16
Your Stock Photo Business: A Mini Tax Shelter

THE GREAT REBATE

If, as you read this book, you discover you’re missing out on a lot of selling opportunities, then I’m accomplishing my purpose. This chapter shows you another significant and far-reaching opportunity: If you work at a “regular” job, you have an annual tax rebate coming to you—when you begin calling your sideline stock photography work a business. Your rebate can amount to more than one thousand dollars a year, depending on your household income, the number of dependents you claim, your photography business deductions, and a few other considerations.

What I’m going to say will enable you to buy a new camera every year, new lenses and new computer equipment or software. Listen carefully.

The Tax Return

I call it the “Tax Rebate System.” It’s legal, logical and lovely. It’s based on the fact that in our free enterprise system, the government tries to help small businesses get off the ground. Many a flourishing business existing today started as a transfigured hobby—and made it, thanks to the tax allowances offered by the Internal Revenue Service (IRS).

While it may be your legal obligation to pay taxes, it’s never your duty to pay more than you owe. In fact, just the opposite is true: European and American courts alike have recognized both an individual’s and a corporation’s right to minimize taxes owed.

If you follow a few simple IRS-approved guidelines, you’ll receive a tax rebate, you’ll get your stock photography business off the ground, and the IRS will give you no heat. In fact, the IRS will be on your side; after all, your business will one day be in a position to pay taxes, too. Up to now you may have called your photography a hobby, but Uncle Sam will “pay” you as much as one thousand dollars a year or more to call your photography a business.

Declaring your photography as a business is easy. You simply say, “My photography is now a business.” That’s it. Then at income-tax time, in addition to the regular 1040 tax form, you also fill out a form called Schedule C (Profit or Loss From a Business or Profession).

Tax professionals suggest that you take at least the following steps to solidify “business status” for your photomarketing operation:

1. Give a name or title to your business, open a separate business checking account and, possibly, a website in this name.
2. Have business stationery, business cards and invoices printed.
3. Ask the IRS for an employer identification number (EIN) if you have employees. It costs you nothing, and it remains your number for as long as your stock photography business is in operation. Ask for Form SS-4, or download the form from www.irs.gov/pub/irs-pdf/fss4.pdf.

These three actions show clear-cut intention for IRS purposes, if any question arises later. Naturally, the IRS doesn’t act kindly toward the person who fabricates a business operation and then enjoys the benefits.

Bear in mind that we’re not discussing tax evasion. That’s against the law. We are talking about making legitimate, legal, justified tax deductions. That’s your right. It’s called tax avoiding.¹

If you’re still in doubt, call the toll-free IRS number for your local area. Tax information specialists are on hand to answer questions and send you literature. Most IRS operators are knowledgeable and cooperative, but if the information isn’t clear to you, you can call back and get a different operator. You also can call and ask for the IRS’s Tele-Tax information. It’s a recorded information system of 140 topics. You can hear up to three topics on each call you make. The IRS will supply you with local and regional 800 numbers to call. Some of the topics: “Taxpayers Starting a Business” (#583); “Business Expenses” (#535); “Travel, Entertainment, Gift and Car Expenses” (#463). Finally, if your question doesn’t have a simple answer, ask to speak to an advisor or a supervisor. The World Wide Web can be an excellent resource for personal tax questions.

You also can ask your personal accountant or tax consultant about these guidelines, but you will need to check the thoroughness of the response. Your questions might require some research—that is, extra work—on the consultant’s part. Don’t open your checkbook to a tax person who has had little experience in dealing with small businesses in the creative fields.

My own experience has been that many tax consultants concern themselves only with the routine elements of retail businesses, standard business situations and individuals on a salary—not the individualized self-employment, intellectual property (creative fields) questions that may take extra research and study. With this in mind, ask around your area. Speak with successful freelancers, writers and other creative persons. Ask them, “Which tax advisor do you use?” You’ll eventually come across the name of a tax advisor who is knowledgeable in the area of intellectual properties.

