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.
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.