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September 2010

Surviving an I.R.S. audit - Cost of Goods SOLD and Jail House Orange - A Fashion Accessory Nightmare

Jailhouse ORANGE outift If the I.R.S. asks you to bring your Cost of Goods Sold from two years ago. Are you ready?  An I.R.S. audit causes lots of anxiety. They earn their reputation. My vivid imagination, normally a fantastic creative asset, revved into the red zone as I imagined myself in jail house orange - a fashion accessory nightmare.  

 

Altoids earrings by Harriete Estel Berman
  Altoids Earrings © 2010
  Recycled tin cans, sterling silver wire,
  jump rings, and posts.
  Artist: Harriete Estel Berman

Double and triple checking my Cost of Goods Sold took hours of work and lots of help to get ready. Sure, I had good Inventory Records, but they were encrypted in "Harriete lingo"  (i.e. no shape to hand over to the I.R.S.).  While I could interpret what and where everything was, auditors prefer to see rows and columns in spread sheets that clearly add up to the numbers on your tax return. 

 

Recycled Two Orange Bracelet from post consumer recycled plastic by Harriete Estel Berman
   RECYCLED Two Orange Bracelet
   © 2010 Harriete Estel Berman
   Post consumer recycled plastic
   Photo Credit: emiko oye

And here is what I learned this year.  Your Finished Goods (discussed in the previous post) becomes Cost of Goods Sold (COGS) only after it is sold. Duhhhhhhhh......

Most artists just move an item from their Inventory to SOLD. Done. Calculating Inventory is magic or subject to their creative imagination.

NOW THINK LIKE THE I.R.S.:
The IRS only wants to see clear and accurate records and neat rows and columns of numbers.

The I.R.S. wants to see how you calculated your Cost of Goods Sold. 

The I.R.S. wants  to see unmistakable evidence that you are acting in a business like manner.

Cost of Goods scratches and scribbles Scribbles and arrows are NOT good enough. You need to know how much each item/artwork cost to make. Each finished piece adds to your Finished Goods Inventory. 

So, month after month, year after year, the cost of your Finished Goods for each finished piece keeps adding to your Inventory.  By keeping an ongoing Inventory Record for each artwork or piece, the rest of this accounting becomes a lot easier.

Finally, when you sell a finished piece/artwork, you know exactly how much it cost you, right? The Finished Goods number becomes the Cost of Goods Sold for that piece. You already wrote the amount down in your Inventory Record.

Repeat, the dollar amount for Finished Goods now becomes the "Cost of Goods Sold" for the piece.  You subtract the amount from Inventory and add it to the end of year total for Cost of Goods SOLD. Voila! you've calculated your Cost of Goods Sold for the year.

Cost of Goods Sold example Ideally, as the year progresses, your list of SOLD work gets longer and your inventory decreases.
Harriete

AOL yellow and orange tin can earrings by Harriete Estel Berman
AOL Earrings by Harriete Estel Berman 

Surviving an I.R.S. audit - What Is Included in the Cost of Finished Good besides your best guess?

In the previous post we focused on using your inventory record to document your cost of Finished Goods for the IRS.  So what can be included in the cost of Finished Goods and what can't?

To keep this really simple, Finished Goods = cost of materials and employee labor that go DIRECTLY into the work.

If you use jump rings, a tube of paint, a roll of canvas, pounds of clay, or sheets of metal, anything that you use DIRECTLY in your work, is included in your Finished Goods. 

Harriete Estel BErman with a gigantic pencil working on her inventory recordTo figure out how much your raw materials cost, you can look at your receipts for purchases or write it on  the materials themselves.  For example,when I buy metal, I write the total cost on the sheet of metal with a magic marker. Buy some clay? Write how much it cost per pound on the outside of the package. Canvas? Write down the price per yard.

COGSsilver
   A sheet of sterling silver. I wrote the
   price of the sterling sheet metal when
   I bought it.


