Episode 4: Shining Light on Taxes for Creatives with Hannah Cole

Welcome to the Entertainment Business Podcast. I'm your host, Tisha Morris. Join me as we go inside the entertainment industry of film, TV, books, music, and all content creation, where we'll weave together the creative and business of entertainment with practical tips, inspirational interviews, and insider information of all the latest trends. And with that, let's get on with the show. Thank you so much everyone for being here today. I am so excited about my guest, Hannah Cole. Hannah is a tax expert who specializes in working with creative businesses and mission-driven solopreneurs. She's a longtime working artist herself and has helped tens of thousands of self-employed people skill up with accessible tax and money education through her Money Bootcamp program, speaking engagements all across the country, and on her podcast called Sunlight. Hannah is the founder of Sunlight Tax and is here today to shine some light on taxes for solo entrepreneurs. Thank you so much for being here, Hannah, and welcome.

Thank you, Tisha, so much for having me. I'm so excited to talk to you.

I'm really excited to kind of bring clarity on an area that seems like a big albatross, albatross for most people, and, um, you just have a really great way of making it really clear. And also your aesthetic brings such a beauty to a topic that otherwise would be a little bit on the darker side. So you are a creative, you are yourself, you're a visual artist, and you also help other creatives on the business side. So how do you find time for both of those sides of yourself with your work?

I, I was a full-time artist for maybe 10 to 15 years. And then when my daughter was born in 2010, the— it kind of all hit the fan. And, um, I was living in New York City and, uh, I was like, oh, I, I can't live the way I've been living with a child. I can't bring a child into my eating rice and beans and like never having anything extra. So that was when I started my company. Okay. Um, and I, I mean, I like to say like you can have it all, but you can't have it all at once.

That's great advice.

Yeah, thanks. Um, I mean, it's from, I've heard it from somewhere. It's not original, but yeah, but I, I tried to paint sort of when the tax season is over and I've done that successfully for many years, but you know, there have been times when my, like I said, like my business exploded and I just was like, well, I'm, I'm just going to help the people who need the help. And, um, now I had to dial everything back and try and make space to write a book. So now my current project is I'm writing a book about taxes, um, for, you know, basically just so more people at a, you know, entry level can get this information. Because I think when you're self-employed, um, gosh, it's just so hard. It's, it's— your taxes are one of the hardest kinds of taxes, and it's also the hardest to get good help.

I would agree with that. And because, I mean, I, you know, I'm an attorney, I'm, you know, consider myself pretty business smart, and yet it's the taxes that, you know, every year it's just like, you know, I mean, I think you probably have more concrete information than I do, but I, I suspect they do make it difficult on purpose, um, for at least, I mean, the tax code in general So that to kind of dissuade you taking deductions that you could take. Yeah.

I mean, there are, there are forces at work that, you know, I mean, we allow lobbying in this country and that, um, you know, there's companies that make their, make their income because we all feel confused and terrified about our taxes. We could have a system where it didn't feel confusing. It didn't feel terrifying., and it was easy and free. I mean, like, why do we even have to pay to get our taxes done? Like, that actually on its face is ridiculous, right? Um, but we love capitalism in this country and we're like, well, we'll let you make money off of this. And so the incentive of those big companies, and they pay a lot, and they pay a lot of, you know, lobbying fees to, you know, make sure that we don't simplify the tax code or, you know, a proposed— I just read a ProPublica report that, um, I don't even want to name the company, but you can go check out the ProPublica report. But that one of the major tax companies, um, lobbied really, really hard and in secret to prevent the IRS from developing its own free file software so that taxpayers could file their software for free. And what the IRS wanted to do was to pre-populate your tax forms with all the information it already has, like your W-2s and your 1099s and your mortgage statements. So that got prevented on purpose so that that company could make money.

All right. So before we change the system, um, until we get there, um, let's talk about how, how it works. So big picture for, for those are self-employed, how do taxes work?

