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Yup it is tax season again. Even as an aspiring author (not yet published), I took a class on tax preparation in November 2010. This article was written from notes and lectures from that class with permission by the instructor, Diane Kelly. Ms. Kelly is not only a published author, but also an attorney and CPA. At the end of the lecture, I’ll provide information on how to contact her with tax questions and a little bit about her. Since April 15th or rather 18th is not that far away, lets jump right in with some tax tips.
1. Business or hobby – first and most importantly, you need to look at your writing and determine whether the IRS would consider it a business or a hobby. If it is a business, you can deduct all of your expenses, even if it results in a net loss. Yeah! I know that sounds stupid however, as an author who has spent a lot of money on conferences, classes, etc. and done some presentations, I haven’t received one cent in income from my writing. Thus to me, even a net loss is good. Not only will it reduce my husband’s income, but it will also give me some satisfaction that hey, I’m declaring myself as an ‘author/writer’ on my tax form for the very first time. Even though I have no monetary gain, I’ve advanced my career and that is a VERY important first step to me.
Okay so Business vs. Hobby – there are actually nine factors that the IRS looks at to determine whether your writing activity constitutes a business or a hobby. No single factor alone should disqualify your activities from being considered a business, but the more factors in your favor the better:
A. Do you operate in a ‘business-like’ manner? You are likely operating in a business-like manner if you do some or all of the following:
1. become involved in professional writing organizations either in person or online. [If you are reading this, you’ve likely joined Savvy Authors (yeah), join RWA, your local chapter of RWA, and a specialty online chapter of RWA or whatever variation that fits your writing, etc.]
2. make attempts to network and promote yourself and your work through business cards, newsletters, websites, online networking sites, etc. [merely being on Savvy authors is a form of networking, websites are wonderful, as is the open ended scope of social media, blogs, glogs, etc.]
3. keep records of your submissions and responses. [Any author submitting a manuscript or pitching should always keep records of this – it should be a no-brainer.]
4. maintain a file of your published clips, if any. [Short stories, articles here on Savvy Authors, magazine articles, flash fiction etc.]
5. invest in your business by purchasing equipment, supplies, and services that will enable you to operate effectively and efficiently. [This includes everything from big purchases as laptops, printers, video cameras, e-readers to small things like paper, paper clips, pens etc. KEEP YOUR RECEIPTS]
6. subscribe to writing magazines, read books on craft and business of writing and attend writing-related conferences, seminars and classes. [Savvy Author members would meet this for the classes you attend here, the Symposium held in July as well as DigiCon {for 2012}, subscribe to ‘The Writer Magazine’, Writer’s Digest etc, books on craft {everyone has at least bought one book on craft during the past year, right}]
Now any writer that is merely writing as a hobby generally doesn’t bother with record keeping, building a network or joining professional organizations.
B. Do the time and effort you put into your writing indicate an intent to make money? Even if you haven’t earned a penny for your work, the fact that you put significant time and effort into your writing evidences an intent to earn money from your activities. You spend time crafting written pieces, you're in a critique group, you attend writing classes, reading and studying your craft, you might be a member of an e-mail loop dedicated to writing-related matters, and/or you’ve entered contests. All of these examples show time and effort spent on your writing business. Yay! [Now in case the IRS ever decides to audit you, it is essential that you KEEP RECORDS by date and time of classes, emails showing your critiques or comments posted on an e-mail loop.]
C. Do you depend on the income from your writing for your livelihood? Yeah, when I start to earn money, I definitely intend to use it to maintain my livelihood. Most writers especially at the beginning don’t earn enough money by their writing alone to support themselves or their families. Given the nature of the beast we call the ‘publishing industry’, the fact that your writing income is nominal or merely supplemental to other earnings shouldn’t disqualify your writing activities from being a business. [So hubby doesn’t get to retire yet *grin*]
D. Are your losses due to circumstances beyond your control or are losses normal during the start-up phase of your type of business? If writers controlled their sales, we’d all be on the NY Times bestseller list, but the hard truth is that a lot of our work is beyond our control. Getting the right smash hit book in front of the right editor at the right time in the market is tricky to say the least. Moreover, it is likely that an author will write a couple of books before getting that ‘call’ selling that first manuscript. The reality is that losses are absolutely normal during the early phase of a writing career. You purchase equipment to write the book, you buy a domain name and set up your website, you join organizations to network and this is all done before that first sale. So congratulations, you're in the same boat with me – this year I will be declaring a loss on my taxes from my writing career. Also, even best selling authors have dry spells in which they have no sales or slow sales.
