Accounting and legal stuff for pencil portrait business

Consult your tax professional for what you can write off.

Get a separate checking account for your business. If you don't keep your financial records separated, then the IRS will see your art as a hobby.

Get a credit card (or debit card) to use for only business expenses. INGDirect.com offers nice debit cards that you can use separately from personal funds.

In most areas, you will need a home occupancy tax permit for working out of your home.
Each area is different, so check with your city and county for your local ordinances. Usually, the fine for operating without a license is more than the cost of the license itself. You can also post the license when you participate in an art festival, so it gives you an extra measure of credibility, besides staying legal!