By establishing your business status with the IRS, you’re establishing intent to make a profit. In your first five years of operation, you should be able to show a profit for any three years out of five. (In other words, you could go as long as two years before you need to show a profit.) The second five-year period, the third and so on are treated in the same manner by the IRS. However, the law doesn’t say that the profit must be large (or likewise that a loss from your business must be small). One dollar of income over expenses is a profit. The five-year period is not a block of time (first five years, second five years), but instead it focuses on the current year plus the prior four years.

However, the record documents that the IRS doesn’t come down hard on people who don’t show a profit as long as they show reasonable intent to make their business prosper. If you conduct your business in a businesslike manner—with evidence of consistent submission of your photographs, self-promotion activity, Internet marketing activity, reasonable record keeping and use of business letterhead—it’s unlikely that you’ll be challenged by the IRS, even if you go many years without showing a profit.²

A GOVERNMENT INCENTIVE TO START UP YOUR BUSINESS

Even though you might not make a profit your first several years (on paper), you may have more money available to you, in terms of actual cash flow, than if you never attempted to start up your stock photography business. Here’s how it works: Say you’re making $40,000 a year at your regular job. Your weekly paycheck would be $769.24. However, after taxes and other deductions (about 28 percent), you could take home as little as $558.24—$211.00 less than your gross income. Since your employer has taken taxes out of your wages in advance (withholding tax), you in effect have placed on deposit with the IRS a sum of money (about $30 a day), which, if not owed to the IRS, is returnable you. (Maybe this is why they originally called it a tax return!)

Apart from your regular, salaried job, you are now also a small-business person just starting a new business, and you are going to have a lot of related expenses. This is where the Schedule C (profit or loss form) and Form 4562 (depreciation and amortization) come in when you make out your tax forms.

Let’s say that after your first year, when you have deducted the legal tax deductions listed later in this chapter (film, chemicals, car expense, Internet expense, stationery, travel, home-office expenses and so on) and enumerated them on your Schedule C form, you find you show a “loss” of $4,000.³ On your Form 1040, you will deduct this from your regular income of $40,000, which means your actual net for the year has been $36,000. Since taxes were taken out on $40,000 and not $36,000, the government owes you a refund. (Or if you are self-employed and haven’t taken advantage of all of these deductions, it will mean a lower taxable income.) You could receive anywhere from $1,000–10,000 or more from the U.S. Treasury Department. Nice going.

It might sound almost un-American to suggest that you come out with a loss in your business. Sometimes, however, it’s more profitable not to make a profit. The popular newsstand magazine Money, which advises how to handle financial matters, was launched by Time Life in 1972: It didn’t show a profit until 1981.

Carrybacks

Did your stock photo business have a bad year? Or did you start a new stock photo business in which expenses exceeded receipts?

Either way, a relief provision allows you to use a loss from the active operation of a business to recover or lower taxes paid in other years. The key to this opportunity: Internal Revenue Code, Section 172 permits a business that suffers a NOL (net operating loss, which is tax jargon for when expenses exceed income) to carry that loss back to earlier years or forward to later years.

Even better, a 2002 law change temporarily liberalizes the carryback period for NOLs incurred during 2001 and 2002. The revision extends the carryback for 2001 and 2002 losses to five years from two years previously in most situations. The cap remains two years on the carryback for NOLs for 2000 and earlier years, and, as of this writing, for 2003 and later years.

BACKWARD OR FORWARD?

One option for an ailing business is to use the current year’s NOL to first offset business profits or other kinds of income in the five previous years, thereby garnering a refund of taxes paid on income for those years. This strategy is particularly advantageous for any outfit with negative earnings that urgently needs cash.

What happens when the NOL is greater than five years’ income? Then the “carryforward” rules come into play. Under those rules, you apply the unused part of any NOL not employed as an income offset, until used up, against profits or other kinds of income in the following twenty years.

