Home-Based Business Considerations for Self-Employed Artists and Crafters

Self-employed artists and crafters harness their creative abilities to add beauty to the world around them. Sometimes, the artist will focus on his or her art and forget that there is also a business to be run.

There are special tax rules for self-employed individuals. The IRS administers the tax code, which contains some provisions that can be very advantageous to business owners. One such provision is a deduction for the business use of your home.

If you run your business out of your home, you may be able to offset some of your income tax with a deduction for the portion of your home used for business. The IRS has two basic requirements that must be met in order to take the deduction: the regular and exclusive use requirement and the principal place of business requirement.

To meet the regular and exclusive use requirement for the deduction, you must use a specific area of your home on a regular basis to conduct business. The area must only be used for business. Using an area for both business and personal purposes does not qualify for the deduction.

In order to meet the principal place of business requirement, your home must be the only fixed location where you conduct substantial management activities of your trade or business. In the case of artists and crafters, your wares may be sold at trade shows, over the internet, or through retailers. You are not conducting substantial management activities in these instances, so your home may qualify as your principal place of business.

Once you've met the requirements needed to take a deduction for the business use of your home, you need to determine what expenses can be deducted. Indirect expenses related to running and maintaining your home qualify. Mortgage interest, real estate taxes, utilities, and homeowners insurance are examples of indirect expenses. The deductible amount is the total expense multiplied by the business percentage.

To determine the percentage of your home that is used for business purposes, calculate the area (length multiplied by width) used for business and divide it by the total area of your home. Apply that percentage to each indirect expense to calculate the amount to deduct.

Starving artists and wildly successful artists alike should be aware that this deduction is available. For further information on the business use of the home deduction and other special deductions for self-employed individuals, go to www.irs.gov or contact your accountant.

by Ray Klinc CPA and Beth Dillon