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

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 jailhouse orange - a fashion accessory nightmare.  

 

  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 spreadsheets that clearly add up to the numbers on your tax return. 

 

   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 the 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.

Scribbles and arrows are NOT good enough. You need to know how much each item/artwork costs 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.

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

This post was updated on January 21, 2022.

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. 

To 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.

 

   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.

Employee labor is also part of your finished goods. Just keep an 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'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 somehow, 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. 

This post was updated on January 21, 2022.
 

 

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.

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, logbook, 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!

To be honest, I am permanently confused about the Cost of Goods Sold and Finished Goods...I feel like one of those bobblehead 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.
FINISHED GOODS is accountant speak. (All accountants live on a different planet than artists.)

Finished Goods equals the cost of any materials that go 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 bobblehead 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

This post was updated on January 21, 2022.

 

 

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.
 

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. Do you know what else they have? An inventory number!

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, the 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 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 first 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

This post was updated on January 21, 2022.

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.  

This post was updated on January 21, 2022.

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 the handle and spout   x   6.25” depth 
Private Collection

 

Morning Heartburn with the I.R.S.

 

Dragon Fire Flower Pin © 2010
Post-consumer recycled tin cans, 
Artist: Harriete Estel Berman

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 Flower Pin © 2010
Post-consumer recycled tin cans, 
Artist: Harriete Estel Berman

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
   © 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
    © 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 an 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

This post was updated on January 21, 2022.

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 craftspeople ask.  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'.

 

  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 any time by going to "My Info".

 

    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 -California Collection
  © 2009 Harriete Estel Berman
  Three-dimensional fruit crate label
  constructed 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 organizations 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

This post was updated on January 21, 2022.
 

Three Meteor  Bracelets from the Meteor Fruit Crate
California Collection  © 2009 Harriete Estel Berman
Bracelets are displayed and sold with the three-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  © 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  © 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 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.

 

   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

This post was updated on January 21, 2022.

 

Old Time Quality Flower Pin by Harriete Estel Berman is constructed from post-consumer recycled tin cans. 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.

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. 

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.  

Harriete
This post was updated on January 21, 2022.

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Van Houten Cocao Flower Brooch by Harriete Estel Berman was constructed from post-consumer recycled tin cans.  See a preview of the Flower Brooch collection on Flickr.