Best Business Practices for Photographers [107]
7. Understand and pay careful attention to the rules on charitable giving. Visit the IRS website (www.irs.gov) and search for "charitable giving." Each year tax laws change, especially on this topic, so be sure you are looking at the rules for the time period being examined. For example, if you complete an assignment for a charity that you would normally have billed $1,000 for, but you "donated" the assignment, you will likely only be able to deduct the overnight shipping charge and the cost for raw materials involved in that donation, which would likely amount to less than $100. In recent years, and repeatedly, artists groups have tried to get enacted into law legislation that would permit the donation of time by artists. Until that law is enacted, you can't donate your services or a $25 8×10 that only cost you $0.75 in raw materials.
Be sure not to throw away clothing items that no longer fit. Organizations such as Goodwill or the Salvation Army will take them, and you may calculate the value of these donations with the help of their online guides. Donations of outdated camera equipment to educational institutions qualify for a tax deduction in many cases. Document these donations to legitimate charities to minimize your tax liability. For example, if you donate an amount less than $500 in one instance to Goodwill and get a receipt from them, that receipt serves as valid proof of the donation. Amounts greater than $500 require additional documentation. Be sure to read very carefully the IRS rules for the year you are making your donations so you have your paperwork in order.
8. Keep receipts for small amounts. If you get into a taxi while on business, and the taxi ride is $40, but you pay with cash so the driver cannot provide a receipt, under current tax records requirements, you may make a handwritten (or printed, if you're so inclined) receipt yourself, which includes the date, amount, business purpose of the expense, and to whom the money was paid (be sure to note the taxi company as he is driving away!). That collection of information on a piece of paper services as a legitimate receipt, for, as of this tax year, $75 or less. That said, if you have hundreds of receipts like this, you can be sure the examiner will look with a critical eye at their collective legitimacy.
9. During the course of the audit, you may be approaching the date to file your taxes again. Unless you have to for some reason, don't. Certainly make any estimated payments you may need to make, but avoid actually filing the return. Doing so could cause the examiner to then include that return in the audit as well.
10. The rules for each state are different. States can audit you as well, but most audits are for your federal returns, and that is what we're focusing on here. State audits as they pertain to photographers often revolve around sales tax issues, independent contractor versus employee issues, or the payment of property taxes for the equipment used by the business. Because every state is different, this book cannot begin to address the tax laws for all 50 states, nor can it provide updates to those as they change each year.
Appeals and Wrapping Things Up
If you find yourself on the "owing more money, plus interest and penalties" end of an audit, there is further recourse. The IRS' own statistics show that many of the appeals result in significantly less being owed than was put forth by the initial examining agent.
The first phase of an appeal is where the examining agent's superiors reassess the audit results. If, during that phase, you still cannot reach an agreement with the IRS, you wind up in Tax Court. When the dispute is for less than $10,000 for a single year, the Tax Court