Here is a similar
question and answer from a couple years ago...the response was a bit lengthy
but very informative. Your expenses may not be expressly mentioned, but
the response will give you insight on your next step. If in fact you are
engaged in a business activity (authoring the book, and getting it published)
the expenses would be deductible as business expenses.
Hello
If you’re like most
writers, you’re probably beside yourself wondering what you can deduct against
your writing income when it comes to taxes. What does the Internal Revenue
Service allow? What deductions send up a red flag? Will you be audited?
And the big one: How
much will you have to pay in taxes? Any time you’re not working for W-2
wages—whether it’s a lone published piece, a whole portfolio full of them or
even sales of a self-published book—you’re classified as a self-employed
independent contractor. As such, your tax liability will be greater than if you
were on payroll. When you find out how much greater, you’ll want to find all
the deductions you can get. Here’s what you need to know to get started.
Self-Employment Taxes (Why it pays—literally—to Know
This Stuff)
If this is your
first time dealing with self-employment income, you might be shocked at what
you owe. It’s going to be a lot more than you imagined! Let’s say you’re in a
15 percent tax bracket. You’re paid $1,000 for an article you’ve written. You
get your 1099 form and take it to your tax professional. If you have nothing to
deduct in expenses against that $1,000, you’ll find yourself with a tax bill of
$150 in income taxes (15 percent). But because you’re self-employed, you’ll owe
another $150 in self-employment tax (15.3 percent)—$300 altogether. You just
vaulted into the 30.3 percent tax bracket. Yikes!
First, the bad news:
There’s no way around paying the self-employment tax. Those dollars fund your
Social Security and Medicare. When you work for wages, Social Security and
Medicare taxes (7.65 percent) are withheld from your paycheck, and your
employer matches the deduction by paying another 7.65 percent out of its
pocket, for a grand total of 15.3 percent. But when your pay status is that of
an independent contractor, no taxes are withheld from your pay. You’re the boss
as well as the employee, so you must pay both sides.
The good news is
that because self-employment tax is based on your net profit, you can reduce it
by taking deductions against your income. Let’s use the same example of a
$1,000 payment for an article you’ve written. Say the topic required you to
travel 100 miles to cover an event. You can deduct the cost of mileage,
admission, research, meals, lodging and any other “ordinary and necessary”
business expenses you incurred in order to complete the assignment. You can
likely add in a bit for office supplies, and if you qualify, you may be able to
deduct home office expenses. (More later on how to determine whether or not you
qualify.) If these deductions total $500, you’ve reduced your total tax
liability to a mere $150 ($75 in income taxes plus $75 in self-employment tax),
a savings of $150. Now you can buy that color printer you’ve had your eye on!
This is why it’s
important to find every deduction to which you are entitled. You can have peace
of mind with a little tax planning, basic organization and a dash of knowledge.
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
I left this link in
just in case you would like to check it out for your self.
I hope that this
helps, thank you for using turbo tax.