A second option is to skip the entire carryback and simply carry forward this year’s NOL—provided it’s advantageous to do so. This tactic might be preferable when, for instance, your income was taxed at low rates for the previous five years and you expect to be in higher brackets in future years.

Example: Your expectation is that the current year’s (2015) bottom line is not going to be black; 2010-2014 were low-income years. By electing to forego any carryback of 2015’s NOL, you should come out ahead, assuming you can use up the NOL during the carryforward years that begin in 2016.

GOING THE CARRYBACK ROUTE

Generally (using 2015 as an example), there’s a chronological sequence. You must first carry back and deduct 2015’s NOL on your 2010 return to obtain a refund of part or all of 2010’s taxes. Only if the NOL surpasses 2010’s income can the unused part then be carried to your 2011 return. Still have a part of 2015’s NOL left? It can then be carried over to your 2012 return, and so forth. However, you’ll have the option to use a two-year carryback, if that saves taxes.

Tip: Does it pay to build up 2015’s loss and thereby increase the amount of the carryback? In that event, where possible, delay the receipt of income until 2016 and accelerate the payment of deductions from 2016 into 2015.

EXCEPTION TO THE GENERAL RULE

Previously, the carryback already was three years for, among others, individuals who suffer casualty losses, and small businesses and farmers with losses incurred in places designated by the president to be disaster areas eligible for federal assistance. Under the revised rules, their carryback becomes five years.

AUDIT ODDS

Before you decide to claim a NOL, check to see whether your returns for the prior years contain any items that might be challenged by the IRS. Filing for a carryback refund doesn’t mean that your return for the loss year will be bounced automatically for an examination. Nevertheless, a refund claim might prompt the feds to question not only your return for the loss year, but also look at returns for earlier years.

HELP FROM IRS

For additional information on the complex carryback/carryforward regulations, consult IRS Publication 536, Net Operating Losses. To obtain a free copy, telephone (800) TAX-FORM or download it from the IRS website www.irs.gov.

Your Stock Photography Business Deductions

Now that you have your own business you can, in addition to taking the normal personal deductions, allow yourself dozens of other deductions related to your stock photo enterprise. Your film and processing expenses, magazine subscriptions, business-related seminars, office supplies, Internet fees, camera and computer equipment and even the cost of this book are natural business deductions as long as they aid you in your business goals.

In its own unique fashion, the stock photography business also can require travel to distant places to get your inventory. It generally can’t solely be “manufactured” locally. If you require amateur or professional models in your pictures, a percentage of their lodging, meals and other expenses on trips is deductible if paid by you.

Incidentally, photographers are the only businesspeople who have a “backup” receipt: a photograph, which gives proof to the IRS that the photographer actually traveled to a certain location and spent the money reported as deductions (which is the main reason to collect receipts).

As an independent photographer, you’re always on the lookout for stock photographs, whether you take them across town or across the country. You have probably called your trips “vacations.” Now that you have a business, portions of the costs of your trips are eligible as deductible business expenses. You will bring back dozens of pictures of interesting mining operations in Colorado, or agricultural observations in Wisconsin, to add to your stock photography collection. You will talk an editor into giving you an assignment in one of the villages or cities 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 “business transportation.” You will keep a daily log of your travel, plus gas, meals and lodging receipts for IRS verification.⁴

It continues. Since you’re a photographer, everyone is a potential customer. Whenever you entertain, at home or elsewhere, keep records of your guests and define a business relationship or a potential business relationship (as a buyer of your photos, possible model or possible client). Then you can deduct those expenses, too. Be sure, though, that you can show a relationship between your guests and your work to the IRS. If you travel overseas, a log will prove vital in case of an IRS audit. Your business time must be 50 percent of your trip or greater, or deductions are severely limited. A good booklet on the subject is IRS Publication 463, Travel, Entertainment, and Gift Expenses. It’s free and available by phoning or writing your local IRS office. The IRS website is www.irs.gov.

