Tax Tips for Writers Who Hate Math

by | Jan 30, 2015

By Helen Sedwick

Writers are masters of words, not numbers. We tried to disappear in the back of algebra class and still suffer anxiety dreams about quadratic equations. Then along comes tax time, and we are forced to assemble, decipher and compute income and expenses, or risk paying Uncle Sam more than our share.

Experts estimate that 40 cents of every dollar earned goes to pay taxes. Did you know you may be able to shave a few cents off of that – and still be completely legal – without enduring math more complicated than addition and subtraction? The key question has nothing to do with math.

Is Your Writing a Hobby or Business?

Suppose you write in your free time. You submit short stories to magazines and occasionally receive a small check. While you may dream of best-selling success, you are not actively pursuing making a profit from your writing. Consequently, the IRS will consider your writing a “hobby.”

This is a bad tax situation. If you make any money from your hobby, you have to report the income, but you are limited in deducting expenses related to your hobby. Typically, you may deduct hobby expenses only up to the income received from the hobby.

So if you make $1000 from your writing, but spend $2500 in conference costs, contest fees, office supplies, and other writing expenses, you must report the $1000 as taxable income and may use only $1000 of your expenses as deductions. The other $1500 is money spent without a tax benefit.

In contrast, if you run your writing as a business (as defined by the IRS), the remaining $1500 could be used to offset income from your day job, saving you up to $750 in taxes, depending on your tax bracket and where you live.

Sounds like good math to me.

When Does Writing Become a Business?

You may have heard the old rule that a business is considered a hobby unless it shows a profit for three out of five years. In practice, the IRS is not as strict as the three-out-of-five-year rule. If you demonstrate you have a serious intent to operate a business at a profit, the IRS will generally give you some slack.

According to the IRS website, they take the following factors into consideration:

  • Whether you carry on the activity in a businesslike manner.
  • Whether the time and effort you put into the activity indicate you intend to make it profitable.
  • Whether you depend on income from the activity for your livelihood.
  • Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
  • Whether you change your methods of operation in an attempt to improve profitability.
  • Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
  • Whether you were successful in making a profit in similar activities in the past.
  • Whether the activity makes a profit in some years and how much profit it makes.
  • Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

Vague standards, aren’t they? It would be nice if the IRS gave clear rules about when a hobby becomes a business, but nothing in tax law is that simple or direct.

What’s a Writer To Do?

If you are self-publishing and making some regular income, then it may be time to treat your writing as a business for tax purposes. In real life terms, this means the following:

  • Set up your business properly. Obtain a separate Federal Employer Identification Number (EIN), a seller’s or resale certificate, and any business licenses required in your local community. For more details, download (for free) SETTING UP YOUR SELF-PUBLISHING BUSINESS.
  • Promote and advertise. Promote yourself and your book on social media and other venues. Maintain a website. Print business cards and bookmarks.
  • Follow tax rules. Collect and pay your sales tax. If you are paying an independent contractor (other than a corporation) $600 or more in any year, ask for a W-9 and report the payment on a 1099-MISC and the equivalent state form.
  • Separate your personal and business finances. Open separate PayPal and bank accounts and run only your business income and expenses through those accounts. Set aside a credit card for business use only.
  • Maintain decent records. In tax audits, more people are nailed for losing receipts than for cheating. If you don’t have a file cabinet (a real one since the IRS wants paper records), get one. It’s tax deductible.
  • Network. Join professional organizations. Attend writing-related conferences, and better yet, speak at them.
  • Develop a business plan. The IRS is more likely to believe you intend to make a profit if you have some kind of plan to show how and when that is going to happen. Developing a business plan is an eye-opening exercise for most writers. You can’t develop a sensible publishing budget without one.
  • Keep writing. Show the IRS you are in this venture for the long haul.

There is no need to incorporate or form a business entity. Your business is just as legitimate as a sole proprietorship. Maintaining an entity is simply too expensive, unless you are making $10,000 or more in net income. In that case, don’t worry about hobby rules, but discuss forming an entity with a tax professional to save on self-employment taxes.

The Joy of Deductible Expenses

One of the nice consequences of running a business is Uncle Sam will share in your expenses. If an $800 conference fee is deductible as a business expense, then a percentage of that fee would have gone to pay taxes anyway, depending on your income bracket.

The general rule is that ordinary and necessary expenses of operating your business are deductible, including:

  • office supplies and postage,
  • magazine subscriptions,
  • telephone charges,
  • printing costs for business cards, bookmarks, and postcards,
  • advertising costs,
  • costs for software, such as design, video-editing, manuscript editing, and analytics,
  • fees and royalties paid for fonts, images, music, and other content,
  • writing club dues,
  • website hosting and online backup costs,
  • subscription costs for HootSuite or other web-based services,
  • payments to freelancers, such as editors, copyeditors, designers, web designers, and publicists,
  • research expenses, including travel,
  • cost of books you give away to reviewers or in promotional giveaways,
  • contest entry fees,
  • copyright registration fees, and
  • potentially, a portion of your car and home expenses.

