I just posted this topic on PNWNP and CANP, and am now canvassing your input. I have been thinking for a while about setting up a website for selling my prints. I am sure many of you here at CANP have websites selling your prints, and I have a few questions I am hoping you could answer for me:
1. Does a website selling your work count as a business? Do you get to deduct your photography-related expenses from your taxable income?
2. Do you have to register the website as a private business enterprise with your home state and/or other local bureaus? Does one require a "license to sell"?
3. Do you have to charge sales tax when selling to your home state residents?
4. Does selling your work through "3rd party" websites like smugmug.com pro count as a business?
Any answers to the above would be much appreciated, thanks.
Kartik
Posted by Jesse Speer on January 29, 2008 at 7:26 PM
Check your local sales tax regulations. But generally, you will need to register your business and obtain a sales tax license. And make sure you track all sales. You will have to report both overall and in-state sales for tax purposes (quarterly or annually). In Colorado, we pay 2.9% sales tax on all in-state sales.
1) yes, although there are "hobby" exceptions
2) You'll register your business name and obtain a sales tax license
3) yes, even over the internet
4) regardless of how you sell, if you sell to home state customers, you must collect sales tax*
*you can simply "include" sales tax in your pricing, and just pay your state taxes at the end of the year (or quarterly). I know some don't mess with collecting taxes, or even pay them. But you don't want to get caught selling and not paying sales tax.
I would add one additional caveat about registering as a business...The IRS frowns on those that register a business and deduct expenses for more than 3 years without showing ANY income. You should consult a tax attorney about the implications of hobby vs. business and the limts of deduction. I am no such attorney and don't claim to offer quality advice in this arena...My CPA did mention these things to me when I started and I've been careful to follow the rules.
Just remember, the only thing that brought Al Capone down was the IRS.
FWIW,
-D
Posted by Neil Corman on January 29, 2008 at 8:24 PM
I would agree with the suggestion of consulting a tax attorney and also a CPA. Additionally many states as well as cities have free seminars run by the revenue division regarding collecting sales tax as well as the payment of use tax. Colorado is one of the more complicated states for sales taxes with the special taxing districts and home rule cities.
thanks for the responses. Dave, I would be quite unhappy if after 3 years of running a website I could not sell even a single print! I plan to set up a website with the intention (or should I say hope) of making profitable sales.
Posted by Rick Dunn on January 29, 2008 at 11:18 PM
Dave, I would be quite unhappy if after 3 years of running a website I could not sell even a single print!
What Dave is referring to, I believe, is a requirement that you show a profit once in the first 3 years and twice in the first five; i.e., income exceeds deductible expenses. Your "income" is not the same as your profits.
The numbers may have changed since I checked into it a while back, but this is to prevent you from deducting expenses without attempting to generate a profit. The caveat - and it's BIG - is if you don't meet that requirement, you could be required to reimburse the IRS for the tax savings that you claimed in previous years. The good news is that you're not required to report all expenses, only income. So, if for some reason your expenses exceeded your revenue for 3 years in a row, you simply claim all of your income and deduct a lesser amount in expenses.
And, of course, consult a tax expert because I'm not one. When I looked into this, H&R Block offered 1 hour free consultation with no additional obligation. It was worth much more.
Posted by Phillip Noll on January 29, 2008 at 11:56 PM
Here is an excerpt from a book that discusses the "3 of 5" test:
Free advice from the web can be useful but I would still hire a CPA.
Posted by Kalin Wilson on January 30, 2008 at 12:14 AM
The exerpt that Phillip mentioned has some good points. The 3 of 5 test is just that a test or indicator. There are plenty of BIG businesses in the US that don't make a profit for many years. Still, you have to treat your enterprise as a business and be able to demonstrate that you are trying to make money, whether you do or not. Typical advice is to have business checking and credit accounts, have business cards, actively market your business, etc. Make it plain that you approach your photography and sales professionally, not just as a way to write off equipment and supply expenses. Still, most of what I've read states that the IRS is inclined to view photography businesses as hobbies, so we can expect to get a little more scrutiny. That doesn't neccesarily mean an audit.
I'm not a CPA or lawyer either. I'd recommend getting professional advice and ensuring you're organized properly. Tax professionals attitudes can run the gamut, try to find someone who is not too conservative and hopefully understands our business (I'm still looking).
Posted by Bill Pelzmann on January 30, 2008 at 1:08 AM
Does a website selling your work count as a business?
Do you get to deduct your photography-related expenses from your taxable income?
Yes, you can.
