Any recommendations for a simple art/craft accounting system? Expenses broken down into supplies, services (giclee printing etc), mileage, travel and lodging. Sales. Inventory, etc
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Any recommendations for a simple art/craft accounting system? Expenses broken down into supplies, services (giclee printing etc), mileage, travel and lodging. Sales. Inventory, etc
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We never said this, and if you quote us we'll deny it and attribute it to a hacker:
One of us is a retired chief cook and bottle washer who takes takes field direction from the other, and one of us is a designer/jewelry crafter.
[Cost] accounting for our craft business, in which we think we're well on our way of graduating from noobie stage, is a small part of the overall work and effort, but otherwise rewarding. Keep that in mind, and definitely pull down the Schedule C instructions and Small Business guidance from www.irs.gov. It will be well worth your while. We say this because: Where else can you expense travel and a substantial portion of your daily dining expenses against gross sales, basically for tax purposes?
And have a helluva good time while doing it? Meeting great people, copying their great ideas and avoiding their baddies, traveling from forest to harbor to park and places in between, and just enjoying yourself most of the time (UGH for loading, unloading, and reloading, but they're all a prerequisite to play and otherwise goofing off, and catching the occasional Whopper with a chocolate shake).
Yes, we want to make a profit -- if you can't make that an objective you might as well get out. But at the same time, even if you never compensate yourself (accounting-wise), so long as you keep good records, you can really (and semi-unconciously) enjoy yourself through the business expense process. Oh, and don't get tee'd off at anyone, especially at your next door neighbors, and your clients -- it's counterproductive. Good neighbors send business your way, and vice versa.
Wow! Thanks all! What a great response.
Finally, use a pencil, not a pen! As you progess through a year's worth of logs and expenses, you'll have to use an eraser. Ink's a bitch to erase.
One further note. Remember and practice the KISS principle. You don't need to invest in sophisticated or web-licensed accounting software, especially when you're just starting out. There's no need. The two points we were trying to make in everything above are (1) in order to be profitable and/or shield (with a loss) other income, is that you have to comply with IRS tax rules, and (2) your accounting methodology can be simple and not cost anything, so long as you put the effort into recording, and documenting, every business-associated cost you experience to meet the requirements of (1). As long as your records are complete and thorough, and you log things (spiral notebook, DOME, or MS Excel workbook, among others), you'll be fine. Grab the DOME book if only to get a fuller picture of all of the expenses related to a small business. (We found General Ledgers worthless, so don't buy one.)
Or, for free, head to irs.gov and look for the small business and Schedule C information publications. You'll find a great deal of info there relating to expenses, accounting, etc. That said, if you're Schedule C league, don't get freaked out by some of the stuff the IRS publishes -- it can be overwhelming if you're not a discerning individual. [Now we're thinking we ought to calculate and record a business expense for the amount of time spent on this topic. Nah! IRS won't buy it.]
Three Basic Principles: (1) Keep it simple; (2) Keep detailed sales/cost records and retain all business/sales-related receipts; (3) log vehicle travel, including both personal and business mileage.
Morale Boost: Small business accounting, especially in the arts and crafts arena, IS NOT COMPLEX. Don't go overboard. Keep regular and reasonable records of your sales and expenses related to producing those sales. You don't need to buy dedicated software, especially if you're just starting out. That said, if/when you actually have employees and payroll (and payroll taxes), you will probably need a bit more sophistication. If it's just you, or you and a significant other, use MS Excel or buy a ledger.
Our first year we didn't know squat, so we bought a DOME "Simplified Monthly Bookkeeping Record" book, about $8 at Amazon.com (the cost of which is a "deductible expense" on the IRS Schedule C).
Unless you're grossing millions of dollars (if you are, can we come work for you?), we assume you report Schedule C business income/expenses as part of your annual 1040. DOME has you record 50-some expense categories, whereas Schedule C only requests a fraction of those. DOME is dated in that way, but it's a solid reference and using it for your first year is good practice -- it helps you get disciplined to bookkeeping neccesities and familiar with what expenses you can assign against gross sales. After our first year we developed a spreadsheet with workbooks for each calendar month to record expenditures and sales, and corresponded (grouped) the DOME expense categories into the IRS Schedule C categories. The worksheet is on a laptop we now carry with us from street fair to festival.
We've used Quicken home accounting software for years, but we don't use it for our craft business. That's our choice, but if you use Quicken (or similar) diligently to record credit card, cash, and check payments for all purchases, personal and otherwise, it does document (i.e., back-up) expenses related to your business to which you can refer to and correlate with your separate business accounting. You can create different working files in Quicken, so you can keep both personal records, and business records, if you want.