Let’s look at your new business expenses in some detail.

OFFICE IN THE HOME

Because you may use part of your home as the headquarters for your stock photography business, the IRS allows you deductions for the portion of the house that you use to operate your business. However, you cannot use your office-in-the-home expenses to create a net operating loss. If the total of your other business expenses (not including home-office expenses) is greater than your income, giving you a loss, that is allowable. On the other hand, if your office-in-the-home expenses, when added to the total of your other business expenses, take you over the top to give you a loss, that’s not allowable. Only that portion of your home-office expense that takes your total of expenses up to the amount of your gross business income can be deducted each year (there is a carry-forward provision). If the total of your home-office expenses added to the total of your other business expenses comes to less than your gross income, the full amount of your home-office expenses is deductible.

Here’s how that works. Let’s say your stock photography business, operated out of your home, has a gross income (receipts before expenses) of $12,000. Your business incurs home-office expenses of $1,500 (utilities, percent of mortgage interest, roof repairs and so on). Your other normal business expenses, such as office supplies, postage, and travel total $11,500. Since your gross income was $12,000, you can use only $500 of your $1,500 office-in-the-home expenses as a deduction. However, you may carry forward the disallowed $1,000 to subsequent tax years; these carried-forward home-office expenses, though, are subject to the same restriction each subsequent year—i.e., they are not allowable if the addition of their total creates a net loss from the business activity.

The room(s) in your home where you conduct your photo-marketing business must be used exclusively and regularly for your photo-marketing operations. The IRS won’t approve the room as a deduction if it’s also used as a sewing room or a part-time recreation room or if it’s part of your living room. If you’ve made a room or large closet into a darkroom, consider that room also as tax deductible. Measure the square footage of your home (don’t include the garage unless it’s heated or air conditioned), and then measure the square footage of your working space. Divide the latter by the former and you’ll determine what portion of your home is used for “profit-making activity.” For example, if your working area is a 14 ft × 11 ft (4.3m × 3.4m) room (used exclusively and regularly for your photo-marketing business), and the total square footage of your home is 1,232 square feet, you are using one-eighth of your home for business.

“Business Use of Your Home” is the title of IRS Publication 587. It’s a clear explanation of what you can and cannot deduct. Also check out Publication 529, Miscellaneous Deductions. Write, log on or phone the IRS for a free copy, (800) TAX-FORM.

Before you established your photography business, you were unable to use the expenditures in the following list as tax deductions. However, now that you’re engaged in an intent-to-make-a-profit activity, you may deduct one-eighth (or 50 percent or 100 percent—whatever your particular setup may be) of these expenses. Get advice from your tax professional as to which of your home deductions would fall under “capital improvement,” or normal repair and upkeep expenses. List these deductions on Schedule C when computing your taxable income (which includes the income from your full-time employment).

HOME

Home repairs; real estate insurance; carpentry; plumbing; masonry; electrical work; roofing; heat; fuel; depreciation; rent or mortgage payment; water; air-conditioning; maintenance; refuse collection; painting; decorating; lighting; fire losses; sprinkler system; burglar alarm system—all of these are deductible.

AUTO USE

The deductions don’t end with home expenses. You will use your car to travel on assignments, research stock photo possibilities, deliver packages to the post office and so on. If you have two cars, designate one your business car and use it for that purpose. Note the mileage at the beginning of the year and on December 31. No matter how many cars you have, keep a perfect record of their use (keep a diary in the glove compartment), and record trips and expenditures related to transportation for your business and professional activities. You also can deduct a percentage of the maintenance and repair of your car equivalent to the percentage of time it’s used for business. Some typical deductible expenses include: insurance; registration; gas, oil, and fluids; lubrication; car washes; rental; waxing; cell phone; accessories; CB radio; tires; snow tires; garaging; tolls; parking fees; repairs; depreciation and vehicle license fees.

