IT'S TAX TIME AGAIN
TAXES. Does that word conjure up mixed feelings? Well, here’s good news. That word can be your friend. How would you like the Feds to cover the cost of a new camera for you this year? Sound incredible? It’s not.
Your friendly IRS is not in the business (as is the Small Business Administration) of mother-henning you in your spare-time freelance photography business. However, tax laws in this country were designed and written with you in mind: the enterprising guy or gal who wants to roll up the shirtsleeves and try to make a go of a small business; i.e. in your case, your freelance photography enterprise.
A FREE CAMERA
Yes, you know that, you say, but what you really want to know is how to get that FREE camera. Nothing comes easy, not even the free lunch, but a little study on your part will buy you not just one camera, but a new piece of equipment each year. Which brings us to this point: You have actually been losing the opportunity to buy yourself a new camera (or a comparable costly piece of equipment) for every year that you have been engaged in your freelance photography enterprise –unless you are already aware of the plentiful deductions you may take as your tax shelter, in which case, you can stop reading right now. However, from my experience, there always seems to be something more to learn on how to take full advantage of tax shelters.
At the start, I want to point out that we are not discussing tax evasion, that's against the law. We are talking about tax avoiding --that's your right. Granted, you are not going to avoid taxes in the amount of great sums of money, the way that we read has been legally done by even our country's top executives. But you will avoid a healthy sum, enough to buy a camera --or possibly two! The tax avoidance system you will use is called the "rebate" method. In effect, it works like this:
At your regular job, you earn a certain salary. Your employer "deducts" a certain amount for the government each payday, which, in effect, is placed in a kitty down in Washington (so they tell us). At the end of the year, by signing your name to your 1040 form, you relinquish those funds (withholding taxes) officially to the government.
Simple arithmetic determines taxes. You take your gross earnings (the total amount you earned), take into consideration your personal deductions (medical bills, interest payments, etc.), plus your exemptions (number of kids and dependents) and the difference is your taxable income. Depending on how much you earned, a certain percentage of the income is called your 'income taxes.'
YOU’RE IN BUSINESS
So how can you buy that new camera? As a freelance photographer, you are officially, in the eyes of the IRS, --a business. (It would help to cement your business image by having some stationary printed and opening a business checking account.) You only have to show "intent" that you are serious about photography. The fact that you are a subscriber to the PhotoLetter is convincing enough to the IRS that photography is not just a "hobby" for you. The IRS gives you five years to "show" that you mean business, by earning a profit in only two years in any of those five years. Which means: the first three years, you could show a loss, and still be eligible to be considered an official business – (and you could make a profit of only $1 in the next two years).
As an official business, you are able to now allow yourself dozens of deductions. Your film expenses, subscriptions, color processing, office supplies, all of course are natural business deductions. But, as a free-lancer, you are always on the lookout for stock photographs --whether you take them across town, or across the country. Which means: your next vacation (don't use that word anymore) will actually be a business trip. You will bring back dozens of pictures of interesting mining operations in Utah, or agricultural methods in Vermont, to add to your stock photography collection. You will talk an editor into giving you an assignment in one of the villages or urban areas along your travel route.
The deductions don't occur just on your three-week summer trip, but throughout the year. Your car now becomes your "transportation." One room in your home becomes your "office" (careful --move the sewing machine out, or the pool table --this room must be, in IRS eyes, used solely for your office, not partly for some household function). Since your office takes up one-eighth of your home (as an example), you can now deduct one-eighth of: your real estate taxes, insurance, home repairs, interest (on your mortgage), plumbing, heat, telephone (probably more than one-eighth on this one if a major portion of your telephone use is business-related), depreciation, rent, cleaning costs, and many more.
THE TAX MAN
Is this so? Is this so? You are probably saying. And the next thing you'll probably say is, "I'm going to check with my tax man." Well, don't. Tax men are very, very conservative. You've heard the commercials. They never make a mistake because they don't venture into offbeat areas where they might be called into question, or run into differences in interpretation. Even tax matters aren't all black and white. There are gray areas that are not illegal but may get stomped on depending on interpretation.
Check your tax situation out yourself. It's simple. Call your IRS Information Center, free, by dialing 800-555-1212 and asking for your local IRS Tax Information Center. The information specialists at IRS are usually helpful and knowledgeable. If you hit one who was just about to go on coffee break when you called, and you find him uncooperative, excuse yourself and hang up. Dial again in five minutes. There are usually a number of information specialists at the phones to answer questions. No need to give your name; they never ask anyway. They'll want to send you information on the areas of your questions, so you might as well order the information pamphlets first, digest them, and then call and ask your questions. Find the local IRS address in the Yellow Pages and ask them for (free): #587 --Business Use of Your Home; #583 and #552 -- Record Keeping; #334 -- Small Business Taxes. Ask also for their "Mr. Businessman Kit" for men (and women!) who are contemplating starting up a business.
Now here's where your new camera comes in. Say you are making $40,000 a year at your regular job. Your weekly pay check would be $769.22. But after taxes and other deductions you could take home as little as $553.84 -- or $215.38 less than your gross salary.
When you figure out your 1040 tax form, you will also fill out a "Schedule C" (Profit and Loss Statement) for your freelance photography business. After your first year, when you have deducted expenses such as film, chemicals, car costs, stationery, travel, home office expenses, etc., let's say you come out with deductions of $8,000. (Actually, on your profit and loss statement, you will probably show a "loss," but this is an academic loss, since naturally in your first year of business you aren't going to set the world on fire -- plus, your "expenses" (deductions) were normal (photo/car/travel/phone/etc.) whether you called yourself a business or not, and you likely would have incurred most of these expenses in your day to day regular routine, photography business or not.
On your 1040 form you will deduct this "loss" ($8,000) from your regular salary of $40,000, which means your actual net income for the year was $32,000, so since taxes were deducted each paycheck from the full $40,000, you'll get a rebate from the government. The size and make of the camera you can now buy will depend on your tax bracket, exemptions, etc. You could receive back from the Treasury Department anywhere from $20 to $2,000. Nice going. And don't forget to take depreciation on your new camera, next year!
Our website, www.photosource.com goes into detail on this subject of taxes. Use the search engine to seek out specifics.
The free enterprise system still flourishes in the USA, and our tax laws still reflect this philosophy and are written in such a way as to encourage the small businessperson. Many successful, thriving businesses today had their inception when the owner decided to turn a "hobby" into a "business" and take advantage of the tax help awaiting him or her.
Comments on this column? Send them to the editor.
Rohn Engh, Photosource International.