E. Do you change your methods of operation in an attempt to improve profitability? Have you tried different methods to increase your effectiveness or productivity such as NANO, or Savvy Authors boot-camp, joined critique groups, different methods of outlining etc. Do you enter contests and use the feedback to improve your technique? These are all methods used in an attempt to improve profitability.
F. Do you have the knowledge needed to carry on a successful writing business? Some writers get an MFA, others [like me] have no formal education in writing or literature. None is needed to become a successful writer. However, that said, any writer knows the importance of attending classes [online or in person] and conferences, reading articles and books on craft etc. [If you can show the IRS that you’ve obtained at least a basic knowledge of the craft of writing and that you are continuing to expand your knowledge, you’ll be fine.]
G. Were you successful in making a profit in similar activities in the past? If your day job involves writing, or if you previously had a job in which your writing skills were utilized, that shows the IRS that you have earned money from your writing in the past. However, don’t think that because you haven’t had such a job means that you’ll be disqualified – this is only one factor. [Ex. While I was working as an attorney I did a lot of legal writing for court cases and made money as an attorney – that falls here. Think outside the box.]
H. Does your writing make a profit in some years, and how much profit does it make? In the writing business even if you have sold a couple of manuscripts, most advances and royalties aren’t extremely generous. If you can show some revenue, even a meager amount, you are still doing well. [Remember lack of income alone will not disqualify you – yay! This is my mantra.]
I. Do you expect to make a future profit from the appreciation of the assets used in the activity? The writer’s best asset is your brain and it doesn’t really appreciate in value. Any computer or other equipment purchased will likely decrease in appreciation over time. This factor doesn’t really ‘fit’ the writing industry, but again it is only one factor.
Don’t be fooled by the hobby loss rule – This is more of a tax myth than a rule. The rule is that the IRS will presume you are running a business if your activity produces a profit in at least three of the last five tax years.
Bottom line – If your writing constitutes a business, you are entitled to deduct your losses no matter how many years in a row you have a loss. Many writers, especially newbies, will report tax losses in their writing business for many years before earning a profit and that is perfectly legal. Yay!
2. Now that we have decided your activities qualify as a business – what type of business do you want? You can write as a sole proprietor usually owned under your own name. You can also operate under an ‘assumed name’ by registering the business name with the local county recording office known as a ‘doing business as’ or a d/b/a/. For most writers this is the easiest way to do business. You can also incorporate as an LLC, which stands for ‘limited liability corporation’. These are quite popular because although they function as a sole proprietorship, they provide limited liability protection for their owners.
Liability concerns for a writer are likely to be of the type that I’ve discussed in other articles for the Writer’s Court such as plagiarism, copyright infringement, defamation, invasion of privacy. If you are writing on the correct path, you should hopefully be able for avoid such allegations.
The main asset of forming an LLC would be if you are writing with co-authors, or if you as a writer employs others to work for you. Caution – check with your state to determine whether or not forming an LLC is the best choice for you and obviously consult an attorney if you have questions.
3. The beloved various tax forms: The following are various tax forms that might fit your situation. Others might be irrelevant. The following were forms discussed in the tax class that I took. All forms, instructions and publications can be downloaded from the IRS website, www.IRS.gov.
a. Form 1040 – U.S. Individual Income Tax Return
b. Schedule C – Profit or Loss from Business
c. Form 4562 – Depreciation and Amortization
d. Form 8892 – Expenses for Business Use of Your Home
e. Schedule SE – Self-Employment Tax
f. Form 1040-ES – Estimated Tax for Individuals
g. Form 2210 – Underpayment of Estimated Tax by Individuals etc.
h. Form 2241 – Child and Dependent Care Expenses
4. I’m not going to go into all of these tax forms in-depth because well, hell I’m still learning about them myself. Any questions I would refer you to Diane Kelly, my instructor whose information is at the bottom of this article. But there are some forms and lines that I do want to point out as places for writers to look at to see if they can use the deductions etc.
