Exploring the Universe

I had planned on continuing my articles on writing expenses, however, an issue arose that I thought was important enough to put that off and discuss whether you, as a free-lance writer, have a hobby or a business. I will continue the discussion on expenses in the coming weeks.

Hobby or Business?

Are you writing as a hobby or do you write to make a profit (also known in tax-law-language as an activity for profit/business)?

This question is very important in respect to your U.S. federal income tax return. Your answer determines where you report your income and expenses and whether or not you can claim your expenses now or later.

You need to make this decision before you prepare your income tax return claiming writing expenses.

The Internal Revenue Service (IRS) has very specific guidelines concerning whether an activity is for profit (a business) or is an activity not for profit (a hobby). The IRS presumes your business is an activity for profit if it makes a profit during three of the last five years. If your business does not make a profit during that time, it may still be considered an activity for profit depending on certain factors. If you are audited, you will be asked to provide information proving you are in the business of being a free-lance writer. I have reworded the general questions so they are applicable to writers.

1. How much time and effort do you spend writing?

This includes writing, researching, taking classes, reading “how-to” books, etc.  Do you spend enough time to make a profit?  (For example, a couple of hours every once in a while is probably not enough.)

2. Do you conduct your activity in a business-like manner?

Do you keep your receipts for your purchases?  Do you keep your business records separate from your personal?  If they are mixed, do you identify which purchases are for your business of being a free-lance writer?

3. Do you depend on the income for your livelihood?

Do you or your spouse have another job which pays for your living expenses?

4. Have you changed your method of operation to improve profitability?

Have you taken any classes, joined a writers group or association, or changed genre? What have you done to increase your ability to make a profit?

5. Do you have the knowledge needed to carry on the activity as a successful business?

Have you taken classes or workshops, entered contests, read “how-to” books by successful authors/editors? Have you attended a Small Business Tax Workshop?

6. Have you made a profit in a similar activity in the past?  Have you been successful in your past/present occupation?  Do you use some of the same skills?

7. Have you made a profit in some years from your writing?

Have you made some sales during the years even though you haven’t made a profit yet?  Are the sales increasing each year?

8. Did the losses occur during the start-up phase of your writing?

If you are ever audited, you will need to prepare a statement answering these questions in as great detail as you can in order to verify your claim that you are an activity for profit.  In addition, it might be helpful to include information concerning how many years it took for certain authors to sell a manuscript.  For example, I’ve seen certain authors say it took them 10 years to get published.

HOBBY

If your writing is a hobby, you report your income on Form 1040, line 21, Other income, and your expenses are deductible on Form 1040, Schedule A, Itemized Deductions, line 28, up to the amount of hobby income reported and subject to the 2% deductible limitation.

BUSINESS

If your writing is a business, you report your income and expenses on Form 1040, Schedule C.

The above links are to the 2010 forms since the 2011 forms have not been published at this time.

Do you consider yourself as a free-lance writer (aka business)?


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Comments on: "Tax Facts: Is Your Writing A Business?" (16)

  1. While I pray the answer will someday be yes, right now, I’m simply a hobby writer, trying to get that contract that will change my tax status!

    Great post.

    • You still need to keep your receipts as proof of your expenses even though you aren’t claiming them on the current year’s tax return. When you do start making money from your books, you can amortize these expenses on Form 4562.

  2. This is good information to have. Thanks!

  3. I LOVE your writing/business posts. I print them all out and have them in a folder marked, “Writing Tax Info” so I can read them again and again to make sure I’m getting everything I need for our taxes. This information is invaluable!

    Thanks for doing this.

  4. And you wonder why everyone thinks the world of you…Invaluable Linda. Truly. Thank you and as someone who owns a corporation, writing is an entirely different animal and your information much appreciated.

    • Thank you. This particular article wouldn’t apply to you, but just wait. The expenses for corporations usually follow the same rules as for individuals with just a few quirks.

  5. Taxes terrify me. It’s actually one of the reasons I refuse to do freelance interpreting. I guess I would say my writing is a business. I work at it periodically and intend on publishing at least one book a year. Thanks for the very detailed explanations; I’m definitely the type of person who needs everything spelled out!

  6. Our accountant told me to get a DBA and open a checking account/credit card, etc. It’s something I’ve been putting off. Last year, I received some checks for contest wins which were made out in my pen name…couldn’t cash them!

    Great info, Linda! I’m printing it off!

    • Yes, if you’re going to write under a pen name you need to do whatever is required so you can open a bank account using your pen name. I believe every state has different rules so check it out. Thanks for coming by.

  7. I am in Canada so some of the information doesn’t apply to me but regardless, it’s all information and questions that are good to ask ourselves and think about. It prompted quite a discussion between me and hubby as to what we could and couldn’t claim if we thought of my writing as a “business”. Interesting. Thank you for sharing your expertise!

    • Does your Canadian tax agency provide publications concerning small business income and expenses? If not, perhaps the instructions for the small business forms may have information concerning what you may or may not claim. Perhaps they offer the equivalent of the USA’s Small Business Workshops? Sometimes it is surprising what information you can find online. If you can’t find it online, is there a phone number to call? Or perhaps a local office you could visit and ask questions of the representative there?

      Thanks for coming by and commenting.

  8. Linda, these posts are so good even if we are in Canada. I’ll follow up on the advice you gave Natalie. Thank you and don’t stop!

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