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Tax Facts: Is Your Writing A Business?

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)?


Tax Facts: Top 9 Expenses for Writers

As a writer, what expenses do you have?

You may have bought paper and pens. Computers and software. Printers, toners, ink, paper. Notebooks, filing cabinets, file folders, desks, and chairs. You may pay for advertising, a website and all additional costs, commissions to your agent, and workshops. You may have expenses related to your car (which I discussed earlier).

Or, if you are self-publishing, you may have expenses for an editor, a front cover, pay someone to take your ms and transform it into the correct format, and other related expenses.

Or you may pay an attorney to review the contract for you. You may have dues or membership fees in writing organizations.

If you are using one area of your home for writing 100% of the time, you have additional expenses you may claim. This includes the business percentage of your utilities, insurance, and your rent. If you are buying your home you may claim depreciation on the business part of your home. Called office in the home.

All these expenses are reported on Form 1040, Schedule C, Profit or Loss from Business. This links you to the 2010 Schedule C. It has not changed in years so you can use it as a go-by.

Keeping up with these expenses can be daunting.

To make it easier, you need either a notebook or file folders. If you have few expenses, a notebook with dividers works well. Label a divider with the type of expense and tape the receipt to a sheet of notebook paper. This makes it very convenient to make notes about what you bought and if unusual, why. This also gives you room to calculate what percentage is used for business if it is used for business and personal.

These are my top 9 expenses for writers, in no particular order of importance:

9. Car expenses (discussed on a previous post).

8. Advertising.

7. Commissions / Legal and Professional.

6. Dues.

5. Travel.

4. Office in the Home.

3. Supplies.

2. Computer and software.

1. Education.

I will share what I know about these expenses individually in subsequent posts.

What expenses did you have this year?

Tax Facts: What Car Expenses Can A Writer Claim?

For tax purposes, car expenses are divided between local (called transportation) and travel (when away from home). I am discussing transportation this time.

Business Mileage:

Unless you meet the qualifications for office-in-the-home, you cannot claim mileage expenses from your home to the first business place.  I will discuss this later.

Therefore, let’s say you are going to the post office to send off a manuscript or two, then you go to a store to buy paper and toner for your printer, some tablets/notebook paper, pens, paper clips, staples, etc., before going home. And you do not qualify for or claim office-in-the-home expenses on your tax return.

You can claim business mileage between the post office and the store. Period.

If you drive to the post office and return home, you cannot claim any business mileage.

The mileage between your home and the post office and between the store and your home is considered commuting, which is a personal expense.

If you qualify for office-in-the-home, you may claim all business related miles – from home to post office to store to home.

Two Methods:

If you do have business mileage for 2011, you may use either the standard mileage rate (51 cents per mile) or the business percentage of actual expenses and depreciation.

Actual expenses includes everything you spend on your vehicle – gas, oil changes, new tires, taxes, garage/parking, tags – everything. You can also claim depreciation on your vehicle (to be discussed later). However, you may only claim the business percentage of these expenses. If your business mileage is 4,000 miles and your total mileage is 10,000 miles, you may claim business percentage of 40%.

In order to claim depreciation on your vehicle, you must not have claimed standard mileage rate for the same vehicle in a previous year.

Regardless of which method you use, you can claim toll fees and parking costs in full if they are business related.

Record Keeping:

If you are ever audited, you will need a way to prove the business mileage claimed. This usually means either a tablet or calendar where you record your beginning and ending odometer readings for each trip and why you made the trip. If you make the same trip several times and know exactly the mileage, you can skip the odometer readings after the first one.

Regardless of which method you select, you must keep records showing business mileage and total mileage for the year so you can determine business percentage.

IRS Publication 463, Travel, Entertainment, Gift, and Car Expenses

Any questions?

Tax Facts for Writers: IRC 263A(h)

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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