During my I.R.S. audit (many years ago), the very straight laced agent raised the issue of aggregating all my income and expenses for my multiple activities on one Schedule C, i.e. for Harriete Estel Berman as a sole proprietor.
What are my "multiple activities"?
In every day life this includes my silver repair business, one-of-a-kind artwork, writing, lectures, and exercise instructor several times a week.
Since every one of these activities generates revenue and is dependent on one person...me, I thought of it as all under one proprietorship, i.e. ME. The I.R.S. agent gently rocked her head and commented that some people mix disparate activities to cover up ill-gotten gains. She recommended using a separate Schedule C in the future to report each activity, but she did not enforce compliance retroactively since all income and expenses were itemized and reported accurately.
I'll bet that a lot of my readers also have multiple revenue streams. This is the life of most artists. While it may be too late for 2016 now that your taxes are already done, this is the time to rearrange your record-keeping for 2017.
What is the correct approach for multiple revenue streams?
I try to keep it simple, accounting for clearly distinguishable income and expenses that are unrelated activities. For example, the exercise instructor income and expenses are now separate. Expenses related to exercise instruction are deducted as unreimbursed employee expenses in accordance with the I.R.S.
Since the silver repair business uses the same tools, studio, and skills as my artwork, my artwork and repair activities are still integrated for both income and expenses. Same for lectures and writing since they are so closely related to the artwork. Everything is documented line by line in my Excel revenue and expense documents.
Legally, there have been several precedent-setting cases regarding taxes and creative accounting for creative people (including makers and artists). If you are interested, the three articles below are worth reading to highlight the principles of tax reporting for artists and makers. I find these articles fascinating.
This first link presents the tax case of Susan Crile (artist) most clearly.
Tax Court Judge Appreciates Art More Than Your Average Revenue Agent
Another very clear explanation is provided by Case Review: Crile v. Commission of Internal Revenue. "The decision the Court reached helps artists to remain artists, even if they are not making a profit from their work."
And a similar article in Forbes Magazine, Susan Crile Paints A Picture Of Tax Court Victory For Artists, highlights this exceptionally interesting case in which an established artist offset her teaching income with generous deductions as an "artist."
A very important point in this example is that "the economic losses she actually sustained in her art business were substantially smaller than the tax losses reported on her Schedules C, owing to the inclusion of many personal expenses when calculating her business income."
Crile won in her first court appearance, but may still be sued over what the IRS perceives as excessive deductions. To avoid IRS audit, I would recommend deducting only ordinary and necessary business expenses every year with a conservative justification especially if you show a net loss year after year.
If losses are persistent, the IRS may question whether you are conducting your business with the intent to earn a profit.
I've heard lots of people say (including the I.R.S.) that a "business" should earn money at least 3 out of every 5 years. For the sake of argument, I just wonder how that holds water when companies like Twitter have not ever made a profit. "10 years later, Twitter still isn't close to making money". In fact, Time magazine reports that "Twitter Has Lost a Staggering Amount of Money."
2020 Update: Twitter had it's first profitable year in 2019.
So why can Twitter continue to lose money for years, while an artist can't? There are no easy answers to making money for artists or Twitter, but acting like a business is important. To minimize the risk of trouble with the IRS, keep your expenses conservative.
This post was updated on December 13th, 2021.