5. Form 1040 – Important lines to know on this form:
a. Line 12 “Business income or (loss)” – your net business income or loss figure will flow from your Schedule C to this line on the 1040.
b. Line 27 “One-half of self-employment tax” – your self-employment tax (social security and Medicare) is computed on Schedule SE. One-half appears on line 27 of the 1040, where it will be subtracted from your income. Since you are setting yourself up as a self-employed writer, you are the owner and employee at the same time. So we are on equal footing with other employers, we are allowed to deduct half of the social security tax we pay on behalf of ourselves (employee).
c. Line 28 “Self-employed SEP, SIMPLE, and qualified plans” – this is if you set up a SEP-IRA retirement plan and outside the scope of this article.
d. Line 29 “Self-employed health insurance deduction” – you can deduct up to 100% of your health insurance premium if:
1. You have a net profit from your writing,
2. You aren’t eligible to participate in an employer-subsidized health plan with your ‘day job’ employer or your spouse’s employer, and
3. You establish the health plan under your writing business.
For more details see IRS publication 502 “Medical and Dental Expenses.”
e. Line 33 “Student loan interest deduction” and line 34 “Tuition and fees deduction.” If you attend writing classes at a college and incur student loan interest and tuition and fees expenses, you may be entitled to deduct them on these lines. * You may instead deduct these expenses as business expenses on your Schedule C, or you could be entitled to claim the expenses as an “Education credit” on Line 50 or “Refundable education credit” Line 66 if you meet certain qualifications. See IRS publication 970 “Tax Benefits for Education” for more information.
f. Line 56 “Self-employment tax.” The total of your self-employment tax flows from your Schedule SE to this line, where it is added to your other taxes. Self-employment tax, includes your social security and Medicare taxes.
g. Line 63 “Making work pay and government retiree credits.” For the 2009 and 2010 tax years, a special credit is available for working taxpayers. The credit is up to $400 for single and $800 for married taxpayers. It begins to phase out for single taxpayers with $75,000 in income and married at $150,000 in income. You will compute your credit on Schedule M.
6. Schedule C – “Profit or Loss From Business -This is the most important tax form for your writing business. It’s where you’ll report your income and expenses and compute your net profit (or loss) for your writing business. Take a look at instructions for Schedule C in Publication 535 “Business Expenses”, and Publication 334 “Tax Guide for Small Business.” These publications contain lots of useful information.
a. Line A-H - For Line A “Principal business or profession,” write “Independent Writer.” For Line B, use code 711510 for “Independent Artists, Writers & Performers.” Leave Line C blank unless you’ve registered an assumed name for your business or formed an LLC. Line E will be either your home address or your office address if you have a separate office. Your accounting method for Line F will be option (1) cash. Under the “cash basis of accounting,” which applies to most individuals and sole proprietorship, the taxpayer will report only payments actually received during the year and expenses actually paid during the year. If your publisher, your agent, or another party makes a payment to you of $600 or more, they are required to issue a Form 1099 to report the payment to you and the IRS. Line G check the ‘yes’ box to indicate that you did ‘materially participate’ in the operation of your business. On Line H, check the box on the right only if this is the first year you file a return for your writing business.
b. Part I ‘Income’ - This section is structured to accommodate all types of businesses, including those selling products, so many of the lines don’t apply to the writing business and will be left blank.
1. Line 1 – this is where you write the total of your advances, royalties, and other revenue, such as payments for speaking engagements, the sale of articles to magazines, or direct sales of your books from stock you own. You are required to report ALL of your income regardless if the party who paid you had to file a 1099 or not. Ex. If you received a gift card in return for presenting a writing workshop, you must include the value of the gift card in your gross receipts. If you have no revenue, write “$0.00” on Line 1 “Gross receipts or sales.”