Well, the biggest thing to get your head around, and I think that this is really important for, you know, those of us in the arts, performers, uh, visual artists like me, et cetera, is that you are, your activity, your self-employment, when you're self-employed, it's treated like a business. That's the biggest sort of, and I think for a lot of us, I mean, I went to art school, that was a huge mental shift. I did not come I didn't come out of art school thinking of myself as a business person or running a business, even though the taxes, that, that is how they're treated. So I think that's the first thing to understand, that you actually are seen under US tax code as a business and you're entitled really to all of the benefits of that. And the, you know, the primary benefit there is that you get to take deductions. Um, so everything that is an ordinary and necessary cost of running your business. You know, essentially every investment you make into your business, with some small exceptions, but almost everything is deductible, you know, so is subtracted. You do not, in other words, you do not pay tax on any money that you invest back into your business. You only pay tax on your profit, on what's left over after you take those expenses out. That's a really big deal if you think about, you know, most companies I mean, this is a huge generalization and industries vary dramatically, but if you were to say that a good profit margin in your area is like a 20% profit margin, so you make $100,000 and you keep $20,000, you only pay tax on $20,000. You don't pay tax on $100,000. Like that's the deal you get as a business in the US. And it's a pretty good deal.

And that's important. That's a very important point. And because when you're W-2'd as an employee, you don't cannot get to take these deductions. Correct. But when you are, when you have your own business, you can. I didn't, you could take like, I went, so I have a friend, she just became, started her own business, you know, life coaching or some kind of business. And she said, my entire life has become a deduction. And that, you know, that's as a someone who owns your own business, that's kind of how you have to think, or you don't have to think that way, but you want to think that way. But I also like the point you make. Whether the IRS sees you as a business or not, you are a business. And I feel like, you know, creatives want to just be creative, but in where we are today, you have to, you have to think like a business as well. And that doesn't mean you can't hire people to help you with those things, but you have to have a business mindset in order to be successful being a creative. Yeah. Yeah.

I learned this the hard way. I mean, I, you couldn't have got me into an economics class when I was in my 20s. Um, I, I avoided business. I avoided all that stuff. I, I saw it as like kind of the enemy and I, I was very punk rock and it was, you know, 10 years of really struggling as an artist that made me learn, oh, okay, these things really would help me. So, wow.

So you're, you're. Pivot into the tax world came from your own needing to learn it. Is that correct? Yes.

It's, uh, it's built on pain.

Yeah.

I actually had a client be like, I think I realized that your entire business is you taking your own pain and trying to teach us how to not be in it. And I was like, you're completely right.

Well, that means you come to it in a very authentic, genuine compassionate way. So it's much appreciated for everyone. So I know one of the big questions for self-employed people is, is you— do you stay as a Schedule C, you know, solo entrepreneur, or should you, you know, become an LLC entity and file under a business? Um, do you advise, uh, people regarding those two options?

Um, yeah, so actually that's one of the main areas of confusion that I end up sorting out for people. Um, I think what many, many, many people do not understand is that an LLC has no bearing on your taxes. They think it does something different to your tax, and it doesn't. So an LLC is a legal entity, but it's not a tax entity. And so If you form an LLC, nothing changes in your taxes. You file the same way the next day that you did the day before. So if you had a Schedule C yesterday and you form an LLC today, you keep your Schedule C. There's, there's no change.

Okay. It's if you make the S corp election, that's when things change.

Correct. An S corp is a tax entity. So yes, that for sure. And also the other thing that is poorly understood, that is nice to clarify for people, I'm sure, is that an LLC, that legal entity, and of course you can, you can speak better to those than I can, but the legal entity of an LLC can sit on top of any tax status you want to have. So that isn't the, the taxation is not determined with the LLC. The tax decision is a separate decision. So The S corp, that's a great, it's a, it's a great and beneficial tax entity once you make enough profit. And I cannot stress that part enough because there is additional cost to having an LLC. I mean, sorry, I misspoke. There's additional cost to having an S corp and there's also a substantial administrative burden when you have an S corp. And if you are not ready to be running payroll and properly paying into your state's unemployment and. All that stuff, um, you, you should not do it. And I say this because I see people who get bad advice and they set up S corps and they lose money on them because nobody ever did a cost analysis for them. And so they end up paying more in accounting fees, um, than they save in taxes. Um, and then I've also seen it where people don't set up the payroll that they're supposed to set up, um, because of it, and then they have the state that they're in coming after them for unpaid, you know, state taxes, and that is ugly.