Write it down when you buy your materials so you won't have to look it up later.  If the jump rings cost you $3 for 20, then they cost you 15 cents each.

There are lots of ways to track your materials. Keep it simple and use the same method all the time. Write your cost of materials in your Inventory Record for each piece.

COGSindexhours

Employee labor is also part of your finished goods. Just keep a index card on your bench or in your studio for each work in progress. Write down the employee's labor and your labor separately.The index card on the left shows my labor ("HB") and 2 employees for a work in progress.

The IRS requires that the artist's labor (as a sole proprietor) does NOT go into Finished Goods, but I keep a record anyway.  I want to know how many hours I have invested in each piece. Don't you? How else can you plan new work or figure out if you are charging a reasonable retail price?

Your Inventory Record SHOULD INCLUDE the cost of materials and employee labor in each artwork. You need this information at the end of the year.  By the end of the year, the sum of Finished Goods for all finished work adds to your inventory.   

NOW IT IS TIME TO SELL! This will be the post for next time when we change FINISHED GOODS into Cost of Goods Sold (without magic).   

Stay tuned! to ASK Harriete Learn  the standards you need to survive an I.R.S. audit.

Harriete

  Campbell Soup Multi-Can Earrings by Harriete EStel Berman
     Campbell's Soup Multi-Can Earrings
    
© 2001 Harriete Estel Berman
     What are my materials costs?
     Materials: 2 sterling silver posts,
     2 sterling silver jump rings, sterling
     silver wire, recycled tin cans.
   


PS  If you don't have Inventory Records or if you don't consider your art or craft a business, then the IRS will not allow you to deduct your expenses.

If you intend to deduct expenses, then some how, some way, you really need to track the cost of materials and employee labor in your FINISHED GOODS to meet the expectations of the I.R.S.

This information is essential every year when you file your taxes. 


 



Surviving the I.R.S. - Cost of Goods Sold, Are you ready? Watch my head explode!

My appointment with the IRS required that I bring my Cost of Goods Sold and Inventory records. I.R.S.sign368

Visualize this written on I.R.S. stationary...

Cost of Goods Sold (and I quote directly from the Information Document Request)
"Physical inventory sheets for both beginning and ending inventory for the year. Copies of the Federal Income tax returns for the year before and the year after the return being examined (copy of your inventory list, log book, invoices, or any documentation you have that records your inventory.)

Canceled checks, receipts, journal or summaries of goods purchased for resale and all other records for labor, materials and supplies, and any other cost incurred to raise or produce goods for sale."

Does that sound scary? There was more....but we will discuss this in another post... the point is:
Are your Inventory Records good enough for the I.R.S.?

IF the I.R.S. wants it, you've got to have it!

BobbleheadTo be honest, I am permanently confused about Cost of Goods Sold and Finished Goods...I feel like one of those bobble head dolls. Yeah, I understand this for about a minute, then get confused again.  But I do know how to keep records, simple records, but records of everything. The IRS requires records and that's what you need to survive an IRS audit.

THE QUESTION IS: "How do you figure your Cost of Goods Sold?"

First you need your Inventory Record of everything you made. This has been discussed in many posts on ASK Harriete.

Use your Inventory Records to figure a value for FINISHED GOODS.
Artists and accountants live on different planets. FINISHED GOODS is accountant speak. (All accountants live on a different planet than artists.)

Finished Goods equals the cost of any materials that goes directly into your completed work plus the cost of your employee's manufacturing labor (but not your own labor).

FINISHED GOODS is the dollar cost of the work that you finish and the amount that you add to your Inventory for each finished piece. 

GET IN A GOOD HABIT.
As soon as you finish an artwork or item, add the costs to your Inventory Record.

FIGURE OUT YOUR MATERIALS COST (and employee labor). Write down every jump ring, bead or sheet of paper. Estimate (as best you can) the cost for the clay, paint or metal. It might be by the pound, by the ounce, by the inch or by the yard.