Questions that arise usually deal with whether or not you need to include expense reimbursement as income, and who gets the deduction for expenses you’re reimbursed for such as travel expenses for a speaking engagement. If you are reimbursed for expenses, you should include the amount in your revenue on Schedule C ONLY if it was included in the amount reported to you on a 1099 OR if you didn’t have to account to the payor for your expenses with your receipts or documentation for the reimbursed expenses. In these cases, the expense is treated as your expense and you can claim the reimbursed costs as a business deduction on your return. If the reimbursement was not reported on a 1099 AND you did account to the payor of expenses with receipts, then the payor gets the deduction. You wouldn’t report the reimbursement as income, nor would you claim the deduction since the payor would claim it as their expense.
2. Line 2 “Returns and Allowances” doesn’t apply to a writing business so enter zero.
3. Line 3 will be the same number as line 1.
4. Line 4 “Costs of goods sold” is generally not applicable to writing so just enter zero.
5. Line 5 will be the same as line 1.
6. Line 6 will also be zero, since all of your income will be reported on line 1.
7. Line 7 will be the same as line 1.
c. Part II “Expenses” – This is where you will provide the IRS with the totals for the various categories of expenses you incurred during the tax year. Because Schedule C is a one-size-fits-all some of the lines will have nothing to do with writing. **Be sure to save all your receipts for your expenses and other documentation to support your expense.** Some writer expenses such as dues to professional writing organizations, conferences or contest entry fees, subscriptions to writing magazines don’t fall neatly into any of the categories so report them on Line 27 “Other expenses.”
1. Car Expenses – Line 9. It is critical that you keep good records of your mileage and car expenses, or the IRS can deny your deductions! Car expenses are one of the most common audit items for small business owners.
You can compute your car expenses in two different ways: (a) standard mileage rate method, OR (b) the actual expense method.
Standard mileage rate is easier to compute and requires less recordkeeping. However, it only applies to passenger vehicles, including pickup trucks, cars and passenger vans. For motorcycles, you must use the actual expense method.** [I didn’t make the rules and its’ the IRS so who know why this is..]
Standard mileage rate – need only to maintain a log of your mileage, keep receipts for parking and tolls, and maintain documentation for any state or local taxes and your auto loan year-end interest statement.
Actual expense method – you need mileage log, AND receipts and other documentation for every single gas purchase etc. and you’ll also have to pro-rate for your business expense – see messy.
IRS has a sample mileage and expense log on page 35 of Publication 463 “Travel, Entertainment, Gift and Car Expenses.” You should mimic their method since that is the way they want you to do it.
One thing that is important which is probably too late now for most of us (me included) is to note your odometer reading on January 1st of each year so you can use that to figure out your total mileage. IRS asks for total business mileage, commuting mileage, and other miles.
For the standard mileage rate, simply record your miles – for example say in 2009 when the standard IRS mileage rate was 55cents/mile and you drove 1000 miles for business, then you’d be entitled to a $550 deduction + tolls, and parking costs. For 2010, the standard mileage rate is 50 cents/mile. If you incur state or local taxes relating to your car, or if you financed your car, you can pro-rate the amount of the taxes and auto loan interest, by the relative business miles in a given year. Check the IRS publications for more information.
2. Line 13 – Depreciation and section 179 expense deduction – rules are pretty nit-picky. Buy tax software that can compute it for you. This will refer to computers, desks, chairs etc. This topic goes beyond the scope of this tip – check the IRS publications for more info.
3. Line 18 – “Office Expense” – this is where you report expenses for office supplies and postage.
4. Lines 24a and 24b – “Travel, Meals and Entertainment” – you’ll report travel expenses here – cost of lodging and transportation for the RWA conference for example. Include the cost of the hotel, airfare, taxes, tips to bellhops. See publication 463. Travel goes on 24a and meals goes on 24b. Also, if your husband or family goes with you on the trip you can’t deduct their transportation cost like a airline ticket. Meals are 50% deductible, regardless of circumstances.
