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Columns: Tax Talk
George Saenz, CPA   Expert: George Saenz, CPA
Tax Talk
Artist stiffed by gallery wants tax write-off
Tax Talk

Deducting a business loss

Dear Tax Talk:
My wife is a visual artist. I work as a hospital administrator, and we file as a couple.

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The art gallery that sells my wife's work owes her $70,000. This amount represents her share of $140,000 worth of paintings by her that were sold by the gallery. They do not dispute the amount, but say that they don't have the money to pay her. We've hired a lawyer ($450 per hour), but the gallery has far deeper pockets than we do.

My question is about deducting a business loss from our income taxes.

Is there any reason why we couldn't deduct the full $70,000? Could we spread it over two years ($35,000 in 2007, $35,000 in 2008)? If we deduct the $70,000 all in 2008, this far outstrips my wife's income for the year. If she earns $40,000 in 2008, can we write off all of her income and then $30,000 of mine, too?

Dear Dan,
A visual artist is an artist who creates works of art, such as paintings or prints. I assume your wife is a sole proprietor and files a Schedule C for her work as an artist. Most sole proprietors report their income on the cash basis method of accounting.

Under the cash basis method, a taxpayer reports income when collected and deducts expenses when paid. When income is not collected, a cash basis taxpayer's loss is the loss of his or her time, which isn't a tax deduction. The costs of supplies (such as paint and canvas) presumably would have been deducted when bought and not inventoried.

If we assume your wife uses the accrual basis of accounting, she would report income when invoiced -- such as through a sale. If your wife had reported her share of the sale of the paintings as income when sold, then her loss would be limited to the amount she previously reported as income. There would be no net loss to offset other income, such as from your salary, ignoring the cost of supplies.

It's a shame that your wife was defrauded by the gallery. If the gallery truly does not have the money to pay her, then I don't see how they can afford an attorney. If your wife can't force them into bankruptcy, I'm sure their reputation will put them out of business soon enough.

Bankrate.com's corrections policy -- Posted: Feb. 19, 2008
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