Tax time is upon us which is always the time we evaluate the financial success for the previous year. But with this economy, trying to make and sell art or craft with a profit is challenging.
The I.R.S. applies multiple criteria for evaluating whether your art or craft is a "hobby" or a "business." Without any doubt, an artist or maker has to take the accounting side of the "art business" seriously. The I.R.S. expects detailed records that reflect a business-like approach, but there is sometimes a kind of gray area.
The gray area in their evaluation criteria is characterized more by words than numbers. The words "time, effort, knowledge, recognition and appreciation" may be the difference between defining your art or craft as a "business" or a "hobby" in the eyes of the I.R.S.
Lets look at the words:
Do you regularly invest time? Do you work regularly and frequently? A half day per week activity, e.g. Sunday afternoon, does not appear to qualify as a business-like approach.
Is it evident that you apply substantial effort? The amount of effort involved should be VERY CLEAR evidence whether the artist/maker intends to make a profit or just enjoy an occasional activity.
Do you have the knowledge from experience or education? Your education and training can be further evidence that you have the knowledge to be a professional in your field. Education certificates or degrees, professional acknowledgments, and experience needed to perform the art activity at an advanced level may differentiate it from a hobby.
Is your work recognized as professional? The I.R.S. could not define my art business as a "hobby" (even when my business lost money) because my
professional profile fit most of the criteria. Establishing yourself as
a recognized expert in the field is the definition of a professional.
The word "appreciation" is critical here. It is evident that my art work "appreciates" or increases in value. This is further evidence of an expectation to make a future profit in the appreciation of assets (my artwork).
So make sure that you "act" like a business in every way with detailed accounting, separate bank account, and perfect record keeping. In addition, keep detailed records with documentation of your professional efforts to make money and gain exposure.