(The reason we don't use Quicken for our business is because we don't have separate banking/credit accounts for it, so it would be both confusing and time-consuming to record duplicative transactions in two separate Quicken databases, using the same accounts. Again, for us, it provides secondary documentation in case the IRS ever asked, but we don't use it for our craft show accounting.)
Given our very small size and volume our first and second years, we'll continue to use a simple spreadsheet (ledger) to record gross sales and detailed expenses, month-by-month. It's simpler and takes less time to record, which is really the purpose of any accounting system you eventually set up. However, while your system need not be complex, it does need to be regularly and continually documented and ensure that you differentiate between personal expenses, and business related expenses.
(One way we differentiate is to simply not confuse/include/combine personal expenses and business expenses. We record all expenses -- personal and business -- in our Quicken Home software, but keep separate, business-only income and expenses in a MS Excel workbook by tax year, with related receipts held in file folders.)
Sales: Record all sales, which should be gross. We don't write receipts generally, but if a customer wants one, we have a receipt book and write one up (I think we've only written one over two summer seasons). If you give a discount from your marked price to an individual customer, record the discount $ amount in your sales log -- these are deductible business expenses on Schedule C.
Further on Discounts: We've noted a number of A&C booths that have prominent marked prices for each piece of work on display, but which also have a large sign that might say, "25% off all items," or similar. We have not investigated the tax implications of a mass discount, or "on sale" items. On our part, we promote quantity discounts, rather than price discounts. For example, we have handmade earrings priced at $3/set. Our signage promotes a quantity buy, stating "$3 / pair -- $10 / 4 pairs". However, we don't report/deduct this quantity pricing as an expense against gross sales in our Schedule C. (We probably need a lawyer to determine this, but we've decided that's a cost we don't need.)
If you can accept credit cards -- and we suggest you do, because these days more people have credit/debit cards than cash, and if you don't, you might lose some sales -- you likely have a servicing arrangement with a credit/debit card processor. Keep a running record of fees per sale (usually documented via your daily "close"), and all monthly account/servicing costs, also an expense of sales.
If you live in a sales tax state or locality, you, as a small business, are liable for collecting and remitting sales tax to the locality, and you likely have a state-issued tax ID -- many venues require you to provide a tax ID number (these are obtained free, after you acquire an [also free] EIN from the USG). NOTE that the IRS instructs you on Schedule C to deduct sales taxes from your gross sales. Don't lose track of your sales tax liabilities because it is deducted from your gross income reported on the Schedule C, which in turn reduces your individual/joint income tax liability.
Many artists and crafters price/sell their products gross without separate sales tax added, but they (you) are still liable for recording, reporting, and paying the sales tax per the rate described by local law for the price you collected for your goods. We've only seen a minority of artists/crafters charge sales tax separately (i.e., added to the advertised price of the work); if you do this, you must keep scrupulous individual sales records, and customers may ask for more receipts than you're used to. (Our Advice: gross price your product to take into account whatever sales tax you're required to collect -- it's simpler accounting.)
Sales tax redub: Assuming you have a state tax ID number, the state will annually (or quarterly, depending on your gross sales) require you to pay the sales tax you collected (or included in your unit price). This should be fairly simple, but for those of us who find ourselves selling on an Indian reservation, we may need to account for sales taxes collected by a specific tribal organization ordained by law or statute AT THE VENUE (yes, happened to us). In that case, make sure you keep track of any such sales taxes paid to a non-state (i.e., locality or Indian tribe) entity in lieu of the state, and equally reduce your gross sales reportable to the state. Otherwise, you'd be paying twice the amount of sales taxes due related your sales in such a locality, which we don't believe is the intent of relevant statutes.
What's important here, as it is throughout, is that you record sales and expenses regularly, reasonably, and accurately.
Raw Materials Costs and Inventory: If you buy raw materials/merchandise/supplies specifically incorporated into artwork or product (which we all do), record a separate, clearly identifiable expense category for such items and total them separately from other expenses (such as office supplies, equipment, postage, selling expenses, travel, meals, fees, etc.). IRS, within relatively huge limits, allows you to expense raw materials tax year-to-tax year, rather than recording them as additions to/subtractions from inventory. It's an option -- you can also diligently keep track of inventory. Just keep in mind that there is a cost and effort related to keeping track of inventory for tax purposes, and we'd bet that 100% of crafters don't come close to the thresholds that REQUIRE inventory accounting.
Keeping inventory is good and nice, but burdensome for the small entrepreneur; so long as your sales/inventory are less than some huge thresholds, annually, you can expense these. However, you do need to document, within reason (by notation, for example), to which tax year you're expensing raw materials against sales (and by extension, you don't have to complete the Schedule C inventory section so long as you follow the rules).
