know what items will considered red flags by the IRS. The following are a few audit issues looked at by the IRS that may be found in the examination of an art gallery or home studio.

Unreported income through cashed checks from galleries to the artists leading to related returns to be examined;

Barter transactions between artists and others in the art field;

Taxability and inventory assessment issues for trades between gallery owners and artists;

Avoidance of state sales taxes;

Treatment of ordinary income as capital gains by mischaracterizing inventory as investments;

Identification of sources who failed to file/report transactions through “cost of goods sold” by studying cancelled checks and payment/transaction records;

Framing costs not properly recorded;

A History of losses or very high travel and entertainment costs with low gross receipts suggesting potential Activity Not Engaged in for Profit pursuant to I.R.C. § 183;

Sales of artwork disguised as “loans” secured by art as collateral and possible “money laundering”;

Other “financial status” indicators which show an artist’s or gallery owner’s reported income is incompatible to his or her lifestyle;

Potential issue on Non Resident Alien Artist, Art Galleries, Dealers and Brokers (International Referral Required);

Artwork being deducted as a charitable contribution at fair market value rather than adjusted cost basis and/or not being taken out of cost of sales;

Business use of the home.

If the gallery purchases its inventory, there should be a very detailed inventory listing showing the purchase date, the purchase price, any restoration and framing costs, the sales date, and price.

If the gallery sells on consignment, there will be a system in place to track consigned items. This system will generally contain the artist’s name, his or her address, a description of artwork, the date on which the artwork was received by the gallery, the asking price by the artist, and any other specific terms. It also indicates the date the piece was sold, the sales price, and terms of the sale.

The sales invoice for an art piece needs to  display the buyer’s name, address, date of sale, amount paid (if not fully paid), terms of any installment plan, sales tax, shipping charges, and framing charges if it is the type of artwork that would require framing.

Since artists are not offering a service, galleries are not required to complete a Form 1099 for the payments made. However, artists should receive a consignment check either monthly, at the time of sale, or at a time specified in an agreement between the artist and the gallery.

The best way to keep issues like those above from impacting your career as an artist is to keep good records for your home studio/gallery. If you sell your art, it is considered income and over a certain amount, it must be reported as such to the IRS on your federal taxes. If you participate in a booth event, you are usually required to have a seller’s permit, collect sales tax, and then report and pay that sales tax to the State.  Art is a business as well as a creative endeavor. Losing your art can be a financial loss. Not being aware of losing money because you don’t keep track of costs can create a huge problem.

Hey, relax; this isn’t as difficult as it sounds! Let’s take this one step at a time, using one piece of work. Step one: decide in what form you are going to keep your work log.While it is very helpful to have this information stored on a computer, artists were tracking their work using paper files long before computers became popular. I personally prefer using a computer worksheet, however, all of this stuff can be put on a sheet of paper and kept in a binder. For the initial record, I recommend a single sheet or worksheet per art piece. (Please see the Art Information Sheet in the Sample section)

ITEM 1—a pictorial image of your work. This can be in the form a printed photograph, a slide or a digital image. If your work is 3-deminsional, be sure to take photos of all sides of the work. Since this image is not going to be used to reproduce the work, a small, low-resolution image will suffice. The image should be large enough to see details of the work, clear and without blurring.

ITEM 2—the title of your work, size, style/genre and when it was finished.

ITEM 3—a brief description of the work (use complete sentences—why will become clear later). Optional—I also like to keep a kind of diary as to what I wanted to achieve, why I chose this image, and what was going on in my life when I created this art piece.

ITEM 4—Keywords to be used when downloading the photo of your art to your web site or other internet media.

ITEM 5—Show and exhibit record is a list of what shows or exhibits were entered, when they took place and if the art won awards.

ITEM 6—wholesale and Retail price. This is probably the hardest thing for an artist to decide on—how much to charge for an artwork! What is the difference between Wholesale and Retail? Wholesale is always lower than Retail. Your wholesale price at a minimum should cover the cost of what it cost you to create the art, plus any gallery commission fees and hopefully with a small profit margin. Retail price for an art piece should cover all this plus what you as an artist feel the art is worth. I realize this is very subjective but most of art issubjective.

ITEM 7—Incidental information such as the date you formally copyrighted the work, cost of the copyright, etc. More about copyrights later in the Copyright section.

ITEM 8—If you had limited editions of a painting or photograph or copies of a sculpture made, when, how many , how much it cost to make them, how many sold and how much you made when you did.