WRITE IT DOWN
Write down the cost of your materials and employee labor in your Inventory Record. This is the monetary value of Finished Goods for each piece.

AT THE END OF THE YEAR, the sum of all the Finished Goods is how much you have increased your Inventory during the year.

Finished Goods is not your retail price. Repeat this mantra.
Finished Goods is not your retail price. 
NOD YOUR HEAD, like a bobble head doll.
Finished Goods is not your retail price. It is your materials cost (plus your employee labor.)

Finished Goods DOES NOT INCLUDE your overhead labor or overhead expenses.
Finished Goods
DOES NOT INCLUDE your profit.
Finished Goods
DOES NOT INCLUDE your labor.

This is my head exploding.  Ask Harriete
Watch my head explode.

 

 


Surviving an I.R.S. audit - No change!


Last Thursday was my I.R.S. audit.  ARRGGGHHH!  We arrived at a location (which apparently is illegal to disclose). There were no signs on the building.  This felt more like a secret liaison than an appointment with my government.
  Irs3smiles

Both Terry (Secretary), Emiko (Studio Assistant), and my husband (taking the picture) came with me. They had prepared the documentation for the audit and reviewed and scrutinized all the records for the year in question. NOTE the extra LARGE red bag full of our papers. We were PREPARED! We even practiced!

Over the next couple of weeks, I am going to share how to survive (at least how I survived) an I.R.S. audit and ultimately heard the sweetest words a civil servant could utter,  "NO CHANGE!"  -- the best outcome you can expect.

I am not a tax adviser, just a "maker" like most of the readers of ASK Harriete who like to make work far better than keep business records.  But if you want to be in the "business of art or craft" (instead of a hobby), then accurate and complete records are required to show that you are "taking care of business."  The I.R.S. requires that you act like a business and your records are the evidence.

The previous post talked about titles. Titles are your first step in accurate Inventory Records. Think about it, every sofa, sweater or shoe in the store has a name. You know what else they have? An inventory number!

PAM Flower Pins from 2010 by Harriete Estel Berman
April Flower Pin © 2010
recycled tin cans, sterling silver,
Artist: Harriete Estel Berman
Inventory #
61.4L8.10/ 575

Every single item you make, whether it is one of a kind or multiple, needs an inventory number. My inventory numbers include a code that is a description, date made, and the price.  The inventory number of this pin is:  Flower pin 61.4L8.10/ 575. This means it is the 61st Flower pin, 4 layers, recorded to inventory in August 2010, and the price is $575. Each group of work has different information in the Inventory Number. I have talked about Inventory Numbers before on ASK Harriete.

AOL earrings from 2008
AOL Earrings08  © 2010
recycled tin cans, sterling silver,
Artist: Harriete Estel Berman

INVENTORY RECORDS are an absolute must to survive your I.R.S. audit. Are you ready?

Every item needs:
-
title
- inventory number  (including date made)
-
date sold
-
materials list, cost of materials and cost of labor to calculate your FG (Finished Goods) and COGS (Cost of Goods Sold).

An itemized COGS (Cost of Goods Sold) is one of the fist items the I.R.S. agent asked for on Thursday.  Are you ready for an I.R.S. audit? Do you know your Cost of Goods Sold?

We will go over COGS (Cost of Goods Sold) in the next post.

Harriete


Inventory Records - "Untitled" is the worst title.

The title for your work is your first step in good record keeping.

All too often I see "untitled" for art and craft objects. I can't think of a worse title. This isn't merely a value judgment, it is an inventory records nightmare. How can accurate records be kept for "untitled" after more than a couple?  Should a potential buyer ask for Untitled or Untitled?  Too many with the same title.... or should I say "untitle".  

Take some words of wisdom from thirty years of making. . . titles help you keep track of all your work. Keep it practical and simple, if you prefer, but titles help you and your store, galleries, clients and the I.R.S. identify and describe your work.

