The following is Part II of an excerpt from “Peace, Love and Financial Planning — An Illustrated Guide to Money”, by E. Larson Gunness, a local financial planner (and friend).

Click here for Part I

Note: “You” is the narrator in the book, who is working for a local accounting firm, and has just met Art, a new (artist!) client in distress because he has not filed his taxes for a couple of years. Any resemblance between the fictional “Rich” and myself must be purely coincidental!

Rich Responds — Part One

Art goes silent. He seems exhausted but relieved, as if he’s confessed to a great burden he’s been carrying… for two days. Rich leans back in his chair, props his elbows on the armrests and interlocks his fingers.

“Well, Art,” Rich begins. “That’s quite a story.”

Then you watch Rich as he applies his wisdom and experience to the situation of Art.

“You will not go to jail, even if it will improve your artistic career. The IRS is not out to punish people but to bring them into compliance and have them pay what they owe. You may face penalties if it turns out you owe – but we do not even know that yet. Relax. Sit in the massage chair.

Our plan is to reconstruct your finances for the last two years as best we can. It will not be precise but at least we will be able to file, get you on the right path going forward.

Do you have a copy of your last tax return, three years ago?

What kind of records can you come up with for your income? Can you or did you get a statement from Katya (the gallery owner) ?

Do you have a separate bank account for your painting income?

Do you have copies of your bank statements? I know it’s a long shot but that might shed a light on your business activities. (You have a business, you have income, you have income tax.)

We need to get a sense of how much you made from non-gallery sales.”

Stay out of jail — FOREVER! Attend my free May 6 webinar, Business Basics for Start-Ups , sponsored by Social Enterprise Greenhouse. Click here for information

Rich Responds — Part Two

Rich continued. It was kind of impressive to see how many ways he could think of to help Art. Art was clearly becoming relaxed, really relaxed.

“You are allowed and expected to deduct your professional expenses and only pay taxes on your “net”. Going forward, you will need that separate bank account AND a tool to help you track your income and expenses (e.g. Quickbooks). Going back, do the bank statements have copies of the checks? Did you pay anything by credit card?

Other expenses – we can deduct your roundtrip business mileage to NYC. How many times did you drive there? Supplies? Courses? Memberships?

Is your studio part of your residence? We may be able to take a “home office deduction” if it qualifies. Or was the studio a separate location?

What % of your phone do you use for business?

Do you pay health insurance? That is a deduction.

What is your best projection for this coming year’s sales?

You should plan to save between 30% and 35% of each art sale for taxes, and we will set you up on an “estimated tax plan” for next year.

Learn more in person May 14, in Warren, RI: The Business Of Art: Tax And Accounting Basics For Working Artists And Designers Sponsored by Gallery Night Bristol Warren. Click here to register

Art is Calmed

The meeting with Art is now almost done. The information will be compiled into filings with the IRS.
.
“Not to worry,” Rich says. “It is possible that you may incur a fine. But, at least you’ll be up to date. At least you are trying to do the right thing.

“And from now on,” Rich continues, “you will do this regularly, right? You’ll pay quarterly estimated taxes on self-employment income and file your annual return, either with or without my help?”

“Right,” cries Art.

“Because, they’re your taxes and your responsibility. The money you owe in taxes isn’t yours, even if it’s in your hands for a few weeks or months… got it?”

“Got it!”

This is copyrighted material, text and illustrations reprinted with permission of the author. The entire book — glossary, case studies and more can be found online. It’s a hoot (and helpful too!).

Boston artists: I will be at the famed Artisan’s Asylum in Somerville, May 21 to present Life On The Ledger, How To Make Your Art Add Up click here for details

Summary Of My May Presentations

May 6 – Webinar Business Basics For Start-Ups at Social Enterprise Greenhouse click here

May 14 – Live lecture in Warren RI: The Business Of Art sponsored by Gallery Night Bristol Warren. click here

May 21 – Live lecture Somerville MA: How To Make Your Art Add Up at Artisan’s Asylum.
click here

The following is an excerpt from “Peace, Love and Financial Planning — An Illustrated Guide to Money”, by E. Larson Gunness, a local financial planner (and friend).

Note: “You” is the narrator in the book, who is working for a local accounting firm.

Art Comes in for a Meeting

One day, a person named Art comes in, looking for help. You know Art, have known him for a while.

Rich calls you to sit in on the meeting and take notes. You’re a bit bashful when you step into the conference room and are introduced to someone you know from the outside world.

But Art doesn’t seem to recognize you. He just sits down facing Rich. But, you tell yourself, Art’s Art and he can be a bit goofy at times.

You watch him. He seems uncomfortable. In fact he seems downright rattled. As you take out a clean sheet of paper, you reflect that it’s been a couple of years since you’ve seen him. Last you heard, he was still the prodigious prodigy, cranking out quality piece after quality piece. After so many years selling all those high priced paintings, he must have quite a bit of money by now.