ITEM 9—the date you sold the original art and the name and address of the Buyer.

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Donating Art

Published March 2, 2019 by Gail Daley Writer & Artist

The phone rings, and some well-meaning fundraiser on the other end wants you to donate a work of art to their charity auction. Usually this goodhearted fundraiser will promise you a tax deduction, great exposure, enhanced publicity, and public exposure if you agree; sadly, most volunteer fundraisers don’t know what they are talking about as far as the actual benefits to you as an artist. Should you do it? This really depends on several things; how much do you support the cause itself? Are the benefits going to out-weigh the costs?

Well lets deal with the tax deduction benefit first. It’s not great.Generally speaking, you as the artist are allowed to deduct only the cost of creation (materials, etc.) unless you have had an appraisal done by a qualified art expert. This is no problem if you are a big name artist whose art is going to bring in thousands of dollars to the charity because the charity will usually have the art appraised by their expert, which you can then attach to your taxes. However, if you are donating to your child’s school, your church, local hospital, etc. chances are the charity is not going to pay for this appraisal because they can’t afford it. Sometimes the charity is worthwhile (in fact most of the time), but unless they follow my rules for donation, what they are really doing is training whoever comes to their event to devalue my art and disrespect me as an artist. This may sound really harsh but it has been proven to be true.

The next two items typically promoted by fundraisers are “enhanced publicity and public exposure” which sounds really good, but what exactly are they actually talking about? A line in the auction catalog and announcing your name when they bring up your art? Please. Remember that most of the fundraisers who do telephone contacts are volunteers with no actual experience in the field. In other words they really have no idea what they are talking about. Enhanced publicity shouldmean your name in the newspaper, on the radio or on the charity’s Facebook page with a link to your website. Public exposure shouldmean that instead of just pointing to your art and asking for bids, the auctioneer talks about you, what awards you’ve won, how good the art is, etc. to encourage the audience to bid higher. He or she should also mention your web site, and the brochures advertising you as an artist, which should have been available when the bidders were doing the walk-through.

Predictably, at most of these charity events, they practically give away the art because the bidders are not art collectors, they are there to support the charity and are looking for two things—something they can afford to bid on to satisfy their tax deduction and to support the charity. A lot of them might be even comparing your fine art to canvas prints they can get at a department store! Auctioning your art for much less than you normally sell for undermines the art market in general, and makes it seem as if the artist (you!)didn’t deserve therealselling price. Another negative side effect is to encourage your regular collectors and potential buyers to wait for events like this to buy your art cheaper than they could if they purchased it directly from you.

The “public exposure”thing is problematical; unless the auctioneer makes a really big deal about your art business and how valuable your work is, everyone present is likely to still think you have a nice hobby. I was once asked by my church to design a poster/logo for a women’s retreat. When the event coordinators husband saw it he remarked to her that it looked like a “real” artist had done it. I find that no matter how good the art I donate to their event is, my circle of acquaintances in my church, my children’s school and my family almost all still believe that my art is a hobby, so I don’t donate unless the charity agrees to the following ground rules:

  • I set a minimum price for original art. If it doesn’t sell, I get it back. This is absolutely essential because unless you have an appraisal from a respectable appraiser attached to the art; all that you can take off on your taxes is the cost of material used to create the art.
  • I qualify the event by making sure there will be folks there who can actually afford to purchase the art (this means getting actual names of who will be attending or at least who has been invited), and that the event will be well publicized: this means actual ads on TV, Internet, and Radio, hopefully with a mention of the art you are donating.

Once charities learned I stuck to these rules, I found that the requests dropped off dramatically. This doesn’t mean that I am wholly against art donations; I dodonate my art to worthwhile charities, but I find that it usually pays better tax deduction-wise to donate a good quality print than the original. If you donate a print, you can deduct the entire printing cost, framing and matting which is a much better deal for tax purposes. To sweeten the pot for prospective buyers, I do always sign prints that I donate, and make sure I tape information about myself, my website and the art to the back of the print.
Good Luck

Gail

Common Potential Audit Issues of Art Galleries

Published January 19, 2019 by Gail Daley Writer & Artist

Information for this blog was taken from REG 121584-05 page 523 http://www.irs.gov/businesses/small/article/0,,id=254019,00.html– 77.3KB

Probably the one agency that terrifies Americans the most is not the NSA, but the IRS and being audited by the IRS ranks up there with being on some mobster’s hit list. The best way to avoid being audited is to know what items will considered red flags by the IRS. The following are a few audit issues looked at by the IRS that may be found in the examination of an art gallery or home studio.