Today, while having my morning coffee at the local I.R.S. office, I will be thinking of you and your Inventory Records.  

IllyCOFFEEPOT.

Coffee Φ: The Golden Ratio  
from The Imposter Series © 2004   Harriete Estel Berman
Coffeepot and cups constructed using recycled tin cans of IILLY coffee,
10k gold and aluminum rivets, stainless steel screws, plastic resin. Stacked espresso cups are permanently attached with a concealed brass rod going through the cups.
        

22” height   x   12” width at handle and spout   x   6.25” depth 
Private Collection

 


Morning Heartburn with the I.R.S.

Dragon Fire Gum Flower Brooch by Harriete Estel Berman
Dragon Fire Flower Pin © 2010
Post consumer recycled tin cans, 
Artist: Harriete Estel Berman
Retail Price $595

I am being audited  by the I.R.S. again. O.M.G. (as in Oh My Government)  This is the 2nd time! Two days after writing a post about the first experience, I received a notice from the I.R.S. !!!!!!!

Coincidence or punishment?  I don't know, but here I go again with a mountain of paperwork. It has taken about 40 hours to get ready. I could be living dangerously by even telling you about this, but we are supposed to be protected by freedom of speech, right? And readers of ASK Harriete may learn something from this painfully anxious and toilsome experience. 

Dragon Fire Gum Flower Brooch by Harriete Estel Berman
Dragon Fire Flower Pin © 2010
Post consumer recycled tin cans, 
Artist: Harriete Estel Berman
Retail Price $ 595

The only protection is accurate records.

Yes, I do have a receipt for every expense.

You have receipts for all your expenses too, right?



Williams Sonoma Chocolate Bracelet by Harriete Estel Berman
   Williams Sonoma Chocolate Bracelet
   © 2007 Harriete Estel Berman
   Inventory Number:   BR10.22.07
   Photo Credit: Philip Cohen


Here is another issue...how about your Inventory Records? The I.R.S. wants to see my Inventory Records!!!

Do your Inventory Records include every single item you made?

Do your Inventory Records include:

  • the completion date for every single item?
  • information about when you sold each item?
  • your COGS (Cost of Goods Sold) for every single item you make/sell?

Williams Sonoma Chocolate Bracelet by Harriete Estel Berman
    Williams Sonoma Chocolate Bracelet
    © 2007 Harriete Estel Berman
    Inventory Number:   BR10.22.07
    Photo Credit: Philip Cohen

Could you reconstruct these records for three years ago?

Thank goodness I had reasonably good Inventory Records.

All my major pieces use the Inventory Record Form from the Professional Guidelines.

Smaller items like pins and earrings are kept in a Inventory List on my computer.

In the next few posts I will go over the minimum (in my opinion) for accurate Inventory Record Information including:

  • Title
  • Inventory Number (including date)
  • Dimensions
  • Cost of Goods Sold
  • Materials
  • Hours

OPTIONAL INFORMATION:
Photo Credit
Exhibition Record
Collector

Hey, and after we cover Inventory Records, I will be recovered (hopefully) and able to tell you what happened at my I.R.S. audit.

Have you been audited by the I.R.S.? What worked for you?

Do you have an Inventory System? What are you doing? Please tell everyone in the comments.

Harriete

Berman.H.B.CA1.WEB

Bermaid, the California Collection              2007
Three dimensional fruit crate label constructed from recycled tin cans on a wooded fruit crate.
Display for three bracelets including the Williams Sonoma Chocolate Bracelet in the above photos.
Photo Credit: Philip Cohen 


Where Do I Find Opportunities to Exhibit My Work?

"Where Do I Find Opportunities to Exhibit My Work?" is one of the most frequent questions that artists and crafts people ask.  CAFElogo copy It's hard enough to make the work, and then spend more time looking for opportunities to exhibit. ASK Harriete has answered variations of this question, such as a previous post titled How Do You Find Venues for Your Work;, but here is another idea, REGISTER with online jury sites like Cafe'.