However, if you have only a few sales and want to deduct significant camera, computer, travel expenses, etc., as losses, you really need to get some expert advice. Technically you can, but do you really want to ?
Posted by Roger Rouch on January 30, 2008 at 9:31 AM
I ran a small non-photo home business for a few years. While I can't be qualified as an expert, this is what I might suggest. Technically, if you have any income from photo sales you need report it and pay taxes on it. If you report it as hobby income, you can't deduct expenses. But then again you don't have to go through the hassle of registering a business, doing book keeping, and paying a CPA to help with business taxes. I can't recall the limit, but if your sales are above a certain amount I don't think you can count as hobby income and need to register as a business. IMHO if you are going to have only small sales, this might be the way to go. Setting up a small business really isn't that hard. Probably an application from the state that will cost a few bucks, a separate checking or bank account (highly recommended to keep your money separate from personal finanaces), and maybe a few business cards. You should also have a very simple understanding of bookkeeping. I really don't see a need to consult a tax attorney myself, but would suggest a visit with a CPA. I used the exellent and very readable book, "Small Time Operator, How to Start Your Own Business, Keep Your Books, Pay Your Taxes & Stay Out of Trouble" when I started. It should answer most of you questions at a cheaper rate than a CPA or attorney.
My CPA mentioned that reporting a business loss on your tax returns was one of the "flags" the IRS uses to screen for potential audits.
I'd like to chime in and echo what Kalin wrote about the 3-in-5 being an indicator, and one of many indicators. Yes, it's wonderful to be able to make a profit every single year, but there are going to be some tough years (and, several years). As I was developing my photography business, I mentioned this 3-in-5 rule to a friend who, along with her husband, had a nature photography business on the side (and, he was a FT professional forensic photographer). She just laughed in my face about the 3-in-5 rule! She said they'd been in business as nature photographers for ten years and had not yet shown a clear profit. And, many other nature photographers that she knew were in a similar boat.
There are a lot of indicators that will show your seriousness - business checking account; credit card processing; web site(s); business registration; paying sales taxes; advertising/marketing; etc.es, while I would love to be able to make a big, fat income as a photographer, it's not going to happen unless I move to NY, Chicago, LA, etc., and then I'd commit suicide. What's more important to me is to be happy, pay my bills and make a contribution...
Tim!
Posted by Brent Murphy on January 30, 2008 at 11:13 AM
I'd like to add a little to what Roger has said....
You can call your photography a business or a hobby. I believe to count as a hobby, your photography income can't account for more than 5% of your total income. Definitely not a problem for me.
As Roger said, any income has to be reported, hobby or not. However, paying taxes as a business allows you to deduct more than you earned, which lowers your taxable income. You can also take deductions as a hobby, but you can only take deductions up to your hobby income. So, while you have to report your income, it's pretty easy to come up with hobby deductions, so you end up breaking even. Basically, with a business you can show a loss; with a hobby, you can't.
So, that's income tax. Sales tax is a whole other story.
You have to charge the sales tax required where the sale takes place. For online sales, you need to charge sales tax for items sold to customers in your home state. When you set up your web site, you will probably want to handle transactions through Paypal or something similar. Whoever you use will have options on how to handle sales tax. Paypal lets you set "rules" that charge the appropriate sales tax based on the buyer's location.
You don't need to notify the state that you are selling things, if you handle it as a hobby. But they still want that sales tax. You can register as a business if you want to, though, but that will come with all the hassles of running a business. Personally, I prefer to remain a hobby. Even if you don't want to set up an official business, you will still want to register a trade name. This is the name of your business/hobby. In Colorado, it's really easy to do, all online, and I think it only costs $1. Basically, this registers a name in your state, and keeps others from using the same name. I wanted to open a free business checking account from my local bank, but since I wasn't registered as a business, they wanted a record of my trade name registration.
First thing to cover yourself DEFFINATLY talk to tax attorney or verify for yourself the following.
Your can run a small business for 2 tax fillings with a loss but must show a profit or EXPANSION to your business to justify the loss for another 2 fillings.
Expansion includes but not limited to (For referance our business) buying a new lens, camera, computer, software, etc....
Discussion
13 repliesI just posted this topic on PNWNP and CANP, and am now canvassing your input. I have been thinking for a while about setting up a website for selling my prints. I am sure many of you here at CANP have websites selling your prints, and I have a few questions I am hoping you could answer for me:
1. Does a website selling your work count as a business? Do you get to deduct your photography-related expenses from your taxable income?
