In 2013, I received the daunting letter in the mail that I was being audited. I learned a lot during this process and thought I would impart some advice and tips to all of you other photographers in Minnesota who this could potentially happen to someday! If you are not a photographer, this can also apply to you, so think of it in terms of your business. Now, for those of you out of state, some of this advice could apply to you as well, but make sure that you look into the specific guidelines for where you live.
So, the first thing that comes out of people’s mouth’s when I say I went through a tax audit is first a ‘gasp!‘, followed by the question, “Why are YOU getting audited? How did that happen?” The answer is, there is no real reason. For me, it was kind of like being called up for Jury Duty. I hadn’t done anything wrong, ever, and I was simply just chosen by the state to have a Sales and Use Tax Audit. Photographers, if you are ever audited, it is probably going to be for Sales and Use Tax. My audit went back from January of 2009 to June of 2012. That’s a giant chunk of time and I have never been so happy to have ALWAYS, like from the beginning of time, been incredibly organized when it came to receipts and paying in my sales tax on time. During the audit, the government takes ‘samples’ from random months within this time period and you have to look up receipts and prove the payment of sales and use tax. Because I have always been so organized, this was the easy part. Many times people see audits as a very scary thing and it’s mostly due to the disorganization far before the audit. Here are some words of advice to either put into practice and/or keep in mind, should your photography business every get called up for an audit:
1 // Know When you File:
Over the course of our business growing, we have gone from filing our sales tax from yearly, to quarterly to now monthly. I. LOVE. FILING. MONTHLY. For us, paying in each month simply works best with the cash flow of our business. Every month, we have our bookkeeper to come in and reconcile. At that time, we also pay in any sales tax that was due. On the slower months, we owe less and when we’re busy, the proper amount of money is in the bank to pay. I’m not saying this is the perfect way, but it has really worked for us and makes paying in taxes as stress-free as it’s ever been. No matter how you pay in your Sales and Use Tax, make sure you know when things are due – those penalties on filing late are quite steep! Check your states Department of Revenue for their filing and payment schedules.
2 // Have Patience, Communicate Clearly and Assemble your Dream Team:
From the get-go of my business, it was important for me to have the best CPA/EA that I could find. I go to Fox Tax, which is a tax firm that is geared specifically towards working artists! As time went on, I realized that I couldn’t handle QuickBooks all myself, so I hired my (amazing) bookkeeper thru Fox Tax. Hiring my bookkeeper was honestly life-changing and worth every penny. When it came to being audited, my auditors didn’t really understand my photography business. It took a lot of patience to explain what certain things were and determine with them whether or not a certain program, piece of equipment, print sale, or wedding booking was taxable or not. The reality is, these auditors might be working with a construction company, a photography business, and a mechanic all at the same time. You want to make sure that they understand your business, so you don’t get charged for something unnecessary. Your CPA/EA and bookkeeper will also be a giant help in explaining your filings and financial reports as well.
3 // Double Check the Work:
It is VERY important to look over the documents that the auditors present you with. Remember that part about not knowing your business, specifically? We caught a giant amount of areas where our auditors accidentally doubled-up on things, which was ultimately asking us to pay in more money than necessary. Double checking could save you lots of money!
4 // Know Your Exemptions:
For us photographers, if we are every selling prints or products for re-sale, we should not be paying sales tax to our labs. During our audit, I realized that our album vendor was not charging us sales tax, but our print lab was. This is because I hadn’t filed a Tax Exemption form with my lab. This will save us TONS of money. Basically, since our clients are purchasing prints, they are paying us tax, which we will pay in for Sales Tax. However, when we go to fulfill that order with the lab, since the prints are being made for re-sale, make sure you aren’t paying that tax twice! You can download the MN Tax Exemption form HERE!
5 // Pay in Use Tax:
What the hell is Use Tax? This is also referred to as the ‘hidden’ tax, and for a reason, because no one really teaches you to file it. However, if you get audited for Sales and Use tax and have never paid it, this is more than likely what you will end up paying in. Use Tax applies mostly to those purchases made on the internet. For example, lets say you purchased your new camera online. You’re probably not charged sales tax when purchasing it online. Use Tax is paying in the tax that would-have-been-charged, had you purchased your camera at the local camera shop. Technically, we should all be keeping track of our online purchases and paying in Use Tax at the same time we pay in Sales Tax. The Use Tax should be the same percentage that you pay in for Sales Tax. Here’s the catchy part… you might be able to get that tax back…
6 // File a Capital Equipment Refund:
Photographers may claim a refund of Sales and Use Tax on equipment purchased to make the photograph. That means that whether you purchased your camera at the local shop (and paid sales tax there) or ordered the camera online (and paid in your Use Tax), you can fill out a form to get ALL of that tax money back! WOO HOO! The kicker is that it takes a little time to fill out the form, but can ultimately refund you a hell-of-a-lot of money. The other kicker is that your refund will be considered Income and will be taxed, but more money is more money. Some examples of equipment that may qualify are:
- Cameras
- Props
- Posing Equipment
- Batteries (YES! ALL OF THOSE BATTERIES!)
- Bulbs
- Tripods
- Production Computers and Software
- Lighting Equipment
- Printing Equipment
- Backdrops
- Accessories and Attachments
7 // Ask Questions:
It’s entirely okay to feel like you have no idea what’s going on. However, not matter how stupid you feel, it’s important to ask questions so you can understand – even if this means asking them over and over until it clicks. This is your business and it’s important to understand the process! Overall, being audited isn’t a scary thing, but it is time consuming, so if anything, prepare yourself for that! Cheers to owning a small business and living the dream!
8 // Above All, Stay Organized:
It’s taken years, but we finally have a really awesome system. I hang onto ALL of my business receipts,and have a special ‘inbox’ where I put everything for the month. Before our bookkeeper comes in, I set aside about 10 minutes to organize all of those receipts in my ‘in box’ and other important documentation into a binder, which is categorized by month. It’s pretty easy and we know exactly where to find everything, so reconciling and filing is easy breezy!
Here are some documents, from the State of Minnesota, that I highly recommend reading. It’s not the most exciting thing you’ll ever read, but it does state the rules and might help better answer some further questions you have about Sales and Use Tax:
Minnesota Sales and Use Tax Instruction Booklet
Photography and Video Production – Sales Tax Fact Sheet 169
Use Tax for Business – Fact Sheet 146
Capital Equipment Refund Claim – ST11 Form
Sales and Use Tax Filing and Payment Schedules
Certificate of Exemption – ST3 Form