TRAVEL EXPENSES

To make your stock photographs, you may have to travel far and wide—in which case these expenditures are legal tax deductions: bus; train; boat; airplane; equipment; luggage; taxi; hotel; laptop; motel; meals; passport fee and business tickets.

ENTERTAINMENT⁵

You’ll have all the usual business expenses, including taking clients out to lunch. If the meal is business related, 50 percent is deductible. Expenses include: meals, theater, tickets to miscellaneous events and nightclubs.

ADVERTISING/PROMOTION

Getting yourself known is deductible: design work; graphics work; copy-writing; typesetting; mailers; postcards; flyers; CD-ROMs; website development and maintenance fees; business gifts; seasonal cards (Christmas, Hanukkah and so on); leaflets; brochures; booklets; catalogs; business cards; magazine ads; newspaper ads; telephone (yellow pages) ads; radio ads; TV ads; matchbooks; calendars; portfolio costs; trade shows; conventions and donations.

PHOTO-RELATED ITEMS

Those expensive lenses and cameras are now deductible. Document the following carefully: camera(s); lenses; accessories; discs; film; printing; processing; lights; model fees; props; costumes and instruction manuals.

PRINTING

It’s an important expenditure for you, and it’s deductible (see Advertising/ Promotion). Be sure to deduct the following items: business stationery (envelopes, letterhead, cards, labels and so on); mailers; books; sell sheets; ads; catalogs; announcements; tear sheet reproductions and office forms.

BUSINESS EDUCATION, SELF-IMPROVEMENT AND MEMBERSHIPS

If they will help you make a business profit, the IRS says the following are deductible: subscriptions (business related); club memberships; market services; business development; dues to professional organizations; seminars; books and references; cassettes; directories and courses.

OFFICE EQUIPMENT AND SUPPLIES⁶

“Little” expenditures in this area add up. Be sure to keep track of the following: computer components (such as extra memory, cables, video accelerator card, and so on); CD-ROMs (blank and professionally pressed demos); insurance; freight charges; file cabinets; pencils, pens, ink; paper; software; file folders; directories; cleaning service; printers; independent contractors; paper clips, staples, erasers, correction fluid; blotters, pads; mailing envelopes; rubber bands; return labels; loose-leaf notebooks; photocopier; fax machine; equipment lease; refunds to customers; computer supplies; diaries; postage stamps; International Reply Coupons; bookkeeping supplies; calendars; briefcase; delivery charges; backup tapes and an uninterruptible power supply (UPS).

EXTRA DEDUCTIONS

A good test for any business deduction is to ask yourself, “If I weren’t in business, would I have this expense?” Include the following: wages to employees; safe-deposit box; accounting fees; self-publishing expenses; legal fees; postage meter rental; permits, licenses, and business fees; maintenance agreements; mailing lists; business-related tools (craft knives and so on); postage; telephone calls; telegrams; R&D (research and development); equipment repairs (furniture, computer and so on); product displays; professional fees; bad debts/bounced checks; interest expense; commissions; consultants and contract labor fees.

Keep records of your expenses. (An excellent book on keeping personal tax records is J.K. Lasser’s Your Income Tax Series, www.jklasser.com, published by Simon & Schuster, New York.) Gather your tax records together at tax time, and list these expenses on Schedule C. These legally deductible expenses are bound to reduce your income received from your regular occupation, as listed on your Form 1040. The result will be a refund for you. Or, if you’re self-employed, you’ll have less taxable income or a loss.

DEPRECIATION

Depreciation allows businesses to replace their business equipment by offering them time-released write-offs over a period of years. For photography equipment, the time period is usually seven years. For your computer or car, it’s five years. However, check with your tax advisor or the IRS, as these provisions change from time to time.

“Investment tax credit” is another incentive sometimes offered by our tax laws to stimulate the economy. Depending on current IRS tax regulations, the government encourages spending by giving you a tax credit incentive on the purchase of major items for your business. Check with your tax advisor.

