by Michael N. Marcus
Michael is a long-time commenter and contributor here. His last post was 24 Practical Tips for Using Photos in Your Print on Demand Books. Today Michael draws on his long experience as an entrepreneur and business owner to give some practical advice for people who are U.S. taxpayers. Keep in mind, as Michael says, this advice is based on his own experience, and he is not an accountant or lawyer. But he does want to see authors keep as much of their hard-earned money as possible.
That means April is coming and it’s time to think of taxes. Writers have to think back to maximize deductions and minimize the taxes they’ll pay in April. Writers also have to think ahead to plan their writing businesses to minimize taxes due in the future.
Benjamin Franklin said that “nothing is certain but death and taxes.” I’m not so certain. At least about taxes.
If you’re a writer, you probably work hard for your money. You’d probably prefer to spend it, save it or invest it—not send it to the governments that tax you.
In order to maximize the money you keep, obviously you must maximize the money you make.
To maximize the money you keep, you must also maximize the income tax deductions you take (but don’t be greedy or stupid about it).
It’s often easier to reduce your taxes by $1,000 than to make an additional $1,000—and the result is the same.
Writers (and other members of the media) can get away with business tax deductions that ordinary people can’t get away with.
I’ve been making my living as part of the media since 1969. I’ve deducted the costs of movies, meals, magazines and much more.
My income tax returns have never been audited and my deductions have never been denied. I am not worried if this blog posts attracts the attention of the Feds.
I am not an accountant, a lawyer, a financial adviser, an IRS-approved enrolled agent, a certified anything or an H. & R. Block alumnus.
HOWEVER, I have years of real-life experience in avoiding taxes. (Avoiding is legal; evading is not. To the government, the words are not synonyms.)
REMEMBER: As a writer—whether you are a freelancer who sells an article every few years or an author who publishes books every few months—you are operating a business, and are subject to taxes, at least in the USA. Writing should not be treated as casually as having a tag sale, selling an old sled on Craig’s List or operating a lemonade stand in your driveway.
I’ll pass on vital advice I developed while working as an advertising copywriter in the early 1970s and have continued to use as a webmaster, writer and publisher.
EVERY piece of media you consume—and the equipment and services that go with them—should be deducted in the range of 25% to 100%. Deduct movies, CDs, music downloads, games, concerts, artwork, vacations, pay-per-views, MP3 players, big TVs, little TVs, iPad, smart phone, books, magazines, newspapers, cameras, subscriptions to Spotify, TiVo and Sirius/XM, Amazon Prime membership fee, museum visits, costs to get to museums and movie theaters. . . everything that helps you stay aware of news, culture trends and history.
Years ago my father owned a chain of clothing stores. He once considered deducting his subscription to Playboy (which provided news and advice about men’s fashions among the airbrushed women).
Alas, he was afraid to list a skin mag on his tax return, so he sent too much money to the IRS. I have no such reluctance—and may have bigger cojones than Pop.
With proper classifications, you can probably get Uncle Sam to subsidize anything.
And that takes us to PART TWO: planning for the future.
If you are an author or a journalist, the key to creative tax avoidance is to write about things you like.
- If you like to travel, write about travel, and then deduct the cost of traveling.
- If you like cars, rent some really cool cars, and write about them.
- If you like to eat—and who doesn’t?—go to lots of restaurants, attend cooking schools, stock your pantry, and write about food.
- If you smoke, write about pipes, cigars, tobacco, hashish or marijuana—and deduct the cost of your research. A trip to a cigar factory, a bong or nickel bag can be as important to your writing career as Microsoft Word.
- If you like sex, deduct the cost of sex toys, enhancement drugs, porn, trips to Bangkok or Nevada, hookers or gigolos—and write about them.
- If you like building things, buy lumber, hardware, tools and paint, write about building, and deduct the cost of your research materials.
- If you like to sew or knit, write about your craft and deduct the cost of your fabric, patterns, thread, yarn, trim, buttons and zippers.
- If you like to take pictures or paint pictures, write about art and deduct the cost of your equipment and supplies—even software.
- Be sensible. If your writing specialty is the Peloponnesian War or pizza, the IRS probably will look askance at a deduction for learning how to ride a horse. If you want to deduct the cost of those lessons, write about horses.
- No matter what you write about, deduct the cost of your computer, fax, Internet access, e-readers, books, magazines and newspapers.
Something that’s an expensive toy for your neighbor can be a vital and deductible business tool for you!
Years ago, some business advisors urged their wealthy clients with high incomes to convert their hobbies into ‘businesses’ so they could have a loss to reduce their taxable income, and keep more of what they earned.
The IRS caught on and did not think kindly of a movie star who had accumulated a valuable stamp collection and declared himself to be a stamp dealer so that new additions to the collection would be deductible business expenses.
A wealthy clothing designer might spend half a million bucks on a swimming pool and deduct the cost because her teenage kid used it to train for a possible summer job as a lifeguard. Not surprisingly, the IRS quickly caught on to this strategy.
Wall Street Wizards who portray their estates as working farms can expect to be examined closely.
As a writer, you should have no problem justifying your business expenses, especially consumption of media necessary for “research.”
‘Creative deductions’ are legitimate, justifiable business expenses that provide pleasure while reducing or eliminating profit that would be taxed. It’s important that your writing or publishing business appears to have the intent to make money, even when and if it doesn’t.
Profit is good if you are trying to sell a business—but not when you are doing your tax return.
There is no shame in being unprofitable. Publishing is a tough business. Most books—even from major publishers—lose money. Major magazines and newspapers have disappeared (even Life died). Big book publishers merge and are acquired to avoid going under.
If your writing or publishing business doesn’t make a profit in at least three years out of five, the IRS may consider it to be a hobby, not a business, and could disallow business expenses as tax deductions.
- Japanese companies with ‘deep pockets’ were willing to wait years to generate a profit in the United States.
- Amazon.com was founded in 1994 but did not show a profit (a tiny one) until late in 2001.
Despite the losses, the IRS did not accuse Panasonic, Toyota or Amazon of disguising hobbies as businesses.
It’s common for a new business to lose money for several years. In fact, immediate profitability is quite rare because of start-up costs and bad decisions.
Despite the ‘three out of five’ rule, if you have no profit in five years—or even more years—but can show a serious business effort, you should appease the IRS.
Here’s what Washington has to say on the subject: (from IRS Publication 535)
“In determining whether you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive. Among the factors to consider are whether:
- You carry on the activity in a businesslike manner,
- The time and effort you put into the activity indicate you intend to make it profitable,
- You depend on the income for your livelihood,
- Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
- You change your methods of operation in an attempt to improve profitability,
- You (or your advisors) have the knowledge needed to carry on the activity as a successful business,
- You were successful in making a profit in similar activities in the past,
- The activity makes a profit in some years, and
- You can expect to make a future profit from the appreciation of the assets used in the activity.”
Remember to be organized, keep good records—and don’t be greedy or stupid.
Michael N. Marcus has published more than 30 books, many about publishing. Three of his books have been Amazon bestsellers. Michael publishes BookMakingBlog.com and frequently comments on this blog. This blog post is adapted from Michael’s new Kindle e-book, Writers Can Get Away With Apparently Absurd Tax Deductions That Ordinary People Can’t. Michael just launched a new website for his books about publishing, www.CreateBetterBooks.com.
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