[NOTE RELATED TO EVERYTHING HEREIN: We have used H&R Block tax reporting software for decades now, and it simplifies a lot of your tax reporting, provided you answer the questions it asks correctly.]
For example, you might buy a $500 silver ingot on December 15 [Tax Year 2012]. However, you don't incorporate this ingot until April [Tax Year 2013] to create something to sell. You need to document that fact to show that the prior year [2012] raw materials purchase contributed to the next tax year's [2013] sale inventory. In this case it would be considered a reasonable expense for the following tax year [2013], and you need to note such a fact on the raw materials receipt and file it with your 2013 records.
Keep track of capital expenditures (i.e., equipment with extended working life). Schedule C will let you expense those -- if you choose -- in the year of acquisition, without you needing to keep track of depreciation. If you expense them in any given year, you cannot depreciate them later. You can also choose to depreciate property rather than expense it in the tax year purchased, but that means keeping track of more stuff and more numbers, and keeping those records. Is it worth your effort and/or cost? It depends on the capital equipment cost/value, and it's up to you. But once you choose either method, you're locked in and cannot change it. IRS tries to keep it simple for small- and micro-businesses, so we recommend keeping your records simple as well -- the more records you end up keeping, the costlier and more time-consuming accounting becomes. It doesn't have to be that way.
NOTE: You can depreciate or expense (in the reporting tax year) the cost of "capital" equipment. If you depreciate, that's the way you have to report it until end-of-life; the annual depreciation expense deduction is based on a life cycle for specified property + residual value at end of life. If you "expense" the cost (for capital equipment -- e.g., a grinder, anvil, kiln, display tables, canopy tent -- stuff like that), the IRS stipulates a formula applied against the total costs in the reportable tax year; you cannot claim the same expenses or change to a depreciation format in the following tax years.
If you add capital equipment in the next year, you report it as new and you can also it, rather than depreciate it. It is crucial that you keep records on claimed property that back-up 1040/Schedule C statements, in case of audit. That said, "records" could amount to a folder with equipment receipts and a log/note showing item, acquisition date, cost (w/documents proving procurement), Schedule C expensed year OR first year for depreciation (based on IRS schedules). Also, if you have a high value capital equipment investment, it may be in your interests, tax- and profit-wise, to depreciate the propery over its life, rather than expense it.
Mileage: You must keep meticulous records of both personal and business mileage if you use your own vehicle going from show to show. Simply, but daily, keep a log with dates, destinations, and miles driven. Buy a spiral notebook and put some columns in it (record everything for a given tax year).
In Schedule C you can elect to (1) simply use the GSA-designated mileage rate (I think $0.55 per business mile for 2012) as your deductible expense, or (2) keep a record of every vehicle expense (cost basis less depreciation, insurance, maintenance, fuel, license and other fees, tolls, etc.) and prorate those against personal and business miles. We used the simpler method, i.e., the $0.55/mile basis for tax year 2012, and kept mileage records, dates, shows, etc., as records. We believe the mile expense for 2013 is $0.56/mile, but you should verify this.
If you lease a vehicle, or use a second, owned vehicle solely for business purposes, there are other rules and records to keep. Check out irs.gov website for various publications related to small business -- some of them aren't necessary for the truly micro-business-person, but they're certainly educational.
On the road, "reasonable" lodging is a deductible expense against sales income. Keep records and receipts, and coordinate these expenses with your mileage records. Make up a worksheet, it's fairly simple to do, which should act as a log of where you go, how far you drive, and where you lodge. We recommend joining hotel chain "points" programs, as many as feasible, as frequent use of a particular chain will reduce your expenses in the long run. You can't discount the cost tax-wise, but they add to your bottom line -- AND THAT'S THE POINT, ISN'T IT?
Meals: When you're on the road for the express purpose of selling your craft, you can deduct 50% of the GSA specified meals & incidental expenses (M&IE) for any given location as business expenses -- check GSA.gov for annual rates. Schedule C asks for DAYS x RATE per location, for the expense deduction. For example, in most Michigan locations the daily M&IE rate is around $52 per person, so you can deduct $26 per day on the Schedule C for every day that you're on the road (keep in mind that if you file a single Schedule C in a joint return -- see below -- you can deduct one person's M&IE costs; if you file equivalent or proportioned Schedule C's, the single person's M&IE is also proportionately shared, usually 50-50). Different locales have different rates, so make sure you check them before signing your 1040 -- they're usually set for each calendar year. NOTE: Don't deduct hotel/lodging expenses greater than the GSA limits per location, or you're asking for an audit.
