It’s coming up tax-time down under, and every year I seem to hear a few horror stories from photographers having tax dramas … whether it’s the ATO down here, the IRS in the States or another countries’ equivalent. So I’ve dug through a few emails and articles I’ve accumulated on the subject and put together this list of 10 tax traps for photographers should watch out for if they’re going to stay out of trouble.
The standard disclaimer applies of course… always seek professional advice when dealing with tax, law or money! It costs little more up front, but sooner or later it will save you a whole lot more.
And regarding ‘professional advice’… I called my Accountant last week and said:
‘Hey Tony, I know times are tough and you’ve got to cover your costs and all, but how much are you going to charge me to ask you a couple of questions?’
With no hesitation he replied… ‘Hundred bucks, what’s your second question?’
OK, back to work…
Mistake #1. Not knowing the relevant tax laws
Now a lot of people will just leave it all to their Accountant and be done with it, but that could be costing you money. After all, the average Accountant is looking after dozens or even hundreds of Clients, all in different industries, all with different allowable deductions and possible tax-minimisation strategies.
The chances of them deliberately researching your industry before advising you is slim at best. And it’s even worse if you use a tax agent. When you’re in-and-out in under an hour, you’re almost guaranteed basics-only advice.
You don’t have to elevate yourself to expert status, but if you’re serious about your business, you should invest some time and effort into researching the relevant tax laws for your location and industry.
Professional associations are a good place to start as they’ll generally try to let their members know about relevant changes. Another option is a Google search for ‘tax benefits photographer’… plus your country. Try swapping ‘benefits’ for deduction, incentive, allowance … and you’ll find a lot of useful information.
The rules do change constantly, as do the incentives and benefits, so it’s well worth checking for yourself every year and making a few notes on anything you think ‘could’ apply to you, and then running through them with your Accountant.
I’ve been been with the same Accountant for years now, but every year I go in with a fresh list of a dozen or so questions … and while he laughs at most of them (quite cruelly at times!) there’s usually one or two that we do use, that he might otherwise have missed!
Mistake #2. Not keeping detailed & accurate records
I know a lot of photographers operate on the theory that credit card statements are ‘good enough’ and for a lot of them, their Accountants agree, or at least let it slide. The various Tax Offices take a different view. Over the years we’ve had a number of our photographers audited, in the US, UK and Australia, and in every case, their bank-statement record keeping wasn’t up to the standard expected by the people doing the audit. And in every case that cost them money.
This gets even worse when you start calculating claims for various things like travel, meals, car expenses. I think in most countries you’re allowed to ‘estimate’ some of these expenses, in terms of what you spend and also in terms of what percentage you attribute to ‘business’.
For some reason, the notes on how you worked out your estimated seem to be the records that are most likely to get lost! If you estimate ANYTHING, work it out on paper and keep the paper.
It’s like just like the old math problems where you didn’t get credit for an answer unless you showed your work… except in tax situations, no credit means they can disallow your claim going back several years, adjust what you owe, and probably charge you interest on top of that.
Another big problem in this area is fading cash register receipts.
I’m sure everyone’s experienced it… you remember to ask for the receipt and you stash it away somewhere safe but when it comes time to enter it in your book keeping system, it’s faded away and a real challenge to read.
Before that happens, make sure you write the details on it in a way that ensures it won’t get worse, if you ever get a ‘please-explain’ from your friendly tax office. If you have a supplier who’s receipts are a constant problem, get in the habit of scanning them, (or even photograph them with your phone and store them at Evernote!)
I’ve heard a few stories now where the tax people have made it clear, a faded receipt is your problem, not theirs. The smart move with all this is to make it a habit to enter all expenses into your book keeping system ‘regularly’, and always remember, you could be asked for ‘the originals’ for a good number of years after that.
Mistake #3. Constantly running at a loss.
OK, this is a basic business mistake as much as a tax time mistake, but the result is the same. A lot of photographers are part-timers, and run the risk of an audit if they consistently show a loss with their business.
If you’re a part-timer, it is nice to be able to make business expense deductions against your day-job income, but the tax office is wise to it. While they’ll give you a couple of years to get your business up and running, if you keep on showing a business-loss and hitting them up for a nice tax-refund every year, sooner or later they’ll call you in.
