DISCLAIMER: THIS IS NOT LEGAL ADVICE. I AM NOT A LAWYER. DO NOT DEPEND ON THIS.
“If I make money at photography, do I have to declare it on a tax form?” (Answer: Yes) “If I sell a photo, do I have to start a business?” (Answer: No) “Can I write off my camera?” (Answer: Possibly, If it is a necessary and ordinary expense).
First of all, congratulations! you’re making money at photography, that’s impressive. Now that you are (to some degree) professional, you get the pleasure of considering one of the two things in life that you can’t avoid: taxes.
The one thing all governments are good at doing is funding themselves. So whenever you make some income, the taxman is very keen to know about it.
All income has to be reported, even that $10 from licensing images on a microstock site. But the amount of tax you pay depends upon how you’re operating your business. Presumably, you want to minimize the amount of tax you pay, so you can save money by choosing an optimum business type.
The main types of business (in the U.S.) are:
- Hobby: What your work is called when you don’t have an established business.
- Sole Proprietorship: A business owned by a single individual (or a husband and wife who file join income taxes) who receives all profits.
- Partnership: A business owned by two or more persons who are liable as co-owners of the business for profit.
- Limited Liability Company (LLC): A business owned by one of more people who have limited liability. (Not available everywhere.)
- Corporation: A business owned by an independent legal and tax entity which remains intact even If its Officers and Directors change.
Which is best for you? How you structure your business affects:
- How much tax you pay.
- How much expenses you can “write off.”
- How much paperwork you do.
- How much You’ll be exposed should you go bankrupt or get sued.
Simple approaches such as a sole proprietorship and partnership have minimal tax and paperwork involved, but your personal assets are at risk should things go bad. You can protect (or “limit”) your personal assets by forming a separate, “limited” company with a corporation. However, the trade-off is double taxation and more paperwork. (An interesting mix of all three is an LLC.)
For example, I started as a hobby, became a sole proprietor for several years, then incorporated the business as a corporation, to protect my house and family from liability. Most individual photographers operate as sole proprietors, as the taxes and paperwork are easier and there aren’t major assets in photography.
How much can I claim in business expenses? If a hobby, losses are deducitlbe up to the invome, on Schedule A Itemized Deductions of your personal return. For a business in development, up to $5,000 in the year the business becomes operational, with excess amortized over 15 years. For active business, any amount of expenses that are reasonable and necessary. For more, see IRS Business Expenses Publication 535.