It depends on whether or not you’re classified as a
self-employed independent contractor or whether or not it's considered a hobby. If you are considered an independent contractor then, Yes, you can write off your expenses as it relates to writing the book and getting it published.
Hobby-Loss Rules (How to Tell if Your Writing is an Occupation or a Hobby)
First, let’s define your writing occupation. The IRS will apply
“hobby-loss” rules according to how serious you are as a writer. If
writing is merely a hobby or an occasional income-producing venture,
then you can deduct your expenses only to the extent of your income. In
other words, you can’t take any losses against other income. For
example, if your hobby writing generates $1,500 for the year and your
expenses amount to $1,900, you will not enjoy a $400 loss against other
income. You may deduct only $1,500 in expenses, making your net taxable
income zero from writing sources.
Intent becomes a key factor in
determining your status. Are you a full-time writer, earning your entire
income from this source? Or do you have a 9-to-5 job and write an
article here and there for extra income? Perhaps you’re currently living
on your savings while writing the Great American Novel. If you are
working toward making a living from writing, even if you have another
job on which you’re subsisting for the time being, then you can declare
your writing an occupation by filing a Schedule C and take deductions,
even if the result is a business loss. The loss applies to all other
income you receive during the year, reducing your taxable income and
therefore your tax liability.
The IRS leaves it up to each
individual to make an honest determination of whether his writing
activities are a hobby or a business. You make the decision as you file
your tax return.
But the IRS gets a big scowl on its face when it
sees five or more years of losses from a business activity. It’s
inclined to audit and disallow the losses if it feels an individual is
attempting to write off her hobby. That could be rather expensive,
because the IRS will go back three years and recalculate your tax
liability—including interest—without the losses. In some cases it may
add penalties.
Here are some ways to prove business intent so you may enjoy losses against other income:
1. Keep business records, either on an accounting software program or on spreadsheets.
2. Maintain a separate checking account for transactions related to
writing. (This not only proves business intent, but will make it easier
to track income and expenses.)
3. Attend classes and conferences to improve your skills.
4. Advertise, network, seek new clients and keep a journal of
these activities.
5. If you plan to deduct vehicle expenses, keep a mileage log.
6. Keep a phone log of business-related calls.
7. Obtain any required licenses and insurance.
8. Give your business a name.
9. Chart future projections and plans to turn the activity into a
profitable enterprise.
By following the above guidelines, you’ll demonstrate a profit motive
and be more likely to convince an auditor you’re serious about the
business of writing.
Business Organization (What you Need to Keep Track of, and How to Do It)
Being organized is one way to prove that your writing is something more
than a hobby—and it makes filing easier, too. The best thing to do is
track your income and expenses on a software program such as Quicken,
QuickBooks or Excel. If you take the above suggestion to open a separate
bank account, keep careful records of your statements, as well.
Make a set of business receipt files. Remember, in the event of an
audit, the IRS may want to see more than cancelled checks. It’s best to
have actual receipts to confirm the nature of your purchases.
For
both the business and the personal side of your taxes, it’s good
practice to create a tax file for each year. Then, as certain
transactions occur, you can store the proper documentation in the file.
For example, when you donate bags of clothing to a nonprofit, place the
receipt immediately in the file. When you pay DMV fees and property
taxes, put the receipts in the file. You get the idea.
And in
January, when you receive all of those third-party reporting documents
(W-2s, K-1s, 1099s, 1098 Mortgage Interest Statement, etc.), simply
place them in the tax file, too. Then, when it comes time to prepare
your tax return, everything is at your fingertips. What was once a
dreaded occurrence will be relieved in part by your organizational
skills.
Deductions (How to Determine What Qualifies)
When it comes to what qualifies as a deductible expense, the guideline
is “ordinary and necessary” business expenses. This is verbiage directly
from the Internal Revenue Code. Because of the subjective nature of
classifying business expenses, questionable deductions are not
automatically disallowed. The validity of deductions is up for debate.
The list of what can or cannot be deducted is short. One reason there
is no definitive list is because of the variance of expense requirements
from one industry to another. What is reasonably deductible for one may
not fly for another. For example, the purchase of candies placed in a
countertop bowl for patients at a chiropractor’s office would be
considered an “ordinary and necessary” business expense. However, if you
are a writer with a home office that has no traffic, you will raise an
auditor’s eyebrows if you try to deduct a bag of Hershey’s Kisses.
I advise my clients to view a questionable expense in terms of, “Would I
incur this expense if I didn’t need it for the business?” If the answer
is no, then you likely have a valid business deduction.
When it
comes to writing, you may encounter some or all of the following
deductions: office supplies, computers, copiers, printers, telephones,
travel, meals, entertainment, self-publishing and print-on-demand costs,
trademarks and copyrights, domain name expenses, costs of book-launch
or book-signing events, advertising, marketing and promotion, vehicle
expenses, postage, bank charges and outside services—to name a few. If
these expenses are related to the business of writing, they are
deductible.
Let’s examine some areas of deductions that have specific IRS guidelines and can be tricky to defend.
HOME OFFICE: You can deduct a home office if you use the space exclusively and as your principal place of business.
Exclusive use: The
area cannot be used for personal pursuits, only writing projects. That
said, the space needn’t be a full room. If you have a desk and computer
set up in your bedroom, you can deduct the area used as an office.