Well, I'll also mention, even with, even just that, even just the LLC, there are costs as well with that on that are not the tax, not the taxable cost, but just the cost of forming an LLC. And also, most states have some kind of tax, corporate tax. I know in California it's the franchise tax, which is at least $800 a year. Um, so you do have those, those costs. So if you are wanting to keep it a little more simple and your income isn't too high yet, we use the yet, then just being a solo entrepreneur, um, filing your taxes on Schedule C is probably the way to go, correct?

For sure. That's the default. So you are on a Schedule C the minute you You know, get your first 1099, um, and that's where you'll stay until you make a choice and form an, form an entity like an S corp.

Okay.

Um, yeah. And there's a, just to give people kind of a baseline, like it's really, really important, um, that you not form an S corp too soon. Like an LLC, you might want on the early side for liability issues, cuz that's the real function of an LLC. An S corp is to save you money on taxes. So. If the break-even analysis doesn't work, it doesn't make any sense to have one until you make enough money. So it's around $50,000 or $60,000 of profit. So remember, that's after your expenses. $50,000, $60,000 profit. That's when you should start thinking about, you know, talking to somebody about an S corp. Do not do it before that point. That's my, that's my takeaway.

Great tips. Good. All right. So whether it's a Schedule C or through an, um, through an S corp, really a Schedule C is basically profit, profit and income and expenses and basically a spreadsheet of your expenses and your, um, of that year. And so let's talk about deductions, my favorite tax word. What are some of the common deductions that, that people in the creative fields don't think about taking?

Yeah. I mean, an example I love to give in the art world is that ordinary and necessary can be really different from one field to another. And, you know, like I, as an artist, I had a show once with this photographer who, you know, his photography was of these like gigantic piles of rotting fruit and like models wrapped in raw bacon.

It was really bizarre.

But for him, you know, 100 pounds of bacon and, you know, like 3,000 tons of papaya, that was a deduction for him. So, and you would have, you know, it would have been like a props expense. Um, right. Yeah. So I think a lot of things, um, most people, I think it's fairly straightforward when you just get a receipt for the thing that feels like, oh, Okay, this is, you know, I should keep the receipt and that's how that works. But the ones where you don't get a receipt, I think, are where people tend to miss the deduction. So mileage, home office or home studio, internet, cell phone, those things, you can get a deduction for, although it's not a 100% deduction, it's a proportion. You only get to take the business portion. But so long as you track it, you know, follow the rules, It's a great deduction. I mean, you know, if you're in California, you're probably in a car a lot. That is an amazing, you know, it's a really generous, the mileage deduction in the US is very generous. It's a great, it's a great one not to miss.

Well, for folks who work from home, how can they use the mileage deduction? Like when they go for, um, for an audition or when they go out to meet a client, how? How does it come?

Well, actually, so just a point of clarity there, whether you work, it's almost the best deal when you do work from home because first of all, a commute, so your, your commute to your place of work, that is not deductible. That is one thing people make a mistake about. That's actually a personal expense. So you're not missing out on anything if you work from home. Um, but all of your stuff outside of commuting is deductible. So if you go to meet a client, if you go to meet your agent, If you, um, go to do like a location scouting or, um, a site visit, um, all of those are deductible mileage, even just a supplies run.

Um, so I was going to ask, yeah, like if you drive to the art store for supplies, that would be— yeah, absolutely.

Absolutely. Yeah. So, um, yeah, I mean, it's pretty, I mean, it's pretty easy to classify. Was I doing this for business or not? Um, you just have to run it through that metric in your head.

Mm-hmm. Now meals, um, I know they don't get a full 100% deduction. I think it's what, 50%? But like, so if I'm meeting— what if it's a friend who's also— we have— we're both in the same field and we talk about business during our lunch, would that be write-offable?

