What Counts as Income in a Creative Business? A Guide for Online Creators

What is business income? Business income is any income your business earns from selling products or services. Learn what counts as income in a creative business and what doesn't, plus how to maximize your income while minimizing taxes.

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David Kindness, CPA

4/6/2024

What Counts as Income in a Creative Business? A Guide for Online Creators

Updated on April 5, 2024

Written by David Kindness, CPA

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Navigating the financial landscape of an online creative business can be perplexing. Many creators grapple with uncertainties about what constitutes income, leading to potential pitfalls in managing their finances effectively. In this guide, tailored for creative entrepreneurs, we'll unravel the complexities surrounding creative income, providing clarity and actionable insights to help you manage your income statement and navigate the world of creative business income with confidence.

What is Income?

Before delving into the intricacies of creative income, let's define what income is. Income, in its essence, is the money or monetary value received by an individual or business in exchange for selling products or services.

For creative businesses, income encompasses various streams earned from their artistic endeavors. From digital products and sponsored content to freelance services and online sales, understanding what constitutes income in your creative business is essential for your financial success.

What Counts as Income in a Creative Business?

In a creative business, income isn't confined to traditional paychecks. Creative income can be earned from a variety of sources, such as selling products, offering your services, and online content monetization/ad revenue, so we created this handy creative income cheat sheet:

CLICK HERE to download this FREE cheat sheet, so you can reference it anytime, anywhere.

**What Doesn't Count as Income in a Creative Business?**

While income sources can be diverse, it's equally crucial to recognize what doesn't qualify as income in your creative business. This will help you understand what to include as income, and what to disregard - and it’ll also help lower your taxes!

The following items should not be included in income:

Gifts: Money or assets received as gifts generally aren't considered taxable income. However, it's essential to distinguish between gifts and business transactions to ensure compliance.
Loans: Funds obtained through loans, whether personal or business loans, aren't classified as income. They represent borrowed capital, and repayments aren't taxable income. However, if the bank forgives your debt (so you don’t have to pay it back anymore), then the amount they forgive would be considered income.
Personal Savings: Utilizing personal savings for business expenses doesn't constitute income. It's a financial strategy rather than a source of revenue.

Next, let’s discuss why all of this matters to you as a creative business owner.

Why Does This Matter?

Understanding what counts as income (and what doesn’t) in your creative business is important for several reasons. First, classifying your income matters for business growth. If you don’t know how much income you’re earning, you won’t know how to invest in your growth. Identifying diverse income streams allows for targeted business growth strategies, which in turn maximizes revenue potential.

Second, classifying your income matters for tax compliance. Properly categorizing income ensures compliance with tax regulations, preventing potential legal issues and penalties. It could even help minimize your tax burden.

Third, classifying your income matters for budgeting and financial planning. Accurate income tracking allows you to set up useful budgets, plan for both you and your business’s financial future, and save and invest strategically.

Conclusion

As a creative entrepreneur, the financial journey can be as intricate as your artistic process. The ambiguity surrounding what counts as income in your online business can be overwhelming.

However, armed with the financial knowledge in this article, you can navigate the financial landscape with confidence. This guide has illuminated the diverse realms of creative income, providing clarity on what to include and what to exclude. By understanding the nuances of your earnings, you can pave the way for a financially thriving creative venture.

Frequently asked questions (FAQs)

What types of income are taxable for creative businesses?

Taxable income for creative businesses includes sales of creative products, freelance services you perform, ad revenue, affiliate revenue, earnings from content platforms like YouTube or Patreon, and more.

Are gifts received by creative businesses considered taxable income?

Generally, gifts received by a creative business are not considered taxable income, but it's crucial to differentiate gifts from transactions to ensure compliance. Also, if the gift is from a client and is above a certain income limit, the IRS might require you to include a portion of it in your income.

Can personal savings used for business expenses be considered income?

No, personal savings used for business expenses are not classified as income. It's a financial strategy rather than a source of taxable revenue, and it's especially common for freelancers, sole proprietors, and single-member LLCs.

What types of expenses can creative businesses deduct?

Creative businesses can deduct a variety of expenses on both their income statements and on their tax returns. These include home office expenses, utilities, manufacturing costs, travel expenses, shipping, internet and phone, and more. Check out our 2024 guide to deducting expenses to learn more.

Disclaimer: the information provided in this article is for educational purposes only and does not constitute tax, accounting, investing, legal, or financial advice. The information in this article does not take into account your unique financial or business situation or goals, and YCCPA cannot be responsible for reader's financial decision-making. YCCPA's goal is to educate and support you on your creative business journey.

Written by David Kindness, CPA

David is a CPA (Certified Public Accountant) and professional photographer, videographer, and designer based in San Diego, California. Learn more.