5. Line 27 “Other Expenses” – this line is your friend. Examples of other expenses are dues to writing organization (Savvy Authors), subscriptions to writing magazines, reference books, internet service, website hosting fees, conference registration fees, contest fees, promotional materials etc. You’ll give a total on Line 27 and then detail them in Part V on page 2. *Prorate anything that is used for business and personal like internet service.
You can’t deduct clothing purchased to wear to a business event – because it is something that can be appropriately worn again elsewhere (regardless of whether or not you ever wear it again). Ex. Forget the cocktail dress that you purchased to wear at RT or RWA conference etc.
6. Line 28 – total of your expenses which will be subtracted from your gross income on line 7 which you will compute as “Tentative profit(loss) on line 29. Known as “tentative” because it may or may not be reduced by home office deductions depending on circumstances.
7. Line 30 “Expenses for business use of your home” – includes if you rent and don’t own your home. This refers to Form 8829 which you will have to complete and attach if you claim the home office deduction. Again this form is out of the scope of this article. Check the form and the IRS website for more information.
8. Line 31 “Net profit(loss)” – if you have a loss, you will continue on to Line 32. Check the box for 32a to indicate that all of your investment in your business is at risk (meaning that you will truly be out of pocket for the expenses you paid relating to your business. Note this figure back on your 1040 Line 12 “Business income or (loss). Remember to put in any loss in parentheses to indicate a negative number.
9. If Line 31 shows a profit – then you go on the Schedule SE “Self-Employment Tax” and fill out that form. Again see the IRS website for more information on this topic.
10. “Estimated Tax for individual” – usually when you are employed money is taken out of your paycheck throughout the year as we earn our wages. For writers who are self-employed it is an ‘estimated’ amount.
If you’ll have a net loss on your writing business for the year, you don’t need to worry about estimated taxes since you won’t owe any taxes on your writing business. If you’ll have a net profit, you will owe income tax and self-employment taxes and should make payments during the year. See forms 1040-ES, which are vouchers for payments made four times a year. Due dates for the payments are April 15th, June 15th, September 15th and January 15th (of the following year).
7. Summary – Keep accurate records!!!!! The time period during which the IRS can review and make changes to your return (“statutes of limitations”) is generally three years. However, IRS can go back six years in cases where taxpayers underreported income by 25% or more.
Rule of thumb – keep records for six years.
Be sure to keep receipts and documentation relating to items that you depreciate until as least three years after it has been fully depreciated.
For receipts for business lunches etc – on the back write the name of who attended, the event and date (ie Lunch with Suzy Q. Writer and Jan Author after RWA chapter monthly meeting). Keep detailed mileage log. Keep canceled checks, bank statements AND original receipts.
For home office deductions, keep copies of your utility bills, mortgage statements, insurance, property taxes, repairs etc.
In essence, think like this – is this something that (if I’m ever audited) I can explain to the IRS as to why it should be considered a business expense for my writing career? If the answer is yes, then you probably can deduct it. Just imagine worst case scenario – can you explain how it affects your writing business.
Check your own state for state tax issues.
Remember – this is advice only and is not meant to be legal advice or tax advice.
Information used in this article was obtained from notes and lectures from the workshop 'Everything You Never Wanted to Know About Taxes' taught by Diane Kelly, CPA/Attorney at Law/Author, copyrighted by Diane Kelly. For more information on this subject, I'd strongly suggest taking this class the next time Diane offers it. You can find out information on Diane and other workshops she will be teaching at her website www.dianekelly.com. Diane is the author of the 'Death and Taxes' romantic mystery series from St. Martin's Press. Her debut novel, 'Death, Taxes and a French Manicure' won the 2009 Golden Heart and will be released on November 1, 2011.
Disclaimer:
Savvy Authors and ‘Writer's Court’ specify that this blog is for informational purposes only and is not intended to give legal advice or create an attorney-client relationship. If you have a specific legal question that needs addressed, you are encouraged to seek counsel from an attorney licensed in your jurisdiction.
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