If you’re an actor, musician, author or artist, you probably think of your career as more of a calling than a business. Passion, not money, drives what you do, so you’d just as soon not have to deal with such financial matters as income projections and tax records.
But most creative types who abandon their passion do so because they can’t find a way to make it financially sustainable, says Miata Edoga, actor and founder of Abundance Bound, a Los Angeles company that provides coaching and financial planning for creative professionals.
“So, your commitment to your art, to your creative career, has to involve a commitment to being financially stable,” Edoga says.
The foundation of financial stability is a comprehensive, custom-designed plan for budgeting, spending and saving the money you earn from your talents.
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The makers of those mall maps that help you find your destination store by orienting the path to where you’re currently standing are on to something. Reaching a financial goal is also a lot easier when you have a clear picture of your starting point. But creative professionals can be especially prone to neglecting that type of financial self-assessment, according to Edoga.
Maybe your goal is to repay all your debts, save for retirement or earn six figures. “That’s point B,” Edoga says. “But most of us do not know where point A is, so how can we chart a course between the two points?”
Edoga recalls how quickly she accumulated debt in her first few years out of college.
“I found myself at that breaking point, where it was clear that I was either going to have to get it together or I was going to have to quit the pursuit of acting, probably go home and live with Mom and Dad and get some sort of job,” she says.
Personal P&L statement
That crisis became her motivation for a self-directed crash course in financial literacy — reading books, listening to experts. Things began to turn around when she followed their advice to create a personal profit and loss statement by tracking her income and spending.
“I plugged in all my numbers over the last six months … and I’ve never forgotten this: I was at negative $1,153 a month,” Edoga says. “So, of course I had debt!”
But with that information she had a clear target for increasing her income to fill the gap, and she was able to set up a debt repayment plan. Today, putting together a P&L statement is one of the first assignments she gives her clients.
Georgia Lee Hussey, a CFP professional and investment adviser at Rosenbaum Financial in Portland, Oregon, has many creative professionals as clients. She herself is a former sculptor who also was an art gallery curator and manager before starting her financial planning career.
Her initial consultation is usually aimed at helping clients identify their financial goals and understand their relationship with money.
“It’s really hard to get behind managing your daily cash flow if there’s not enough awareness of what you spend and what the purpose of money is in your life,” says Hussey.
Sometimes the biggest hurdle is getting “creatives” to let go of the notion that focusing on their earnings means selling out. Hussey’s mission is to help these clients “be OK with being successful,” she says.
Creative professionals also need better awareness of the time they put into their work, says Elaine Grogan Luttrull, a certified public accountant who specializes in working with artists and nonprofit arts organizations.
“I encourage artists to be as diligent as they can in tracking their time. It helps them set the price for their work,” says Luttrull, who teaches finance and business classes at the Columbus College of Art and Design in Columbus, Ohio, and owns a professional consulting firm called Minerva Financial Arts.
Keeping track of their spending is something else that often goes against the grain of artists, says Hussey. She walks her clients through the process of dividing their budgets into three categories, or “buckets,” of spending:
- Past — every bill they already owe.
- Present — ongoing expenses, such as gasoline, groceries and dining out.
- Future — money put aside for new costs they can anticipate, such as car and house maintenance, travel, professional development and gifts.
She also encourages them to consider adding a mini sabbatical to that future bucket so they can take an extended time out from the daily grind.
“That’s something that’s an important part of the healthy development of a creative career,” Hussey says.
Creative entrepreneurs should follow some of the same tax planning guidelines as other freelancers, such as setting aside a portion of their income for paying the required quarterly self-employment tax, maintaining separate accounts for business and personal expenses, and saving money in a tax-deferred retirement plan. Luttrull points out a few more tax matters of particular concern to creatives:
Sales taxes. If you earn your living selling the items you make, you will probably be required to collect sales taxes. Even if you fail to charge your customer for the tax, you still are responsible for paying the money to your state or county government, whichever jurisdiction applies.
After undergoing a state audit, one of Luttrull’s students found himself scrambling to pay the sales taxes on paintings he had sold.
“They sent a fairly substantial tax bill for sales taxes he failed to collect,” she says. “This was two years after he had made many of the sales, so he couldn’t go back to the customers.”
Cost of goods sold. The cost of the materials you use for your creations is tax deductible, but only when you sell the items.
“Sometimes artists will go to the art supply shop and buy paints and a bunch of canvases and stock up their studio,” Luttrull says. “You can only deduct those expenses when you actually sell whatever you create.”
Transportation. If you’re shipping your works to galleries and customers, or traveling to perform, meet with clients or attend festivals, you can deduct those expenses on your federal income tax return — provided they meet the IRS litmus test: ordinary and necessary — not lavish or extravagant.
“Now these are terms of art defined by the IRS,” Luttrull says. “The expenses have to be common and accepted in your industry, and they have to be helpful and appropriate for your trade or business.”
Grants. Funds from grant awards to artists, musicians, writers and other creative professionals are generally considered taxable income, according to Luttrull. But because there are a few exceptions, she recommends discussing each case with your tax preparer.
Royalties. These payments are taxed at ordinary income rates. Royalties could be an income stream that lasts the rest of your life, and they also can be inherited.
Protecting your intellectual property
Hussey encourages creative professionals to spend some time thinking about whom they want to name as heirs of their intellectual property, and whether those heirs will be good stewards of what they leave behind. Another issue to consider is whether your family will have enough cash on hand to pay the estate taxes if your work appreciates after your death.
While you’re still around, make sure you appreciate the value of your own work.
“Intellectual property is a very important asset for many creative people,” Hussey says. “The stories are legion of creatives who did not hire a lawyer early enough to review a contract so that they understood what they were giving away.”