Rich begins the conversation with small talk, apparently trying to get Art to relax. But Art will have none of it. Art never did go in for nice-nice.

Art Explains

“I DON’T WANT TO GO TO PRISON,” Art blurts out, to which Rich visibly flinches.

“Uhm, say more,” Rich says

Art leans back in his chair and looks around the room, examining everything except for Rich. At that moment, Art appears like nothing so much as a stray dog, cornered and frightened. For a moment, you’re not sure what’s going to happen next. Anything seems possible.

Then Art closes his eyes and goes quiet for a moment. When he opens them again, he’s regained his composure. He draws a breath and launches into his story. He speaks spasmodically and fast. You struggle to keep up with your notes. Rich just sits back and listens, occasionally picking up his pen to jot down a brief note.

“I don’t want to go to prison,” Art says again. Only this time, he says it in a calm, even tone, firm with resolution.

“I’ve always done well with my painting. It’s the only thing I ever do, only thing I’ve ever done. I can’t say that I do a good job or bad, because it’s all I do. I paint.

And people have always seemed to want my paintings, which used to amuse me. I mean I paint all the time anyway, so if someone wants to go through and buy from the piles of canvas I have in my shed, then so be it.

But I don’t see it that way now. Wasn’t too long after I got out of art school that I realized I need to eat. And I’m not trained to do any other kind of work.

“So I met this woman At one of my local shows. Her name’s Katya and she owns a big swanky gallery in Manhattan. Well, long story short, she got all excited about my work and said she wanted to help me sell my art through her gallery.”

Art Meets Katya

“So for the past two years, it’s been pretty simple: every couple of months or so, I send a few paintings to her. Well, at first I just threw them in the back of my car and drove them down to her, but when I asked her to help me unload one time in the rain, she got all freaked out and since then she’s insisted that I take them to the UPS store to have them packed and shipped. I keep telling her it’s an expensive way to ship, but she says she can afford it, so I let her have her way.

Anyway, for a while we went on like that. I’d send her the paintings. A few days later I’d get a check in the mail. I’d cash the checks, spend some of the money, put the rest in my stash, and send her more paintings. It was all good.

Then last October, she decided to stop selling my paintings for a little while. She said she wanted to let anticipation build, that people were coming in looking for my work and she wanted to play hard to get or something in order to do a big show around my work in a year or so.

Katya said she felt bad that she had to disrupt my cash flow. I didn’t tell her that it didn’t matter to me, that I never spent a lot of the money I got from her checks anyway.

So she gave me a job down at her gallery. I go down there every other week. I do whatever needs to be done, like hanging pictures, sweeping up, painting walls, or whatever. Then at night I crash at her brother’s place, which is fine because he’s I guess living in Europe so I get his loft all to myself. Then after the week’s up, I drive up to my studio again and sleep and paint some more.

I was feeling pretty good about things. I have this super cush job. I get to live in this apartment in the middle of New York. There’ll be a big showing of my work some time soon.

I remember thinking: “What could go wrong?”

Art Receives a W-9

“Well, basically the same day I asked myself that question, I came back to my studio, and there was this letter waiting for me from Katya’s office. Inside it was this form called a W-9?

Rich nodded, like yes, he’s heard of them. Then gestures for Art to continue.

“The next time I saw Katya, I asked her what I was supposed to do with that form and she said I should give it to my accountant when I do my taxes this year. She said it’s kind of like the 1099s I “always turn in (here, Art adds air quotes around ‘always turn in’). I played it cool, like I knew what she was talking about.

That was three days ago and I haven’t slept since. The whole conversation sent me into a sort of panic because I haven’t dealt with taxes, basically… ever… as far as I know. I kind of thought I didn’t need to deal with that because every gallery I’ve ever sold through was in charge of paying the taxes ….. so I didn’t know I was supposed to pay those taxes too.

So now I’m in big big trouble. But I’m prepared to face whatever awaits. And after my time has been served, I’ll start all over again, as an upstanding citizen.

Who knows? Prison might even improve my paintings. Heck, might even make them more valuable.”

Art goes silent. He seems exhausted but relieved, as if he’s confessed to a great burden he’s been carrying… for two days. Rich leans back in his chair, props his elbows on the armrests and interlocks his fingers.

“Well, Art,” Rich begins. “That’s quite a story.”

In the Next Installment: Rich Responds!

This is copyrighted material, text and illustrations reprinted with permission of the author. The entire book — glossary, case studies and more can be found online. It’s a hoot (and helpful too!).

What Can I Do To Minimize Payment Pain?

As with anything, that which you avoid persists. Right? Get a handle, get a grip — will you owe for this year?

Get help if you need it — your accountant can project your liability if you provide her some basic information. Maybe you need to add more withholdings to your final paycheck. Or can benefit by a retirement plan contribution.

Or maybe, just maybe, you will be just fine and don’t know it.
Getting the facts is always a wise way to start.

What Can I Do To Minimize Preparation Pain?

