The following is not meant as tax advice nor are the recommendations and examples meant as interpretations of the US Tax Code. For tax advice and opinions always consult a licensed tax advisor.
Google “Tax tips for writers” and you’ll get a cascade of hits. You’ll get so many tips, ideas and pointers that you may be confused beyond belief. Welcome to the world of Authors and the IRS.
Federal income tax, that “temporary” measure introduced by ??? in ??? has persisted and now is the subject of many myths. You may have heard that the tax code is 70,000 pages. Well, it depends.
The actual U.S. tax code is somewhere over 3,000 pages—a daunting and complex read indeed—but when you add in case law, commentaries, old statutes, and other material, it can probably consume 70,000 pages or more; a small library.
Just in case you didn’t know, President Lincoln convinced Congress to pass a temporary Revenue Act which levied a three percent tax on incomes over $800 to help finance the Civil War effort. The permanent income tax was spearheaded by President Taft and was enacted in 1913.
So began the great American game. Experts began to read and carefully interpret the words to find the “loopholes” in the tax act. Politicians and bureaucrats amended the act to plug the loopholes. Often, courts at various levels made rulings. And ordinary citizens began saving their receipts in old shoe boxes.
So, how does this affect you?
The first question is are you a ‘hobby’ writer or a ‘professional’ writer? “You’re presumed to be a professional if your writing makes a profit in at least three of the past five years, including the current year.” Cathy Boring is a Registered Tax Return Preparer (and a former Enrolled Agent), a member of the National Association of Tax Professionals, and has experience handling tax work for independent self-published authors. If you’re considered a pro, you may be allowed to deduct certain business-related expenses from your income.
But she cautions, “If you can’t prove yourself to be a pro, those expenses may not be deductible, and you may have to pay taxes on your writing income.”
As with many complex legal and financial matters, the answer is: It depends.
“First of all,” Boring points out, “you are required to report all of your sources of income no matter what the source. If that income is over $400 you may be required to pay self-employment tax.” That income might include book royalties, fees for speaking or writing for publications, and payment for writing a brochure for a local retailer.
So, if you’re a professional writer with more than $400 in income in a year, what are the potential expenses you might be able to claim as deductions?
Boring cites expenses such as your studio or office, “but only if the space is solely dedicated to your profession—not just the kitchen table,” supplies. Computer hardware and software, vehicle expenses (you’ll need a log separating business and personal mileage), fees paid to self-publish and market your book, might also be allowed. Of course, there’s paperwork. If you’ve paid a self-publisher or freelancer more than $600 in a year, you may have to send them a 1099-form and file it with your tax return to show the payment.
Complicated for the average person? Boring agrees. “Some of the tax laws do not translate easily into English,” she says ruefully. “If you an author and you’re making a few bucks and you want to keep it a hobby, follow the rules and file. But if you want to make it business, you have to take everything to a whole new level.”
The first step is to retain a tax advisor. They range from CPA firms to small independents like Boring. Establish a fee structure and scope of work that meets your needs. Explain your tax strategy and heed their advice.
That might include saving virtually all receipts either on paper or digitally (your tax advisor will tell you if they are deductible), keeping a mileage log, maintaining your home office, keeping travel expenses (there are clear rules), and having a separate credit and bank account for your writing business.
Some people think that buying dinner for an interviewee is an expense. Not so, says Boring. “The old deduction for meals and entertainment went away. But meals that relate to your profession may be deductible at 50% as long as the event has a clear business purpose. What I generally do is write the name of the person I had the meal with, and what we discussed. Now some events may be 100% deductible if you are providing entertainment or recreational facilities as a means of advertising or promoting your book.” Again, check with your tax advisor.”
Another, often overlooked, expense is advertising and marketing purchased to promote your book. Boring lists media advertising, third party fees for marketing, bookmarks, business cards, T-shirts, hats and anything that you buy to help sell your work. One author, promoting her book where one of the characters was a moonshiner, took minis of moonshine to book club speaking engagements. “It’s advertising and it’s deductible,” Boring concludes.
Buying a new computer? Printer? They might be entirely deductible in this tax year. Check with your tax advisor.
Many professional independent authors have an attic full of old file boxes with receipts and other tax papers. Boring recommends keeping them for seven years. The IRS can go back several years and recalculate your tax payable. Keeping the records may help your cause.
Another good point: Don’t assume that your hobby won’t explode into a profession this year. Run a business-like operation so that if the big bang happens, you’re in good shape to greet the IRS.
As for those ‘loopholes,’ Boring prefers to call them ‘legitimate business expenses.’ And that’s what professional independent self-published authors need to embrace to save money on their taxes. Check with your tax advisor.
Registered Tax Return Preparer Cathy Boring (shown with her husband, Jack) is a resident of The Villages, Florida.