Do you have so many questions about your upcoming tax filings that your head is spinning? Here are 12 helpful tax tips for photographers.
Here we go again, it’s that time of year. I don’t think anyone loves this season (maybe the IRS?)! It’s tax season, and I put together some tax tips for photographers! Partnership and S Corporation tax returns are due on March 15, 2018. Individual and C Corporation tax returns have to be filed or extended on or before my birthday, April 17. I have good news for you though! This article will provide you with essential and practical tax tips (aimed at federal) and your photography business. My hope is that you find it very useful and valuable!
Before we get started on these essential tax tips for photographers, please understand that these are general guidelines. I am a CPA, but this does not constitute, and is not a substitute for, professional advice. If you have questions, please contact a professional that can evaluate your overall personal and business situation.
What are the most critical things you can do?
- Keep your tax return filing process as simple, effective, and quick as you can.
- Proactively keep your tax liability as small as possible, within the law.
- Don’t panic. Even if you hate numbers. If you can figure out how to shoot on manual mode in different lighting conditions, you can learn what you need to know about your taxes.
How can you accomplish this? Please review the following tax tips.
1. PLEASE – Use Accounting Software, Not a Shoe Box or a Folder or Even Excel
This is one of the biggest tax tips for photographers! My favorite accounting software is Xero. It’s relatively inexpensive and easy to use. It’s intuitive, particularly for those who do not have an accounting background. Live bank feeds allow it to pull in your bank transactions, and we can “teach” it to remember how to code transactions. In many cases, all you will need 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. Wouldn’t it be nice if all you had to do was add your CPA as a user and answer the few questions she had? No gathering your receipts and driving to her office. Just an email and you’re basically done.
You can use Excel, but I guarantee you will save time (it’s your most valuable asset), energy, and frustration with Xero or another accounting program. Additionally, you will be less likely to miss transactions, i.e., tax deductions.
Have you been using a separate bank account for your business? Consider that it’s not that difficult to go back to January 2017, pull in your transactions for the year, and categorize them. If you haven’t done anything in terms of your accounting, please do consider this option.
If your business transactions are mixed in with your personal bank account, first, please stop that right now. Set up a separate business account. You will need to spend time and likely frustrating effort extracting your business from your personal. In addition, you’re much more likely to miss something or make a mistake. It’s your responsibility and no one can really execute that process for you. Set yourself up for a smoother, less time consuming, and more effective process in 2018!
2. What Is Your Tax Basis Revenue?
This may not fall under the category of tax tips, but it is critical to know. First off, what is tax basis versus cash basis versus accrual basis? Tax basis means that your books are kept in terms of tax accounting rules, versus cash or accrual or GAAP (Generally Accepted Accounting Principles). Tax basis can vary depending on how you file your tax return, cash basis or accrual basis. Cash basis or accrual basis is determined by 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. There are other differences, but those are the basics. Most of us with photography businesses are cash basis, and many of us likely keep our books on an accrual/cash hybrid. So we need to figure out what our revenue is for tax purposes.
Here are the questions to ask yourself?
- Do you take deposits/retainers?
- If so, are the deposits/retainers non-refundable?
- Are you a cash basis or accrual basis taxpayer? You can find the answer to this on your last business tax return or Schedule C.
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, determining your revenue is fairly simple. Let’s say for weddings I take a 50% non-refundable retainer when the contract is signed, and I collect the other 50% two weeks before the wedding. For a wedding in September 2018 that I booked in November 2017 for $5,000, I would collect 50% ($2,500) in 2017 and the remaining 50% ($2,500) in 2018. Even though I had the $5,000 contract signed in 2017, I would recognize $2,500 of revenue in 2017 and $2,500 of revenue in 2018, for tax purposes. This would be true even if I were an accrual basis taxpayer.
If the retainer is refundable (not likely for photographers in most cases), and 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.
In summary, for most of us that receive non-refundable retainers, include the income in the year it is collected, for tax purposes. And if the retainer and balance are collected in the same year, don’t worry about it too much. At least for tax purposes, you just need to get it in the right year.
3. Deductions – Equipment (Not Just Your Camera and Lenses)
Equipment deductions can add up quite nicely and decrease your taxable income. Assuming you make the proper election, you should be able to deduct (without using depreciation), any equipment purchases OR ANY EQUIPMENT YOU ADDED TO THE BUSINESS DURING THE YEAR, under $2,500. Technically, equipment should be capitalized (i.e., it would go on your balance sheet and be depreciated as an expense over time, based on the estimated tax basis life of the asset). However, current tax law allows you to deduct equipment as an expense as long as it’s under $2,500.
That said, even if the cost or fair market value is $2,500 or more, you may be able to deduct it using Section 179, depending on your overall tax situation (and if you can’t, you should be able to take the regular tax depreciation). There are some restrictions on the overall Section 179 deduction you can take, and more restrictions on certain assets, e.g., 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.
Please notice the capitalized words two paragraphs above. This is a reminder that you may be able to deduct (or capitalize and depreciate if $2,500 or more per asset) all or a portion of, any personal assets you use in your business, that you may have purchased prior to starting your business. Think about your computer, monitor, cell phone, keyboard, mouse, SD cards, cables, SD card readers, tablets, etc. Also, please remember that if these items have both business and personal use, you should only be deducting the business use.