Every country has it’s own guidelines on the difference between a ‘hobby that makes money’ and a ‘fledgling’ business so if you think you might be flirting with trouble on this, pay a visit to your tax-office website and search for ‘hobby or business’ you’ll soon find their official definition and how they are likely to view your operation.
They will obviously take a lot of factors into consideration, but spending a small fortune on equipment does not make it a business. If you’re called on this, you’ll need to show records, you’ll need to demonstrate established business processes… sales & marketing, fulfillment, operations… but most importantly, you’ll need to show a profit, or at least regular, increasing income.
Mistake #4. Not depreciating equipment.
This follows on from #3: I’ve heard a few stories of photographers writing-off the full cost of expensive new gear in one year… possibly to try and snare a nice tax refund from the day job… and unfortunately this can also set off alarms bells at the tax office.
The rule of thumb is: if you’re going to use an ‘expensive’ item for longer than a year, you can’t claim the full cost of it in one year. Instead you need to depreciate it over multiple years.
If accounting isn’t your strength, that means claiming a percentage of it as an expense this year, the same percentage of the reminder next year, and so on until there’s nothing left. The tax office will usually tell you how much to depreciate off an item each year, and then you just keep going until there’s nothing left.
You don’t need to know how to do this is you have an Accountant… all you need is a list of new high-price items you’ve bought that you’ll expect to still be using next year!
If you’re doing it yourself, just maintain a spreadsheet with the date of purchase and a depreciation schedule showing the start price, the amount deducted each year, and the residual value. You can find the specified depreciation rates on your local tax office website, and then keep track of how much you claim each year, and the residual value of the item that you carry over to next year.
Mistake #5. Not declaring all income.
It surprises me when people get caught out for not declaring income, even though they actually invoiced the Client or even filled out the relevant tax forms. They know the Client is going to lodge the form and claim the expense, so they have to know the tax office knows they got paid … and yet people still ‘forget’ to declare the income.
I’m sure some genuinely forget, (though proper record keeping should prevent that), but I know of a few cases where people have been caught out, basically because they ‘didn’t bother’ with a small job, or confused themselves trying to sneak one through.
Personally I think the days of cash work under-the-table are long gone for photographers, and the smart move it to keep it simple and declare everything. With all the consumption taxes, (GST & VAT) and various state sales taxes, the opportunities for working off the books are all but gone, so it makes more sense to put your time and energy and ingenuity towards making your business more profitable instead of looking for new ways to stiff the tax office a few dollars!
Besides, even if you do sneak one through, it’s a one-off windfall. If you improve your profitability, it’s a permanent benefit that will put extra money in your pocket for many years to come. That’s where you should be focusing.
Mistake #6. Not collecting sales tax or GST or VAT.
This is another area where you need to get familiar with the rules where you live. Mostly these taxes are consumption taxes, that you as the business-owner are obliged to charge your customers, on behalf of the tax office any time you sell goods or services.
And even if you don’t charge your customers, the tax office’s view is usually that if you sold goods or services, the relevant taxes were applicable, should have been collected, and are now owed by you!
If your a new business, this is one area where it would be particularly useful to find an Accountant and get totally clear on your obligations and responsibilities right from the start!
Mistake #7. Not handling your car & travel expenses properly.
Travel expenses seem to be a perpetual problem area for photographers. Most tax offices allow either a deduction of your total (documented) costs, or a cents per mile/km method. The only real way to know which is best for you is to keep track of both for a couple of years, until you’re satisfied there’s a clear advantage to one option or the other.
Either way, you will need to know how much of your travel is work-related, and how much is private use of the vehicle. For that you need a CURRENT log book. Log books should contain the date, distance, and purpose of the trip in the very least, and usually need to be kept for a minimum amount of time before you can use that work-related percentage against your expenses.
I remember talking to a photographer a few years back who’d kept the required logbook 10-15 years ago, and had use that percentage ever since. Unfortunately, he got audited and the tax man decided his calculations were seriously out of date, his travel patterns had changed significantly, and a fair percentage of his last 5 years travel related deductions had to be repaid!