2. Do you have to register the website as a private business enterprise with your home state and/or other local bureaus? Does one require a "license to sell"?
3. Do you have to charge sales tax when selling to your home state residents?
4. Does selling your work through "3rd party" websites like smugmug.com pro count as a business?
Any answers to the above would be much appreciated, thanks.
Kartik
1) yes, although there are "hobby" exceptions
2) You'll register your business name and obtain a sales tax license
3) yes, even over the internet
4) regardless of how you sell, if you sell to home state customers, you must collect sales tax*
*you can simply "include" sales tax in your pricing, and just pay your state taxes at the end of the year (or quarterly). I know some don't mess with collecting taxes, or even pay them. But you don't want to get caught selling and not paying sales tax.
Just remember, the only thing that brought Al Capone down was the IRS.
FWIW,
-D
thanks for the responses. Dave, I would be quite unhappy if after 3 years of running a website I could not sell even a single print! I plan to set up a website with the intention (or should I say hope) of making profitable sales.
What Dave is referring to, I believe, is a requirement that you show a profit once in the first 3 years and twice in the first five; i.e., income exceeds deductible expenses. Your "income" is not the same as your profits.
The numbers may have changed since I checked into it a while back, but this is to prevent you from deducting expenses without attempting to generate a profit. The caveat - and it's BIG - is if you don't meet that requirement, you could be required to reimburse the IRS for the tax savings that you claimed in previous years. The good news is that you're not required to report all expenses, only income. So, if for some reason your expenses exceeded your revenue for 3 years in a row, you simply claim all of your income and deduct a lesser amount in expenses.
And, of course, consult a tax expert because I'm not one. When I looked into this, H&R Block offered 1 hour free consultation with no additional obligation. It was worth much more.
Tax Savvy for Small Business
I wish there was more to this excerpt but you can get the jist of it--or buy the book.
Nine Step Profit Motive Test
Small Business Guide
Free advice from the web can be useful but I would still hire a CPA.
I'm not a CPA or lawyer either. I'd recommend getting professional advice and ensuring you're organized properly. Tax professionals attitudes can run the gamut, try to find someone who is not too conservative and hopefully understands our business (I'm still looking).
Yes, you can.
However, if you have only a few sales and want to deduct significant camera, computer, travel expenses, etc., as losses, you really need to get some expert advice. Technically you can, but do you really want to ?
My CPA mentioned that reporting a business loss on your tax returns was one of the "flags" the IRS uses to screen for potential audits.
There are a lot of indicators that will show your seriousness - business checking account; credit card processing; web site(s); business registration; paying sales taxes; advertising/marketing; etc.es, while I would love to be able to make a big, fat income as a photographer, it's not going to happen unless I move to NY, Chicago, LA, etc., and then I'd commit suicide. What's more important to me is to be happy, pay my bills and make a contribution...
Tim!
You can call your photography a business or a hobby. I believe to count as a hobby, your photography income can't account for more than 5% of your total income. Definitely not a problem for me.
As Roger said, any income has to be reported, hobby or not. However, paying taxes as a business allows you to deduct more than you earned, which lowers your taxable income. You can also take deductions as a hobby, but you can only take deductions up to your hobby income. So, while you have to report your income, it's pretty easy to come up with hobby deductions, so you end up breaking even. Basically, with a business you can show a loss; with a hobby, you can't.
So, that's income tax. Sales tax is a whole other story.
You have to charge the sales tax required where the sale takes place. For online sales, you need to charge sales tax for items sold to customers in your home state. When you set up your web site, you will probably want to handle transactions through Paypal or something similar. Whoever you use will have options on how to handle sales tax. Paypal lets you set "rules" that charge the appropriate sales tax based on the buyer's location.
You don't need to notify the state that you are selling things, if you handle it as a hobby. But they still want that sales tax. You can register as a business if you want to, though, but that will come with all the hassles of running a business. Personally, I prefer to remain a hobby. Even if you don't want to set up an official business, you will still want to register a trade name. This is the name of your business/hobby. In Colorado, it's really easy to do, all online, and I think it only costs $1. Basically, this registers a name in your state, and keeps others from using the same name. I wanted to open a free business checking account from my local bank, but since I wasn't registered as a business, they wanted a record of my trade name registration.
Hope this helps.
Your can run a small business for 2 tax fillings with a loss but must show a profit or EXPANSION to your business to justify the loss for another 2 fillings.
Expansion includes but not limited to (For referance our business) buying a new lens, camera, computer, software, etc....