Um, yeah, so you want to be careful with it because It's an area that tends to get abused, and for that reason it tends to get audited. Oh, okay. So you want to be, you want to be careful and extra scrupulous when you do business meals or client meals, but it's a fantastic deduction. And the other thing is like, I think a lot of times in the arts, like, we like each other, you know, like you become, I don't know about you, but I become friends with people that I work with and I, you know, it starts becoming, yes, it's a work meeting, but I really enjoy it.

Right.

Um, so that is fine as long as it's a genuine, you know, business meeting. What you don't want to do is like go out for drinks with friends and then spontaneously decide, oh, you know what, we talked about business. I'll pay with this for my, with my business credit card. That's not, that's not okay. But if you set it on your calendar and you, um, you need to say who you met with and what the business purpose was. This is actually required. Information. If you only keep the receipt and you don't say the business purpose on who you met with, the IRS can disallow it even with the receipt. So, okay, the reason for that extra, um, you know, there's, there's, uh, an extra stringent documentation requirement for business meals for that reason, because essentially they're trying to prevent abuse. So just try to have a habit of like, when you make a meetup with somebody, be like, you know, you want to get together to talk about our project, blah blah blah. And then stick it on your calendar and, and then it's fine. And that's a legitimate business meeting, even if you love the person.

And it does. Yeah. Whether you enjoyed it or didn't enjoy it does not affect tax. Correct.

Correct. Yes.

And also painful to be right off the books.

Oh yes. And isn't that lovely? Also, you can drink, by the way. A lot of people have thoughts, you know, workplaces may have— this is one of the benefits of not working for the man, right? Like when we work for ourselves, like you can have a 3-martini lunch. That's a business lunch. Alcohol is, you know, it is the great American way, whether you like that or not. Much, much business is done over drinks.

And so that's completely twice as much so that you, since only 50% is write-offable, you can, you can, or extra fries or something. Yeah. Yeah.

You do, you do you. Um, I do, you know, um, I do have a guide though if people want to get, um, any more detail. I have a visual guide to tax deductions that I make available.

I downloaded it myself.

Oh, great.

And it is— well, you being a visual artist, um, means all of your branding and aesthetic is beautiful. And so again, for those who are listening, check out Hannah's Instagram, Sunlight Tax. Her website is sunlighttax.com, and she has this free visual guide to tax deductions, and it's gorgeous. And she's color-coded and listed everything out in a very, very easy, simple way. So, and it's free on her website, sunlighttax.com.

Awesome.

Thanks.

Yeah, I really, I made that just because there's so many questions about deductions and I think what you really want is, you know, in art school we learn like match the medium to the message. And, um, I think what you really want when it comes to tax deductions is you want a written resource. So I wanted to make something printable because you want to be able to print it out, have it on your wall, like have it in front of you as you are trying to do your taxes or set up your bookkeeping because you don't want to misremember, oh, that podcast I listened to a month ago, and get the number wrong.

Right.

You want to like be absolutely sure.

Yeah. You need to sell like a laminate version copy on your website. Not that I can't go to the office store and laminate myself, but if it were on there, I'd buy it. All right. So we talked about receipts for, uh, for meals. Let's talk about receipts in general.

Um, yeah.

When, when I kind of I have been a little bit sloppy on keeping receipts. Um, now that you're mentioning it, um, what do we need to keep receipts for?

So any, essentially any deduction on your Schedule C, any business expense you have, you should keep a receipt. If you get a receipt, you need the receipt. Um, so, you know, and, and don't forget that in the world of online, you know, living, my whole, my business is 100% online, um, almost. So Most of my receipts are coming through my email. That's still a receipt, right? So, um, don't forget your emailed receipts if it's from Amazon or Dick Blick or, you know, wherever, Costume Depot, whatever it is. Um, don't forget. And I, I just recommend that audits happen by year. So in general, you want to file your receipts just by year because you just want to be able to pull out a single year at one time. What you would not want to do is put 10 years of receipts all in the same box unsorted because if you were to be audited, you'd have to actually go through 10 years of receipts. I, it's, well, it makes me queasy to even think about that. But in your inbox, you can just create a little folder with the year on it and then it's all in there. You just make yourself a little habit where you always put the receipt into that inbox folder instead of deleting it and you're good.