Principal place of business: You cannot have another space outside of your home (like a rented room) where you pursue your writing projects.
Many folks fear that the home office is a red flag. This was the case
during the 1990s, when there was a big flap over home office use. There
were severe restrictions in place stemming from a 1992 Supreme Court
decision. But the IRS wised up and threw out those restrictions a decade
ago. It understands that many self-employed individuals, even
telecommuters, use qualified home offices. They’re not the red flags
they used to be. As long as you follow the rules, you have nothing to
worry about.
If you write one or two articles a year, you likely
are not qualified to deduct a home office. The IRS would have a hard
time believing you need an entire space of your home devoted to an
activity that constitutes so little time. It also won’t believe the
space is never used for personal purposes. You’ll throw up a red flag if
you try to take the deduction.
However, if you spend a
considerable amount of time in your home office on serious writing
projects with a goal of reaping financial rewards, take the deduction.
First, calculate the square footage of your home office space, then
divide that number by the total square footage of your home. This will
give you a percentage to use against all your home expenses. For
example, your home is 1,000 square feet and your home office measures 10
by 10 (100 square feet): 100/1000 = .10, or 10 percent.
Apply
that percentage to the following expenses: rent or mortgage interest,
property taxes, homeowner’s or renter’s insurance, utilities,
housekeeper, repairs and maintenance. Don’t forget to write off the
furniture and equipment used in the home office. (Yes, you can deduct
that old desk you’ve had since college. Write off the lower of its cost
or its fair market value.)
If you plan to do this, it’s a good
idea to go to irs.gov and take a look at Form 8829 to see how the
calculations are made. An even better idea is to consult with a tax pro
to ensure that your office qualifies—and that you get every other
deduction to which you are entitled.
TRAVEL, MEALS AND ENTERTAINMENT: If you travel quite a bit for your writing business,
you should maintain a travel file of notes, correspondence and any
other documentation that will demonstrate to an auditor that the trips
were for business rather than personal pleasure. Let’s face it: The IRS
always suspects that you’re cheating on your taxes. It pictures business
owners merrily writing off personal expenses as deductions,
illegitimately saving beaucoup bucks in taxes. Assume you’ll be presumed
guilty until proven innocent. That’s why I can’t stress enough the
importance of keeping proper documentation to support the deductions to
which you are entitled—especially in the area of travel, meals and
entertainment. The IRS has encountered a lot of abuse in this area, and
is therefore very strict in its record-keeping requirements. It would
behoove you not only to keep receipts, but to thoroughly document the
nature of each activity. If you take your agent to lunch to discuss your
book proposal, write that info on the receipt and keep it. If you go to
the San Francisco Writers Conference,
you’ll need more than a credit card statement showing room charges at
the InterContinental Mark Hopkins Hotel. If this is all an auditor has
to go by, he’ll likely assert you had a nice little vacation, not a
valid business deduction. Attach to the credit card statement a copy of
your registration form and a flyer advertising the event. The auditor
will match the location and dates and honor the deduction without
question.
In fact, think about this with every receipt you have.
If you buy a new computer from a store such as Costco, the auditor will
want to see the receipt. After all, you can buy groceries and all manner
of personal items from this retailer. Therefore, the IRS will want
proof that the purchase was in fact for a new laptop and not for a dozen
cases
of vino.
There must be a clear business purpose to
all travel, meals and entertainment deductions. A travel deduction for
spending three months in Italy because the location “inspires” you to
write will be met with a slamming gavel and the word “disallowed!” Yes,
exclamation point included. But if the writing project you’re tackling
is set in Italy and requires research of the culture, flora and fauna,
architecture, etc., then hey, have at it.
Just be prepared to
defend yourself. Keep all of your notes and your finished or unfinished
project(s) in case you ever have to prove your point to an auditor.
LISTED PROPERTY: The
term “listed property” refers to the acquisition of capital assets such
as vehicles, computers and cell phones. Most self-employed people use
these items on a personal level as well as for business, so you need to
track the percent of business versus personal use. You then apply the
percentage of business use to the cost and operating expenses, and use
the result as a basis for your deduction. Of course, the IRS expects you
to keep logs to verify those numbers.
Oh, great! A big homework
assignment. It’s not as bad as you think. For instance, I have never
been asked to produce a log for business versus personal use of a
computer. The IRS has the right to ask for such a log and it technically
can disallow the deduction for a computer if the taxpayer does not
produce the log. Does that happen in real life? No—especially if you’re a
writer. That’s the main tool of your trade. It would be like
disallowing a ratchet set to an auto mechanic.
To properly
document vehicle expense, write your beginning odometer reading under
Jan. 1 in your appointment book. Flip to Dec. 31 and write the words
“ending odometer.” That will jog you to record the ending mileage when
the time comes. Throughout the year, write in various business
destinations: office supply store, restaurant to meet a business
contact, etc. At the end of the year, you’ll have your total mileage and
a pretty good idea of what your business usage was. The IRS could
technically demand a contemporaneous log, but I’ve never seen it happen.
This is, of course, an overview of a very complex subject. I would
encourage you to meet with your tax pro to discuss your individual
situation and how best to apply the laws to your advantage.
From more advice on how to save money on your taxes, consider:
Finances and Tax Issues for Writers