THE S CORPORATION

Most stock photographers set up their businesses as sole proprietorships. The numbers work out best for them. Some find advantage in setting up as an S corporation.

As an S corporation (formally called a Sub Chapter S Corporation), you do not operate as a self-employed sole proprietor or partner. Your business income is not subject to self-employment (Social Security) tax. By forming an S Corporation, you legally change the nature of your photomarketing income. By making the Election by a Small Business Corporation (on Form 2553), you eliminate corporate taxes on the corporate income. A newly formed S corporation never pays income tax. Instead, the net income of the corporation is reported on each stockholder’s (or “owner’s”) individual tax return(s) (on a Schedule E). The owners pay the income tax on their corporate S income, but no Social Security tax. With the Social Security tax rate continually going up, this can represent a considerable tax savings. When you’re an employee of the S corporation, your salary, of course, is subject to the usual employment taxes.

Almost all forms of business have some disadvantages, and the S corporation is not without its drawbacks. There are legal setup costs and annual costs to maintain your corporate status. Once you check with your tax advisor and gauge your financial situation in relation to the S corporation, you’ll know if this business form can be advantageous to you.

ADDITIONAL TAX AVOIDANCES

Other tax breaks you will want to consider (depending on your circumstances) are Credit for Child and Dependent Care Expenses (Form 2441), Moving Expenses (Form 3903) and the tax-sheltered retirement plans, such as a Roth IRA, Keogh Plan or SEP (Simplified Employee Pension).

Also, two other provisions might result in the return of money to you:

1. Earned Income Credit. This credit is available to certain low-income families. Information on how to apply for this is in the filing instructions that accompany Form 1040.
2. On the state level, about half the states offer a Homestead Tax Credit (in Wisconsin, for example, use Schedule H, Homestead Claim). This is a rebate on your property tax if you’re in a low-income tax bracket. Other states, such as California, have a “Home Owners Exemption” that will save on your property taxes regardless of income bracket. If you rent, you also receive a proportionate refund.

As noted earlier, to be recognized as a bona fide pro in the eyes of the IRS, you have to, in good faith, be operating your business with regularity. As I mention elsewhere in this chapter, the IRS will provide you with some excellent free booklets on operating professionally: 583 and 552 deal with record keeping, 587 is on using your home for your business, 463 deals with business use of a car, and 334 deals with small business taxes.

Here’s some recommended reading: Legal Handbook for Photographers by Bert P. Krages II; Legal Guide for the Visual Artist by Tad Crawford and The Legal Guide for Starting And Running a Small Business by Fred Steingold. Most of these are available at www.amazon.com.

Note: The information in this chapter can be helpful in getting your stock photography business off the ground. It will allow you to reinvest money into your business by allowing you to keep more of the money you earn.

I assume you will take this information and apply it in an honest manner. To make sure you don’t put yourself in a position to get heat from the IRS, always plan your deduction activities with the IRS in mind. In other words, cover your bases before you go on that trip, plan that business entertainment or make that photo-related purchase. Ask yourself, “Can I satisfy IRS substantiation requirements?” “Does this proposed tax deduction meet current IRS guidelines?” When in doubt, give the IRS toll-free number a call: (800) 829-1040. For business tax information, call (800) 829-4933; for tax forms, call (800) 829-3676. Also visit their website at www.irs.gov. If you use this simple procedure, you’ll have few problems with the IRS because you have followed the rules of the IRS game. You beat the system with your own system. The percentages are actually heavily against your photomarketing enterprise ever being audited.

HELPFUL IRS PUBLICATIONS
PUBLICATION NUMBER	TOPICS	IRS CODE
334	Small Business	162
463	Travel, Telephone, Car, Entertainment	162 and 274
560	SEP and Keogh Plans	162 and 401
587	Home Office	280A