4. Deductions – Vehicle Expenses
There are many of rules surrounding automobile expenses, but that shouldn’t stop you from deducting what you’re allowed to deduct. Essentially, you can deduct the expenses attributable to your business. You can take the deductions in one of two ways. (1) 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, (2) you can deduct the standard mileage rate multiplied by the business mileage you drove over the course of the year. I like the latter 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. The depreciation portion 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 know that rule and don’t actually do it, but that is the rule.
Also, please be advised that you cannot switch back and forth between the two methods. Essentially, once the actual method is used, the standard mileage method cannot be used. You can switch from the standard mileage method to the actual method.
Keep detailed records!
If you deduct automobile expenses, you’re required to keep a log of business trips that includes business purpose, date, people involved, beginning and ending odometer readings, and total mileage. Should you ever be audited (which may not be likely, but is possible), you may be asked to produce this log. If you don’t, the deductions may be disallowed. This usually isn’t in your favor, as you would likely owe tax, penalties, and interest. If you deduct automobile expenses, please just keep a log. There are many great apps out there to track your business mileage. I use MileIQ.
One final note on vehicle expenses – commuter miles are not deductible. An employee can’t deduct her vehicle expenses when she drives to and from work. A business owner can’t deduct her vehicle expenses when driving to and from her office. This doesn’t apply too often to self-employed photographers unless you have a separate office or studio that is your primary place of business. If not, driving from your home to your photo session is a deductible expense. On a side note, miles driven for medical reasons and/or for charitable work may be deductible as well, so you may want to track them too.
5. Deductions – Home Office / Home 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 related expenses.
- It must be your principal place of business AND
- It must be used solely for your business – no personal use, including storage.
If you have an external office or studio space and your home space is a secondary office, you probably don’t qualify. Maybe you’re like me and have a desk in your dining room. I cannot deduct my dining room, because my whole family eats in there, at least sometimes. However, my upstairs fourth bedroom that is used entirely as an office, does qualify for the deduction.
What should you deduct?
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 and it makes sense for your situation, 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 was created.
Also, if you own your home, please remember you should be able 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.
Finally, there seems to be a lot of concern over the home office deduction and it triggering an audit. I think this is a common misconception. If I’m eligible for the home office deduction, and I keep the necessary records, I’m going to take it! The average percentage of tax returns that are audited is 1%. I definitely don’t want to pay more in taxes than I’m required to pay. If I want to give that money away, I’m going to give it to a charitable cause that means something to me.
6. Meals & Entertainment
Meals and entertainment deductions have always been – interesting – but they just got even more interesting in 2018! In 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 buy when meeting a potential client at a local coffee or wine shop. In some instances, you could deduct 100% (e.g., a company holiday party).
New rules for 2018!
Beginning with 2018, entertainment is no longer deductible. What does that mean exactly? No one is quite certain yet! The general consensus is that you can still deduct 50% of your or your employee’s meals while on location at a photo session or on business travel, but you can no longer deduct coffee shop meetings, lunches, or other meals and entertainment with clients or prospects.
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). This is particularly important for meals and entertainment deductions because it is a commonly abused deduction. You can take your dinner receipt, write these items right on the receipt, take a quick cell phone photo for your records, and upload directly to Xero, Receipt Bank, Box, or any storage system that you use. Keep it simple and easy so that you do it, and don’t find yourself with a stack of receipts to scan at the end of the year.
7. Deductions – Other Expenses That Are Easy to Miss
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 phone and the old-fashioned kind as well
- Home utilities (as part of the home office deduction)
- Office supplies – pens, paper, printer toner, labels – All of these items add up, and you might not realize it if you are grabbing what’s already around your house.
- House cleaning (as part of the home office expense). Please 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 to landscapers.
8. Deductions – The Standards
This is one of my favorite tax tips for photographers: please take the deductions you’re eligible to take. My goal is to highlight the deductions you might miss, but please remember to deduct the standard 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 is lumped in with your personal return, ask your tax preparer to break it out for you or prorate 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. On Schedule A, it might not even meet the threshold to deduct).
- Business insurance
- Meals and entertainment (Please see #6 above)
What about clothing?
I get a lot of questions about deducting clothing. In most cases, clothing is not deductible, even if you have to buy an expensive outfit for a wedding that you normally wouldn’t wear. In order for clothing to be deductible, it has to be something that you just wouldn’t wear outside of work, such as a UPS uniform, or scrubs for a doctor. So unless you need scrubs for your Fresh 48 newborn session, you probably shouldn’t be deducting your clothing (or your dry cleaning for that matter). I can hear you cursing me through the screen. Please don’t be upset with me – I definitely don’t make these rules. If I did, they’d be far less complex.
9. Your children – It may be time for them to start working for you!
This may be my favorite tax tips for photographers! 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, 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….”
If you own 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 may 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, and that depends on your tax bracket). If you paid your child $5,500 in wages, that’s $841.50 – $1,171.50 in tax savings (less the deduction you would get for the employment tax deduction, which depends on your tax bracket).
