The IRS distinguishes between art production as a business and art making as a hobby. According to the IRS –if you make art and sell it, that’s a business, if you make it purely for pleasure, it’s a hobby. In order to use your business expenses from art production (supplies, travel, promotion) you must intend to sell the art you make and you must show periodic sales and show a profit three-out-of-five years. Generally, the IRS’s deductible business expenses are those that are incurred in connection with your art trade, business, or profession, are “ordinary” and “necessary”; and not lavish or extravagant under the circumstances. To deduct expenses you must conduct your art production as a business and use a business log of income and expenses. Use tax form 1040, or 1040-EZ, with Schedule C to list the deductions, including depreciation on such items as computers or a camera. You will also need to prepare a Profit and Loss document related to your art business. You may complete form 8829 for Office in the Home expenses, such as your studio. If you are self-employed, you will need to pay the self-employment taxes on schedule SE. This tax normally needs to be paid on a quarterly basis. Good record keeping is essential.
Unfortunately, because of changes in the tax law, outright donations of artwork to museums for the market value of the art you make is no longer valid. You as artist can deduct only the cost of the supplies it took to make the piece-not the fair market value. That said, you should realize that if an individual buys one of your artworks and donates it to a museum, they can deduct the appraised market value of the piece on their taxes as a charitable donation. Depending on the value of the piece, it might require a written appraisal of fair market value.
The IRS web site and others have information that you might find helpful in navigating the tax law and tax return procedures. Remember to use an accountant who is knowledgeable about such issues. It can be a bewildering experience navigating the tax laws and the IRS.
Some helpful web sites: