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 “I Painted En Plein Air in Iceland and Norway and Deducted it”  

  - An article by Sandra Delong

I have two professions.  Four months of the year I am a tax professional, an EA (Enrolled Agent), eight months I am an oil painter.  When I learned that Kevin Macpherson was going to be the mentor for a group of artists going to Iceland and Norway , I signed up.  The trip was organized by The Artist Tours Group and I will describe how I expensed it. 

Since the expenses for the whole trip are ordinary and necessary for my business as an artist, I can deduct the entire trip on Schedule C, “Profit or Loss From Business” on my tax return.  If one week was painting and one week was just sightseeing, then only 50% would be deductible.  If the primary reason for a trip is personal, then only the direct business expenses while there are deductible but no travel costs to get there.

Any new equipment that I purchased for the trip (or for my studio) would be 100% deductible even if it was a capital item (would last more than twelve months).  Internal Revenue Code (IRC) Section 179 allows up to $125,000 (Year 2007) first year write off for new qualifying equipment.

For me, all lodging, tips, rental cars, mileage (including the trip to the airport), ferries, etc. would be deductible.  50% of the cost of meals while away from home overnight are allowable by the tax code, but since I don’t want to keep receipts, I just take a standard meal allowance (SMA) and 50% of that amount would be deductible.  The rate changes yearly and depends on whether you are in a low-cost or high-cost area ($45/58 for Year 2007).  OCONUS (out of the continental US) rates are difficult to find and change constantly.  You can call the IRS at 1-800-829-1040, give them the dates and the country and they will give you the current rate.

Film and film processing is a necessary expense.  Ordinary street clothes are NOT deductible but aprons, smocks, hats for sunburn care, or any other specialized clothing would be.  Passport fees, workshop fees, turpentine purchased in route, paper towels, maps and travel books are ordinary business expenses.  Dinner cruises are deductible after you deduct the value of your meal.  Telephone calls home are deductible only if they are business related.  The IRS requires lodging receipts in order to be deductible but if lodging is included in the total bill from the touring company and you have that receipt, you will meet that requirement.

For those that are in business and do NOT have an employer provided health insurance plan, there is a way to fully deduct not only medical insurance payments but other health care costs as well.  It is called an IRC Section 105(b) Plan referred to as a Health Care Reimbursement Plan.  I do not recommend it if you have employees because it could be prohibitive in cost to cover their medical needs.  Although, if they have other insurance and sign a waiver opting out, you would not need to cover them.  To implement this plan, you must operate a business for which you file a business tax return.  Your business can be a sole proprietorship, partnership, C-corporation, or limited liability company.  The attribution rule eliminates the use of this system for S-corporations.

There is no requirement that the business make a profit.  You would prepare a written company plan and sign it as owner; obtain a Federal ID number and hire your spouse to do legitimate tasks and pay him/her from the business checking account.  You must file payroll reports:  Form 941, Employer’s Quarterly Federal Tax Return, and pay FICA tax.  Also, an annual Form W-2, Report of Wages, needs to be filed by January 31^st each year.  I do not know about other states, but California does not require state payroll taxes be paid on a spouse.  Ask your tax preparer about this health care plan, it could save you real tax dollars, not only income taxes but self-employment taxes.  Or, for a fee I can give you more details and a sample plan.

For artists that have other full time careers or jobs, or are just learning the art of painting, expenses are not deductible unless you have some sales and maybe not even then.  If your involvement is considered a hobby (not for profit), then the amount of your sales would be shown on page one of Form 1040, Line 21 “Other Income”.  The income WOULD NOT be subject to self-employment tax.  Any expenses related to this income would have to be itemized on Schedule A, Miscellaneous Deductions, subject to 2% of gross income.  The expenses are only allowed up to the amount of the income.

For those in this category, another option is to go ahead and report sales each year but not expenses.  Keep a record of all costs and use IRC Section 263A to “capitalize” all costs of producing your art.  When gross sales increase substantially and a true business nature is established, the prior years’ start up expenses can be amortized using IRC Section 195 and deducted on Schedule C with the current year’s income.  The capitalized costs of producing paintings, prints, or cards, would become cost of goods sold and expensed on a prorate basis per item sold.

If you show a profit on Schedule C in three out of five years, then the burden of proof is on the IRS that you are not actually in it “for profit”.  You can still take losses, but the burden of proof is then on you to prove that you are truly operating a business for profit.  This is an area that the IRS looks closely at for noncompliance.  However, they do understand that it usually takes years for an artist to make a profit.  One argument in favor of proving a profit motive is the expectation that the assets of the business (the paintings) will appreciate in value as you become known.

One of the criteria for determining whether an activity is a hobby or a business is material participation.  Under 500 hours a year is considered NOT materially participating (i.e. a hobby).  Also a factor is whether the taxpayer is holding down a full time job (W-2 wages), therefore, would not have the time for material participation.  Other areas that are watched is whether gross sales increase each year which indicates one is actively working to expand the business.  Or, if cost of goods sold are more than sales this could mean current expenses are being written off when they should be part of inventory.  Inventory would include parts of the saleable product such as frames, canvas, paints, glass, mats, etc. , those items not used up in a calendar year. 

The IRS watches for unreported income by examining art galleries that issue sales checks to artists.  If these checks are “cashed” instead of deposited the IRS may decide to examine the artist also.

An area often misunderstood is how to deduct a donated work of art.  If you feel generous and donate a painting to a non-profit organization, your deduction would be limited to your cost to create the work; not the fair market value.  And, if like most artists, you deduct all of your materials purchased each year, then that is the only cost you get.  No fair double dipping as a charitable deduction.

I can be reached by e-mail at: srdelong@gv.net I am a member of the Placer Arts League, Pioneer Arts Club, Nevada County Plein Air Painters, American Impressionist Society, and Oil Painters of America .  I am a founding member of Chroma Gallery, in Fair Oaks , CA; which is the area’s premier plein air fine arts gallery.  I paint contemporary impressionism with representational images using a palette knife.

My work and other Chroma artists’ work can be seen at www.thechromagallery.com

Copyright Notice 2002.  Revised 2008.  All rights reserved Sandra Delong – The Author