Keep that one in mind… if it’s been a while, check how long your log book is good for, and if need be, do it again!
Mistake #8. Not using an Accountant.
Despite my opening joke, my view is an Accountant is a necessary and valuable investment in your business, and my guy is great. A lot of people will try to get by with a tax agent or even doing it themselves, but when you pay an Accountant to do your tax, you basically have access to their expertise and experience all year round. For a new business, that is invaluable.
So when you find a good Accountant, they should be someone who takes a real interest in your business, and someone you feel comfortable picking up the phone and talking to anytime you need advice. And even if you think you don’t need any help, you probably should think of an excuse and do it anyway, at least a few times a year.
Having an Accountant prepare your tax return will also reduce your chances of your business been seen as a hobby, and hopefully lower your chances of being audited.
Mistake #9. Missing genuine deductions
Again this is where you need to take control and responsibility, and not rely on your Accountant to get every deduction you’re entitled to.
I know one photographer who’d been in the game for over 20 years before he ever made a claim for his home office. It was a dedicated work area and a legitimate deduction, but it never occurred to his Accountant because the photographer also had a separate studio.
Eventually the photographer saw others making the claim so he ran it past his Accountant, who said, ‘sure thing’ … 20 years too late!
Starting this year, make a list of the things you do claim, and then add to it every year from here on. When you take your list of questions to your Accountant… any time he lets you claim something new, add it to your list!
Then review that list carefully around tax time to make sure you’re giving the Accountant everything, or better still, post it somewhere where you see it all year round, so you’re always thinking about what you should be saving receipts for!
Mistake #10. Not treating your photography as a business.
This last one is the crux of it. For many photographers, their only really income comes from ‘stock’, where they might be ‘selling photos’ but it in no way resembles a business.
It’s mostly just a matter of submitting images and hoping for a few sales.
So come tax time they show some modest income and they try to claim every expense they can think of… and the average gadget-buying photographers doesn’t have to be too creative to show a loss, year after year.
And as mentioned, after a few years of consecutive losses, the tax office will start to ask questions…
So those people have two choices …
They can either stop claiming all the expenses, or they can get a bit more realistic about what percentage of their expenditure is business and how much is personal. Declaring the income is not-negotiable, but writing-off thousands in new camera equipment when you only sold a dozen images is asking for trouble.
The other option is to make a conscious decision to stop waiting for photo sales and start building a business. It means making a proper plan for your business…
- How you’re going to structure your business?
- Your profit model… what are you going to sell and who you’re going to sell it to?
- How you plan to bring in new customers?
- What differentiates your & your work from everyone else in the marketplace?
- How do you take orders and deliver your products and services?
- How you’ll build relationships with your Clients?
- How you can increase revenue and decrease expenses?
- How you’ll grow your business each and every year, so you never have to worry about the tax office calling you a hobbyist again!
Now there’s no question that a list like that is going to scare a lot of people off, but that’s to be expected. Stock photography does attract a lot of people who just want some easy cash from their hobby.
It’s not their fault, that’s just the way the industry has evolved. The problem is, it’s not reliable or even viable for most, unless they make a conscious decision to step up and treat it like a business.
Around here, we’re much more interested in finding the business builders.
They’re the people who want something more substantial from their photography, and are prepared to invest some time and effort to get it. There’s already hundreds of places where photographers can submit-and-wait-and-hope so a long time ago we decided to aim a little higher.
So if that’s sounding like it could be a better approach, I’ll encourage you to look over this alternative photography business plan, and see if it might be a good model for you…
End of Financial Year Specials!
From now until 30th June we’ve got our regular end-of-year specials running again. So if you’ve been thinking about taking a closer look at what GlobalEye can do for your business now’s a great time!
If you’ve already registered, you need to do that now, then get your Membership Application together as soon as possible, if you want to lock in these great bargains…
PS. While you’re here … what are some of your deductions you claim that other photographers might miss? Share a few ideas and we’ll see if we can make a ‘starter list’ for everyone … though remember to get them checked by your accountant before you try to claim them!