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Why Do You As A Writer Need to Know About IRC 263A(h)?

Internal Revenue Code 263A(h). Capitalization Rules.  As a free-lance (self-employed) author/writer, you may be exempt from the capitalization rules. You can deduct the expenses of creating your manuscripts(s) on Form 1040, Schedule C, Profit or Loss From Business, if you meet the requirements of an activity-for-profit. You do not have to wait until you income from the sale of your manuscript(s) to claim these expenses.

What Does It Mean?

Under the capitalization rules, normally you may not claim expenses until you start receiving income from the sales of your products. Then you must spread the expenses over the life of the products being sold.

If you are a self-employed (free-lance) writer with the goal of earning a living and making a profit from your writing (a business), you may claim your writing expenses on your federal income tax return when the expenses occur. You do not have to wait until you are earning income from writing to claim your writing expenses.

How Does This Benefit You?

You report your business-related expenses on Form 1040, Schedule C, Profit or Loss From Business. Even if you have no income from writing. This results in a loss. This loss is carried from Schedule C to Form 1040, line 12, as a negative number. This loss is subtracted from all your other income (or spouse’s income) causing your gross income to be less. When gross income is less, then your taxable income is less and you pay less income taxes.

Drawback?

When you sell your book and receive royalties, you will not have these expenses to decrease your income. Therefore, you may pay higher income taxes and self-employment taxes on this income in the year you receive it. Self-employment taxes are the equivalent of social security taxes for self-employed individuals.


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Comments on: "Tax Facts for Writers: IRC 263A(h)" (13)

  1. Thanks for this, Linda. I don’t know anyone else who is posting such details and I think it is very important information. I’m looking forward to becoming much more knowledgeable about my tax status from your blog.

  2. Thank you! This information is very timely as my husband was just asking me about these things this morning.

    Very easy to understand and well said.

    I look forward to more tax info (I can’t believe I just said that!). ; )

  3. Hey Linda,

    Great information on writers and taxes. I hope I have to pay taxes on a best-seller one day. I wasn’t aware you could start taking deductions now, so thanks for the info.

    Kerry

    • Just remember you have to be in the business of being a writer, planning on making a profit, and treat it like a business (keep records and receipts proving your expenses).

      Thanks for the comment.

      Linda

  4. Hey Linda! I really like the crisp clean look of your blog. Great job.

    I’m with Patricia. I don’t think anyone else is giving out this information. My husband and I have a very good accountant who has had experience with writers and seems to know what he’s doing. However, it’s good to be able to check on the tax rules for myself. Very empowering. Thanks.

  5. Great post Linda…I’ve started taking deductions this last year…..what can all be deducted however? I’m saving receipts for craft books and online classes I take. Do contests count?

    carrie

    • Writing contests, yes. Save proof of payment. Justification, in case you’re asked, is to improve your writing and to get your work in front of editors/agents.

      Thanks for coming by.

      Linda

  6. I claim expenses, and include car mileage to get to and from meetings, workshops, and conferences. I use turbo tax, and it works best for me if I note the mileage at the beginning of the tax year, the odometer reading at the end of the tax year, and keep a spread sheet of destinations, purpose, and the odometer readings. Then at the year end, I figure the percentage of those miles which pertains to writing. Thanks for this post, Linda. I see so many talented writers who do not claim taxes.

    • I will be discussing car mileage in another article. For now just be aware that unless you can claim office in the home expenses the car mileage expense is limited.

  7. Thank you Linda!
    I didn’t even think about the taxs we need to pay for our books. I’m glad to hear we can deduct what we spent on our book. Editing can be so costly. I will be saving your posts for next year. I can’t wait to hear more,

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