HAND PICK & Win Flower Brooch by Harriete Estel Berman
  Pace HAND-PICK & WIN Flower Pin
  Post Consumer recycled tin cans
  © 2010  Harriete Estel Berman
  View the entire collection on Flickr.

The recent newsletter emailed from Cafe' prompted me to write this post.  I found several opportunities for myself and friends not otherwise on my radar screen. Here is what Cafe' says on their registration page.

"CaFÉ provides artists with an easy-to-use system to create a profile with contact information, upload digital images of their artwork, and apply to a number of open calls for entry at one time. There is no cost to register your profile and you can update it at anytime by going to "My Info".

HAND PICK & Win Flower Brooch(back view) by Harriete Estel Berman is jewelry constructed from post consumer reycled tin cans.
    Pace HAND-PICK & WIN Flower Pin  
   (back view of pin with hallmark)  
   Post consumer recycled tin cans
   Artist: Harriete Estel Berman
  View the entire collection on Flickr.

Registration is FREE, do it now!!!! It only takes a few minutes. After, you register, you can receive their newsletter listing new opportunities. 

In the future, as you respond to juried opportunities, the photos that you upload can be saved on the Cafe' site for you. This way you can access them again for the next opportunity.The downside is that CAFE requires your photos to be uploaded in a specific size (eliminating any advantage that horizontal shots have over vertical) and resizing your images for Cafe' takes extra time.

Meteor Fruit Crate and three bracelets by Harriete Estel Berman is constructed from recycled tin cans
  Meteor Fruit Crate -California Collection
  © 2009 Harriete Estel Berman
  Three dimensional fruit crate label con-
  structed from post consumer recycled
  tin cans, custom made wood crate,
  handmade paper, three bracelets.
  Photo Credit: Philip Cohen

Do you know of any online Jury sites that you would like to recommend to other artists?

Why not list them below in the comments?

Help yourself and other artists:

  • JOIN (yes, pay membership dollars) to a select number of artist organization that fit your work. Most likely they will regularly send out emails and newsletters to their members. Support the organizations that support artists like you.
  • REGISTER with online jury sites like Cafe
  • SHARE opportunities with friends and they will share with you
Harriete
Meteor bracelets by Harriete Estel Berman fit in the Meteor Fruit Crate display as a commentary about the California economy. 

Three Meteor  Bracelets from the Meteor Fruit Crate
California Collection
  © 2009 Harriete Estel Berman
Bracelets are displayed and sold with the 3 dimensional fruit crate label,
and wood crate display.
MATERIALS: Post consumer recycled tin cans, handmade paper, recycled cardboard, s/s rivets, brass tubing, wood. 
Photo Credit: Philip Cohen




She Sells Wholesale. She Sells Retail. Is She Selling Wholesale at Retail?

Recent correspondence with Suzanne Sippel, Retail Manager Asher Gallery at the Houston Center for Contemporary Craft, raised an important issue.  Many artists and craftspeople too often make a huge mistake. I have witnessed this phenomenon myself for years especially when I go to the smaller shows, exhibitions and online.

Suzanne Sippel said, “It’s the craft shows and fairs where I find more artists who don’t understand the business aspect of what they do. They are so excited to be selling their work that they ignore or forget the “sales” portion of the transaction. They miss the distinction between wholesale and retail, and absolutely forget overhead. I was very excited to read your column on including overhead, as I had not found a way to explain this to my “younger” artists.

As the Asher has grown we are representing more mature artists, and these issues arise less and less as a consequence. But it’s still a problem. I will find fantastic work by a new artist, but they would want to double their prices for me (wholesale/retail mix-up again).  Naturally this keeps them out of my gallery, but they are still out there. It devalues all of our businesses and their own professional growth.”