Thank you for mentioning that. That I, I do that. And, um, so in my former life, I was a decluttering expert.

Oh my gosh.

And, um, and I know people's inboxes, email inboxes particularly, um, we've moved from the, you know, the counter, kitchen counter inbox to now, um, our digital inboxes. And I know email is just a real headache for a lot of people. And so just setting up folders on your, for your email and putting these things in it, but one being your receipts for each, for for each year. And like Hannah just said, just slide it on over and you're good.

Yeah, I mean, you will get physical receipts too, um, or you can, and of course you need those as well. So I actually, I find my brain wants my whole system to be one way, and I find that I have trouble when it's two, when it has to be two ways. So I try to digitize my physical receipts as quickly as I can and get them into my inbox. That way it's all in the same place. That's my personal style. You're the decluttering expert, so you might have better tips on that.

Well, I'm a little, I'm a little out of practice. Um, but I'm sure there's a lot of like probably good app. Do you use an app for that or you just do your own, like scan it and with, you know, nothing?

They definitely make apps and some people, you know, swear by them. I actually just take a cell phone picture and send it to my, I email it to myself because I have this habit when I get a receipt in email, I stick it in my email folder.

Mm-hmm.

So to me that just helps keep the same, keep one habit and that's all I have to remember.

So yeah, systemizing, um, is key for anything, but especially with taxes. Having, um, in the same way we were speaking of having that digital email folder or folder for, for each year, having a physical one if that's more your style of the physical receipts, having a manila envelope or whatever in your office closet or in your file cabinet. To where you automatically— so the more you can systemize your, your, your life and your workflow, the more you stay on top of this stuff. And really, would you say that's really the key to— for, for kind of people who kind of have recently started their own business and perhaps they're kind of just sitting, setting up systems, do you suggest certain software or getting a bookkeeper or or just having these envelopes we're talking about? And what do you suggest?

Yeah, I mean, I think in terms of keeping your receipts, you don't need a bookkeeper for that. Receipts really are for cold storage. You need them for 7 years and that's it. But, um, bookkeeping is another matter. Um, that, you know, I honestly, I recommend when you're starting out to just do your books on a spreadsheet. Um, and I say that in part because spreadsheet bookkeeping is a lot simpler and it doesn't require knowledge of double-entry bookkeeping, um, which is the, the standard and the basis of all software. And I, I say from a lot of experience and seeing a lot of people, my clients go through painful, painful situations that if you try to DIY, uh, setting yourself up on bookkeeping without, um, without paying for a professional who has knowledge of that system, um, you can set up a problem that will compound itself over time and cost you so much more money to undo, um, than you ever saved DIYing it. So setting up bookkeeping software is, um, I, I used to try to teach people how to do it, and now I think like if you haven't taken, you know, like a college course in double entry bookkeeping, I don't think you should set it up. You should pay somebody who knows that stuff to set it up for you.

So you just let us all off the hook of learning QuickBooks. Is that what just happened?

That is what just happened.

Okay. Yeah.

Yeah.

Perfect.

There are bookkeepers out here who, who will set up, who will do the setup, the chart of accounts for you, and then help you. And then you can do the active bookkeeping. Like it's okay to do bookkeeping if you have the software set up and if is functional, but you want it to pass the smell test of like somebody who knows double entry accounting.

I find it super helpful to have a separate— well, I'm incorporated, so it needs to be, but even if I were just a sole entrepreneur with a Schedule C, having a separate credit card that I put on my expenses on for to make the bookkeeping part a lot easier.

Yeah.

So that I don't have to look through all my different, you know, sources of payments to figure out where I spent what. And it's also helpful just, just to do run a, you know, a simple profit and loss statement.

Right. Can I— you just said something so important really fast. Can I just like underline that?

Please.