Many expenses incurred in the years prior to your first book launch will be deductible as start-up expenses, so save those receipts as well.

Have I Lost You?

It makes sense to hire a tax accountant when you set up your business. so you start off on the right foot. A good tax advisor will save you money in the long run and get you a few steps closer to quitting your day job.

Finally, I must end with all the usual disclaimers.

If you ask a lawyer a question, her favorite answer will be “it depends.” Every taxpayer’s situation is unique. Nowhere is that more true than with tax law. All this information is general in nature; the technical details would fill a bookshelf.

The IRS requires me to say the following: CIRCULAR 230 DISCLAIMER: If and to the extent that this post contains any tax advice, I am required by the Internal Revenue Service’s Circular 230 (31 CFR Part 10) to advise you that such tax advice is not a formal legal opinion and is not intended or written to be used by you, and may not be used by you, (i) for the purpose of avoiding tax penalties that might be imposed on you or (ii) for promoting, marketing or recommending to another party any transaction or matter addressed herein.

And finally, I am an attorney licensed to practice in California only. This information is general in nature and should not be used as a substitute for the advice of an attorney authorized to practice in your jurisdiction.

Sedwick.HeadshotHelen Sedwick, is a Contributing Writer for The Book Designer. She is also an author and a California attorney with thirty years of experience representing businesses and entrepreneurs. Her latest book is Self-Publisher’s Legal Handbook: The Step-by-Step Guide to the Legal Issues of Self-Publishing.

You can find more information about Helen here.

Disclaimer: Helen Sedwick is an attorney licensed to practice in California only. This information is general in nature and should not be used as a substitute for the advice of an attorney authorized to practice in your jurisdiction.
 
Photo: bigstockphoto.com

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10 Comments

  1. Marla Markman

    Great post Helen. Love how accessible your posts are. This material had the potential to be deadly boring, but it is anything but. Great lead, too!

    Reply
  2. Jason C Anderson

    It’s that time of year, huh? Thanks for the great tax advice. It just proves how important it is to have a good accountant on your team.

    Reply
  3. Suzanne Joshi

    Thanks Helen and Joel for the helpful advice.

    Reply
  4. Crystal Walton

    For Schedule C purposes, how would you classify the expense for proof copies ordered from Create Space?

    Reply
    • Helen Sedwick

      Crystal, I believe you could treat them either as expenses or as Costs of Goods Sold (COGS), so long as you are consistent year to year. Treating them as COGS would be the more conservative approach. Your tax preparer or CPA may have a preference, and I would definitely defer to your tax person.
      Any CPAs out there who want to chime in? Please do.

      Reply
      • Crystal Walton

        Since Amazon is the seller, I won’t have any inventory, so I think it fits better as an expense than COGS. But since it’s kind of a non-standard business expense, I wasn’t sure which category to lump it into.

        Reply
        • Rachel

          I am having the same dilemma. It seems like an expense to me, but WHAT? It isn’t “advertising” or “professional services,” etc. If there were a lot of them, it would make sense to give it its own description in the “other” category, but that doesn’t make a lot of sense for one or two proof copies.

          Surely someone has solved this problem before!

          Reply
  5. Michael N. Marcus

    Every bit of media you consume (books, magazines, newspapers, movies, music, theater, museum exhibits, TV) and associated hardware should be deducted somewhere in the range of 25% to 100%. Writers must be aware of cultural trends.

    Also: Here’s some more advice of uncertain value:

    (1) A successful small business is one that breaks even each year, with a slightly higher gross income.

    (2) Big profits are nice if you’re trying to sell the business, but not when you’re filing your income tax return.

    (3) Write about stuff you like, whether it’s wine, sports cars, clothes, travel, cameras, horse racing or sex. Then you can deduct everything you spend on fun — if you classify it as “research.” With proper classifications, you can probably get Uncle Sam to subsidize porn, booze and hallucinogens.

    (4) There’s almost nothing that’s too crappy to donate to Goodwill Industries or the Salvation Army and claim an appropriate deduction for. Bill Clinton was criticized for claiming a deduction for donating used underwear. I’m not the president and don’t care what Sean Hannity or Rush Limbaugh will say about me. I’ve lost a lot of weight recently, and I donated lots of oversized underwear. Washed, of course.

    More in my book Writers Can Get Away With Apparently Absurd Tax Deductions That Ordinary People Can’t_ https://www.amazon.com/dp/B00AP487TM

    Reply
    • Helen Sedwick

      Michael,
      Great advice and attitude! I just downloaded your book and look forward to reading it.

      Reply
  6. R. E. Hunter

    In Canada it’s so much easier–you only ever get to deduct up to the income of the business. You can carry those business losses forward to deduct against any future income from the same business, but you can’t use to offset other income.

    Reply

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