Keep a log for all travel which shows departure time/date, mileage start, mileage end, lodging name, etc. If you're ever audited (audit risk increases if your Schedule C reports a negative number, or loss), the proof is in your documentation showing that you are trying to conduct a profitable business. If you have documentation that's consistent and regular, especially your mileage/travel logs, it demonstrates that you've made an effort to record accurately. If your record-keeping is sloppy, irregular, and you can't document expenses/sales claimed, the IRS is going to rule in their favor, not yours.
Keep/file ALL receipts to document expenses. However, some things just don't receipt -- if you will. For example, we will buy 100 "Forever" US postage stamps, and have a receipt, but we record the cost of every stamp we use on show applications, self-addressed envelopes, etc., rather than record the whole thing as a business expense. We scan each completed form/application, along with the jury fee/application rules, and file them in seasonally identified folders in the computer. Not only is it a good record of what we've committed ourselves to, but it also documents postage costs, including the "self-addressed" envelope costs. it's up to you as to how you account/document this type of thing, but if ever audited you have to be able to demonstrate that you did not mix personal expenses with business expenses.
There are lots of expenses you can deduct against sales. However, keep in mind that reporting a Schedule C loss, even for one year, increases risk of IRS or state audit. We think the IRS recognizes that first year starts may indeed result in Schedule C losses -- you are required to state when you started your small business, for example. In our case, we made considerable investments in depreciable property (which we expensed) in our first year, and thus for future years we won't have those costs to expense against our sales. Similarly, take into consideration what tax year in which you may be able to deduct raw materials costs. If you record a second, or third, year of losses that reduce your AGI, you are ever increasing your risk for audit. So again, keep good records and be prepared to explain the purpose/objective of your business and how you are executing it, especially if your Schedule C expenses outweigh your gross sales.
One other thing we learned about the Schedule C this past year, is that depending on your AGI (adjusted gross income), you (or partner) may have to file a Schedule SE, self-employment tax (for social security tax payment purposes). If you have a husband/wife partnership type of thing as a concept and working relationship, it takes on a whole new context in terms of tax considerations (seek further advice on this). In the tax/benefit context, you need to take a look at your past work histories, as a couple, to see if it makes sense to report things one way or the other come April 15.
If both parties don't have sufficient creditable quarters to establish social security benefits when it comes time to try to claim them, then it makes sense to establish SSA quarters for each party by preparing two (2) Schedule C's in your tax return, each of which would claim 50% of gross income and all deductible expenses (i.e., they're two identical halves of your total business, with the exception of the names and SSNs at the top). If your joint return results in an AGI above a certain level, you may be required to pay self-employment (i.e., SE) social security taxes. This may happen when, according to your Schedule C, you make a profit, rather than a tax-calculated loss that is deductible from other income.
However, if one of you has sufficient SSA creditable quarters to apply for and receive social security benefits when eligible, and the other not (or, less quarters than their partner), it may make more sense (tax- and social security-wise) to prepare a single Schedule C attributed to the deficient partner (i.e., 100% of the business belongs to the one with the smaller number of creditable quarters). Thus, while you may operate like/as a partnership, it may make more sense to put your business into one name, tax-wise. Regardless, the Schedule C (or two, 50-50 Schedule C's) gains or losses identically affect the AGI of a single joint return. Talk this issue over between the two of you, and/or consult a tax advisor. We don't believe the issue we're talking about here really has any correlation as to how your business is actually organized. That's what's great about a "family business."
DISCLAIMER: WE ARE NOT TAX OR ACCOUNTING EXPERTS AND ALL OF THE ABOVE INFORMATION COULD BE TOTALLY WRONG! These are only our observations and how we conducted ourselves, accounting-wise, for our first and second years. You must investigate tax reporting requirements related to your own situation, which on the federal side are fairly minimal for the truly micro-business (which we are). Record every sale as income, but also make sure you deduct every reasonable and legal expense associated with your craft business. We learned a lot over our first year and thought we'd contribute. IT DOESN'T MEAN THAT IT'S CORRECT!
We expect a lawyer or accountant member of the blog to come down hard on this, but we're not paying for their advice, no matter what happens. Good Luck!
Freshbooks is free for the first month; $29.95/month thereafter. It comes with standard expense categories, plus you can make your own. Best of all, for me, you simply tag categories that contain COGS (cost of goods sold). Thereafter, the software will track and categorize your expenses as they occur. You can even link one or more of your bank accounts/credit cards and the expenses will be imported automatically.
i use www.outright.com its proven more helpful than my manila envelope