Your Writing and Taxes: What can you Deduct?
This is another in my series of articles focusing on helping the writer get every possible tax benefit from writing. Becoming a successful writer can be expensive, donít think just because you donít make a profit you canít write off your expenses.
My last article focused on whether your writing expenses are deductible. The key to deductibility is whether you are carrying on a business or a hobby. Business expenses are deductible against your other non-writing income, hobby costs are not. If your writing activities have you in the red, make them pay for you. Deduct them against your day job.
Since operating a business is the key to deducting your writing expenses, here are tips on how to demonstrate that you are operating a business.
Since you are required to report virtually all income on your return getting paid for an activity is not, in itself, proof that the activity is a business you are engaging in with the expectation of making a profit. To deduct expenses in excess of the income associated with those expenses, you need to be able to demonstrate that you are conducting a business. Here are some of the guidelines the IRS uses to make that determination.
1. You carry on the activity in a business-like manner.
Comment: Keep good records. Open a separate checking account just for your writing activities. You can also get a separate credit card. Keep your writing expenses separate from your other expenses.
2. The time and the effort you put into the activity indicate you intend to make it profitable.
Comment: Keep a calendar. If you keep a regular schedule for your writing, put it in your calendar. And donít forget the time devoted to book fairs, signings and other promotional activities.
3. You depend on income from the activity for you livelihood.
Comment: If this is already the case, you are probably running in the black. Future articles will explain the kinds of costs you can deduct.
4. Your losses are due to circumstances beyond your control, or they are normal start-up costs.
Comment: What does this mean? You canít deduct an item you willingly spent? Not at all! In most businesses, the expenses are controllable to some extent. It is the income that is unpredictable. You need to show that the expenses are ordinary and necessary to produce the income you seek. Losses in most businesses are due to circumstances beyond control, or there would be darn few losses!
5. You change the methods of operation to improve profitability.
Comment: Generally, writers write and then attempt to sell. Some writers get advances, most donít. Put the emphasis here on your marketing. If sending out query letters to the top three book publishers doesnít work, then vary your plan. Send out queries to many more houses. Include small press publishers. Try to get an agent. Save all your query letters. Investigate self publishing as an alternative. Investigate freelancing.
6. You, or your advisors, have the knowledge needed to carry on the activity as a business.
Comment: You plan to build a fan base over time through your published works. This is not a tough business plan to understand. If you have a tax guy, an agent, or other such professional advisors, you are golden. If not, this one shouldnít be a stumbling block.
7. You were successful in making a profit in similar activities in the past.
Comment: One thing that really helps your cause is that you are profitable in one of three years. So, if you have one good year of selling a book or getting paid for copyrighting, etc., this goes a long, long way to supporting that your writing activities are a business.
8. The activity makes a profit in some years.
Comment: Did I mention making money in one of three years?
9. You can expect to make a profit from the appreciation of assets used in your writing.
Comment: Unless your typewriter is a valued antique, or you become super famous and can sell your original manuscripts for huge money, this is just not going to apply to writing.
The above guidelines are those the IRS considers in determining whether you are carrying on a business or engaging in a hobby. If you know the points and satisfy as many as possible, you are stacking the deck heavily in your favor. But remember, these rules are judgmental and are applied subjectively. The IRS says they take all the above factors into account; no one factor is decisive. The more of them you have nailed down, the better your case. If a careful measure of reason is introduced into the mix, you are pretty likely to come out ahead.
My future articles will address the kinds of expenses you can deduct in your writing business. Until then, hereís to your profitable writing.
Copyright © James Kavanagh
eWritingToday Ė Everything for the Writer
About the Author: James Kavanagh is a CPA and an associate writer for eWritingToday , a site focusing on the writing community and helping writers and authors promote their work. Mr. Kavanagh is also an editor at Seven Sisters Publishing, a small press that focuses on unique ways to support its authorsí marketing efforts. If you have a completed manuscript that you would like to submit to a press active in supporting you after publication, go to Seven Sisters Publishing . Mr. Kavanagh may be reached at Jkavanagh@7sisterspublishing.com .