The separate account. Is a big deal. And, and, and as you mentioned, like when you have an LLC, it's, it's actually very critical and important, um, because the LLC, the whole, the whole deal is keeping your personal and business entities separate from each other. But even if you haven't set up the LLC, it's still wonderful and beneficial to have a separate business bank account. Like there's no bad side to that. Right. So, Yeah, having, having a separate business account is your first step. Even if you do your own everything else, um, like spreadsheet bookkeeping, um, having a separate business bank account that gives you a bank statement where every single thing in and out of that account, you know, is for business. And so you do not have that hideous scenario, which I say from personal painful experience of like highlighter on your bank statement at tax time. Like, oh shoot, was that trip to Staples, uh, for business or was that from personal? Like, it's so unpleasant to work that way. And it's, it just, your life instantly gets better when you have your accounts separate. So a separate business bank account is wonderful.

Yes.

For everybody.

All right. So, um, again, check out Hannah's, um, website at sunlighttax.com and get the deductions guide. Um, it's free. And it's gorgeous. It's as gorgeous as taxes can get, I promise. And, um, Hannah's podcast. So any question that we haven't covered, which there's plenty, um, she has answered in her podcast, like everything from can massage therapists write off their getting them getting a massage? Like what a brilliant question. Um, so like seriously, every, she has covered everything you could come up with, um, in her podcast. And it's— the podcast is called Sunlight. And so check it out. Um, you have also, I think, like a bootcamp or masterclass that you offer. Can you tell us about that?

Sure. Yeah. So, um, everything— my— I have one paid offering and I put everything into it, heart and soul. So it's a program called Money Bootcamp and it comes with a simple spreadsheet bookkeeping setup, um, that where I help you, you know, I have formulas in it that help you calculate what your estimated quarterly taxes are. Um, and all the special tax rules are kind of built into this spreadsheet. So I'm very proud of that system. But it's also, it's a holistic program that teaches you how to simplify your taxes, um, how to just kind of get your basic tax knowledge, but also how to, how to do it and maintain it. But it also teaches you the empowerment side of how to use these tax-smart accounts and actually how to invest, um, so that your money is growing inside tax-advantaged accounts. Um, and I built that program honestly because it's what I wish 20-year-old me had had access to. Um, so I just felt— found myself shamed and blamed by accountants, and I was like, our artists and creative people are doing the work that the world needs. I think we need this information and we don't need to be made to feel incompetent as we get the info.

So it's—

that's my whole project is just to help, you know, people like us feel good about the work we do. And I think when you, you know, put a little bit of upfront time into setting these things up, it actually frees you up to do more of the creative work. I mean, I, I avoided it. I avoided it for years and built some problems for myself because of that. And I'm here I'm here with experience to say like avoiding does not make your taxes go away. Yeah. And a little bit of upfront.

Like, correct. The more you're, the more the, the solid your business, the freer you're going to feel to be creative. Um, and go outside the lines in your, in your creative work is when you have all the boxes set up in your business side of things.

It's so true. And I, I've had clients say to me like, oh my God, once I finally got this stuff set up, I had so much more time in my studio. I didn't realize how much headspace and like mental energy it was I was spending on being stressed about the money stuff. So I really wanna help people feel like there is relief on the other side of this.

Yes.

Um, and it's not about becoming a tax weenie or a legal weenie. Like you don't have to become a lawyer or a tax accountant, just spend a little upfront time and get it set up so that you can go back to your wonderful work.

Yeah.

So, thank you. Yeah.

All right. Well, thank you so much for being with us today, Hannah. Again, her website, sunlighttax.com. Anything, any other places we need to find you at, or did I cover it?

No, I think it's all, you can find everything at my website. I think that's great. And I'm honored to be asked onto your podcast. Thanks for doing the work you do, Tisha. That's awesome.

Or continue helping so many more people. So thank you.

Awesome. Thank you.

Thank you so much for listening to today's episode. If you like the podcast, please like, subscribe, maybe even share to your friends. And for more information about my services, visit my website at tishamorris.com. That's T-I-S-H-A M-O-R-R-I-S. Yes, well, that concludes today's episode, and I wish you all the best. Until next time, keep creating, and please take care.