Do your children have to file?
Although your children may be subject to income tax withholding, when they actually file their tax returns, they may have little or no tax liability, and get some or all of the withholdings refunded. At the least, their tax rate is most likely lower than yours. Furthermore, you could contribute their wages to a traditional IRA, Roth IRA, or 529 college savings plan, and potentially reduce income taxes that way (In some states for the 529; Roth IRA contributions are not tax deductible in the year they are made). Those options should be evaluated for your personal situation to see which options are best for you.
According to the US Department of Labor, there are no age restrictions on minors working for their parents (except in certain hazardous jobs).
A few words of caution, this may or may not be a good option for you. First, your child should actually be working for you if you are going to pay him as an employee, and this work should be documented and kept in your records. Second, payroll adds a layer of complexity to your business that may or may not be worth it to you. If you already have payroll, it’s probably not hard to add your child. If you have to set up payroll just to pay your child, pay the payroll service, file the monthly/quarterly/annual forms with the federal and state governments, it may not be worth the effort to you.
10. Hobby Loss Rules
Photography is one of those businesses that may easily be viewed as a hobby, particularly if you have a loss (i.e., your expenses are more than your income) year after year. The IRS has Hobby Loss Rules. They are – well let’s just call them gray – when you are just starting your business. Basically, the IRS does not allow you to reduce your taxable income from an activity that may be a hobby as opposed to a business that you’re engaged in to make a profit. If you’re reporting taxable income from your photography business, the Hobby Loss Rules don’t apply to you. If you reported taxable income in three out of the past five tax years, you satisfy the rules and shouldn’t have a problem with this. But what should you do if you’re in your first or second year and you have a loss?
Need and example?
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. However, 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. How could I be certain about that in Year 1 and determine if I was allowed to take the loss? I couldn’t.
So, what should you do?
Really I think 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, by the time I filed my tax return for Year 1, I was no longer at my full-time job, was much more focused on my photography business, and on track to make a profit in Year 2. 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. I prefer not to get into that in this post. Just know it is an option that should be discussed with your tax preparer.
11. Should You Prepare Your Own Taxes?
That’s a funny question for a CPA to answer. Let me ask you this. Would you take your own family portrait? I’ll admit that I have done this, when the only thing at stake was my holiday card that year. It came out fine, although not as good as it could have been. Would I consider taking my own wedding photos? No way! Not when a once in a lifetime event is on the line.
You can view your tax preparation in that light. You can do it yourself, but it’s going to take up your time, and it’s not likely to be as good as it could be if a tax preparer did it for you. It’s a possibility that you may miss something, you may pay more in taxes than you have to, or you may not. I think you have to ask yourself, is reducing your tax liability and making sure you’re compliant important to you? To use the analogy above, maybe it’s somewhere between a family photo and a wedding photo – you need to decide that.
Here’s an example for you!
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, after a quick review. He had sold a house that was a rental at the time of the sale, but that he had lived 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. 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 the efile send button and would have paid about an extra $25,000 in taxes. That’s not something the IRS would likely catch and refund.
I don’t tell you that story to “toot my own horn,” as my friend Val would say. I think most tax preparers would have picked that up. It’s also not frequent that I can save someone that much money. But it does illustrate my point. You’re a professional photographer and place a high value on professional photography services, as do your clients. I am too, and I am also a CPA and place a high value on accounting services, as do my clients.
12. Which Form Should You File?
As it pertains to federal income tax and your business, you may need to file Form 1040 with Schedule C, Form 1065, Form 1120S, or Form 1120.
Here’s a quick overview:
File Form 1040 with Schedule C if your business is:
- A sole proprietorship, meaning you have no separate legal entity set up
- A single member LLC that has not made the corporate election (default)
- A Qualified Joint Venture between you and your spouse, you have no separate legal entity set up, and you make the election to be treated as a Qualified Joint Venture
File Form 1065 (Partnership) if your business is:
- An informal partnership, meaning you have no separate legal entity set up, with one or more other people (in addition to you)
- An informal partnership with your spouse, that has not elected to be treated as a Qualified Joint Venture
- An LLC with two or more members that has not made the corporate election (default)
File Form 1120 (C Corporation) if your business is:
- A legally formed corporation that has not made the S election
- An LLC that has made the corporate election and NOT the S election
File Form 1120S (S Corporation) if your business is:
- A legally formed corporation that has made the S election
- An LLC that has made the corporate and S elections
For the Schedule C, 1065, and 1120S, the business does not pay income tax separately from you. The taxable income flows through to your personal tax return. You then pay income tax based on your overall taxable income. For entities that file Form 1120, the business pays income tax separately from you.
There are likely additional forms that need to be filed if you live or do business in a state that has an income tax. If you need help determining which tax status is best for you and your business, please talk to a tax professional. There are several variables to consider.
So that’s it! Our twelve tax tips for photographers! 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 hope you have found these tax tips, written just for photographers, helpful. I’m here if you have questions or need help.
DISCLAIMER: All data and information provided in this article are for informational purposes only. The author 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.