Unreported income through cashed checks from galleries to the artists leading to related returns to be examined;

Barter transactions between artists and others in the art field;

Taxability and inventory assessment issues for trades between gallery owners and artists;

Avoidance of state sales taxes;

Treatment of ordinary income as capital gains by mischaracterizing inventory as investments;

Identification of sources who failed to file/report transactions through “cost of goods sold” by studying cancelled checks and payment/transaction records;

Framing costs not properly recorded;

A History of losses or very high travel and entertainment costs with low gross receipts suggesting potential Activity Not Engaged in for Profit pursuant to I.R.C. § 183;

Sales of artwork disguised as “loans” secured by art as collateral and possible “money laundering”;

Other “financial status” indicators which show an artist’s or gallery owner’s reported income is incompatible to his or her lifestyle;

Potential issue on Non Resident Alien Artist, Art Galleries, Dealers and Brokers (International Referral Required);

Artwork being deducted as a charitable contribution at fair market value rather than adjusted cost basis and/or not being taken out of cost of sales;

Business use of the home.

If the gallery purchases its inventory, there should be a very detailed inventory listing showing the purchase date, the purchase price, any restoration and framing costs, the sales date, and price.

If the gallery sells on consignment, there will be a system in place to track consigned items. This system will generally contain the artist’s name, his or her address, a description of artwork, the date on which the artwork was received by the gallery, the asking price by the artist, and any other specific terms. It also indicates the date the piece was sold, the sales price, and terms of the sale.

The sales invoice for an art piece needs to  display the buyer’s name, address, date of sale, amount paid (if not fully paid), terms of any installment plan, sales tax, shipping charges, and framing charges if it is the type of artwork that would require framing.

Since artists are not offering a service, galleries are not required to complete a Form 1099 for the payments made. However, artists should receive a consignment check either monthly, at the time of sale, or at a time specified in an agreement between the artist and the gallery.

The best way to keep issues like those above from impacting your career as an artist is to keep good records for your home studio/gallery. If you sell your art, it is considered income and over a certain amount, it must be reported as such to the IRS on your federal taxes. If you participate in a booth event, you are usually required to have a seller’s permit, collect sales tax, and then report and pay that sales tax to the State.  Art is a business as well as a creative endeavor. Losing your art can be a financial loss. Not being aware of losing money because you don’t keep track of costs can create a huge problem.

Hey, relax; this isn’t as difficult as it sounds! Let’s take this one step at a time, using one piece of work. Step one: decide in what form you are going to keep your work log.While it is very helpful to have this information stored on a computer, artists were tracking their work using paper files long before computers became popular. I personally prefer using a computer worksheet, however, all of this stuff can be put on a sheet of paper and kept in a binder. For the initial record, I recommend a single sheet or worksheet per art piece. (Please see the Art Information Sheet in the Sample section)

ITEM 1—a pictorial image of your work. This can be in the form a printed photograph, a slide or a digital image. If your work is 3-deminsional, be sure to take photos of all sides of the work. Since this image is not going to be used to reproduce the work, a small, low-resolution image will suffice. The image should be large enough to see details of the work, clear and without blurring.

ITEM 2—the title of your work, size, style/genre and when it was finished.

ITEM 3—a brief description of the work (use complete sentences—why will become clear later). Optional—I also like to keep a kind of diary as to what I wanted to achieve, why I chose this image, and what was going on in my life when I created this art piece.

ITEM 4—Keywords to be used when downloading the photo of your art to your web site or other internet media.

ITEM 5—Show and exhibit record is a list of what shows or exhibits were entered, when they took place and if the art won awards.

ITEM 6—wholesale and Retail price. This is probably the hardest thing for an artist to decide on—how much to charge for an artwork! What is the difference between Wholesale and Retail? Wholesale is always lower than Retail. Your wholesale price at a minimum should cover the cost of what it cost you to create the art, plus any gallery commission fees and hopefully with a small profit margin. Retail price for an art piece should cover all this plus what you as an artist feel the art is worth. I realize this is very subjective but most of art issubjective.

ITEM 7—Incidental information such as the date you formally copyrighted the work, cost of the copyright, etc. More about copyrights later in the Copyright section.

ITEM 8—If you had limited editions of a painting or photograph or copies of a sculpture made, when, how many , how much it cost to make them, how many sold and how much you made when you did.

ITEM 9—the date you sold the original art and the name and address of the Buyer.

 

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