Have a consistent system that works for you and for your tax preparer. Small businesses really ought to be using accounting software like Quickbooks. Freelancers and households can benefit from tools like Mint.com.

I helped a friend set up Mint — someone who is not particularly tech savvy or financially inclined — and he loves it. It’s good on the micro and macro level. I went home and set it up for my household and am also enthralled. Not only does it painlessly gather your financial information, it allows you to set and track budgets and goals.

If you are a client of my firm, you can use our handy-dandy checklist to help keep your tax preparer sane.

What About That Survey You Sent Out?
Did You Learn Anything, Rich Streitfeld?

Yes! I received many helpful answers and offers to contribute or post an article. More of you than I realized benefit from the divorce and personal financial postings, some of you read Dispatches depending on the topic and many, I am glad to hear, just enjoy reading it even if there is nothing that particularly speaks to your situation.

However, I am not sure I can fulfill the requests for content devoted to”obscure bird calls” or “ancient history.” More than one person asked for more content on “your personal life”! and another enjoys “a glimpse into your world, Richie.” The fictional interviews are popular, and people enjoy the humor.

And The Caption For:

• Keep your eye on the ball
• Keep your eye off the ball
• From begging bowl to world cup
• Damn kids
• Soccer ball seeking Enlightenment
• Be the Ball
• Being the Ball
• Tips for the Enlightened Soccer Mom
• Eight fold path to Victory

Just A Sampling! Thanks…..

Q: How long should I keep tax records?
B. Madoff, investor

A: In general it’s advisable to save documentation supporting your tax return for seven years. The IRS generally has three years from the date of filing to audit your return, but up to seven if it suspects you under-reported your income. If you didn’t file or filed fraudulently there is no time limit — so keep meticulous records of your embezzlement, okay?

Q: Is there an easy way to do this without cluttering my cell?
A. Capone, Alcatraz

A: Digital is the way to go,Al. Scan your paper receipts and tax documents into a file and archive it. Once a year send a back-up to your CPA, ex-wife or Elliot Ness.

Q: I freelance a bit mixing investments and putting distance between people and their money. What else should I save?
C. Ponzi, Roma

A: If you are a freelancer like Chuck who files a “Schedule C” and deducts expenses from self-employment income, save all the documentation supporting your income and expenses.

Q: I put all my business expenses on my Worldwide Wrestling Federation credit card. Need I save all the underlying receipts?
B. Cianci, candidate

A: Depends if the nature of the activity is evident by the description on the statement. Motel Six is for lodging but Target could be for your pet’s dog food or your kennel business. A credit card and/or bank account used exclusively for business is also helpful.

Q: I preach impermanence but am told some things should be saved permanently. Advise.
S. Buddha, India

A: Some examples might be business tax returns, home purchase documents and investment records if you purchase securities independently of a broker. If you are a partner in a business, save any documents related to what you paid for your share and how profits and taxes are to be allocated.

Q: How else can I be efficient and tidy in keeping records?
M. Stewart, fussy

A: If you deduct medical expenses ask the drugstore for a print-out of your prescription drug purchases, recreational marijuana use and the number of times you had a question for the pharmacist. If you have a business or rent property a bookkeeping system or qualified bookkeeper is essential. (Balancing Act, — part of my company — does that, and we know others.)

You are a busy dentist and your bookkeeper signs the checks.

You are president of a non-profit; the treasurer is supposed to co-sign large checks with the ED. But the treasurer  is out of town, and you trust the ED.

Your Quickbooks password hasn’t been changed in seven years (Oh, you don’t have one.)

The cash part of the business? It’s just too complicated to keep track of.

Years ago I was engaged in my first audit, of a large mental health facility with a walk-in clinic.  We wondered why the income had decreased so much in the current year.  I spot-checked a few weeks of cash receipts and discovered there were several days when no cash had been recorded or deposited; this was highly unusual for such a high-volume facility.

Eventually the State Police were called in and the bookkeeper confessed. She had been there twenty years; the “little old lady” whom everyone trusted had taken over $30,000within a couple of years.

(My company, ALSD, makes recommendations on how to strengthen internal control when it conducts audits.)

Years ago (again!), I was studying to be a Certified Fraud Examiner and traveling overseas. I asked a carpenter friend to house sit; I was also hiring Molly to renovate my attic.  I gave her some cash upfront to buy supplies.  I came back ready to  take my CFE Exam ( Molly knew about this),  and discovered that very little had been accomplished on the attic.  She handed me a receipt for $100 even, with only the word “paint” on it and no sales tax; the receipt number was “001“.  Not a very crafty embezzler but you get the point — embezzlement (as opposed to robbery) by definition is an inside job — stealing bysomeone you trust.

To make matters worse, Molly had left cooked sweet potatoes in the oven for over a week.  But I passed the exam, and remain a CFE  (the yams had no such luck.).  In future posts I will talk more about how you can prevent fraud in your business and personal affairs.