 

64 Crayola Crayons Flower pin by Harriete Estel Berman is jewelry constructed from recycled materials.
 64 Crayola Crayons Flower pin  © 2010
 Post Consumer Recycled tin cans
 Artist: Harriete Estel Berman

So what is the impact of selling your work at wholesale prices at a street fair, open studio, online, or exhibition?  If you sell work in retail venues (such as the above) and charge only wholesale prices, then you aren't covering your retail expenses.  But even more important, no gallery or store will take your work. They don't want to compete with YOU selling at your wholesale price.

64 Crayola Crayons Flower pin by Harriete Estel Berman
 64 Crayola Crayons Flower pin  © 2010
 (Back View)
 Post Consumer Recycled tin cans
 Artist: Harriete Estel Berman


A gallery or store can't sell your work when they know that their customers might buy something similar from you at at half the price.  It makes their retail price look like they are ripping off their customers. Of course, that isn't true, but the customer might not understand that the artist is the one making a big mistake.

 

Conversation M from the series Consuming Conversation by Harriete Estel Berman
   Consuming Conversation
   Conversation M © 2004
   Post Consumer recycled tin cans.
   Artist: Harriete Estel Berman
   Photo Credit: Philip Cohen

You heard the gallery perspective in the quote from Suzanne Sippel, but the message concerns your survival as an artist or maker. Your wholesale prices should cover your investment in fabricating the work including  hours, materials, and overhead (including overhead labor and overhead materials.)

Your retail prices should cover your retailing expenses. In the example of a street fair, you have the booth fee, travel, hotel, food, time for sitting at the booth, expenses involved in creating your booth (such as tent, cases, tables, fabric for your drape, and display expenses such as lights, fixtures, and more.) These expenses are not covered in your wholesale price. Retailing has its own set of expenses which is why there is a retail price. 

Harriete

 

RedOLDtime

Old Time Quality Flower Pin by Harriete Estel Berman is constructed from post consumer recycled tin cans. Retail Price for this pin is $380. One of a kind and hallmarked with my iron hallmark to establish the provenance. This flower will never fade.

 


Business Advice on the Internet

These days there is so much advice on the Internet, I mean tons....some good, and some that seems a little ,,,well....shallow, self-serving, or half-baked.  Penetrating through this fog, there is one person who I recommend, Alyson Stanfield. I have followed her for years. Her professional experience at the museum level is well grounded, yet her very down to earth approach helps artists get their work out of the studio to develop promotional visibility and a market for their work.

STUDIObook I read her book, "I'd Rather Be in the Studio" which reveals practical ways to market your art or craft more effectively.  It is definitely worth reading.

Alyson Stanfield also has a free newsletter. This week she is offering a gift for the subscribers to her newsletter. The gift is some GREAT information about using SlideShare to promote your art and craft. (I know what it says because I wrote it!)

A super short summary on how to get started on SlideShare is included on Alyson Stanfield's ARTBIZblog. The SlideShare site is FREE at the basic level. This is a truly easy, inexpensive, and effective tool.  There is so much you can do with it.  As examples, links to two of my SlideShare presentations are itemized below (the links paste right into my blog or an email). I also use them in several locations on my web site.

Why not subscribe to Alyson Stanfield's free newsletter to receive tips for your art career development.  I read it regularly to perk up my outlook.  

If you sign up now, new subscribers get the step-by-step instructions (that I wrote) to make your first SlideShare presentation.

Harriete

Here are two links to my presentations from SlideShare.  The first one is about my chocolate pot, Obverse Obsession.  The second one is a presentation from the Professional Development Seminar at the SNAG Conference in Houston.

Affiliate links on this blog may provide me with a few pennies to help defray expense and keep on going. Thanks for your support.
VanHouten72
Van Houten Cocao Flower Brooch by Harriete Estel Berman constructed from post consumer recycled tin cans. Retail Price is Pin $485. See a preview of the Flower Brooch collection on Flickr.