Taxes for the Professional Writer

Recap of Donna MacMeans' January Presentation

By Oberon Ingold Wonch, COFW newsletter editor

Donna MacMeans, COFW chapter treasurer and author of Smoke and Mirrors (in the Dream Quest anthology, LTD Books) has been a CPA for over twenty years.  At COFW's January meeting, she addressed important tax concerns for the writer. Her presentation focused on two issues: how to present your writing concern as a true business rather than a hobby and how to report your taxes.  Why do you want your writing to be seen as a business? In a business, Ms. MacMeans pointed out, you are allowed to deduct expenses. You pay taxes on income LESS expenses. A business loss can offset W2 earnings. On the other hand, hobby losses cannot be deducted. You pay taxes on your whole income.

According to Ms. MacMeans, the IRS guideline says an endeavor that makes a profit in three out of five years is a business. In other words, if in a five-year period there are not three years of profit, the IRS could conceivably consider your writing as a hobby. There are ways to maintain your writing is a business and continue to deduct expenses. Ms. MacMeans defined profit as "income over expenses."

Be prepared to demonstrate you are operating as a business by adhering to the following practices.

1. Organize your finances with adequate software such as Quicken. Keep good accounting records (expenses and revenues) by separating your business checking and credit card accounts from your personal ones. If your business finances are mixed with your personal finances, your personal accounting is subject to scrutiny if you are audited. The situation can mushroom into real trouble.

2. Keep track of the hours you spend working (writing).

3. Keep track of the career-advancement actions you take, such as conferences, classes, and the hours you put into them.

4. Keep track of submissions and rejections to show that you are pursuing publication.

5. A true financial need weighs in favor of being a business. If you are independently wealthy, you might have a harder time convincing the IRS your writing is more than a hobby.

In response to an audience question, Ms. MacMeans said volunteer writing (church newsletters, etc.) supports an argument that you are qualified to be in business as a writer.

Ms. MacMeans pointed out that your aggressiveness in claiming deductions is up to you, depending on your willingness to risk an audit. There is a three-year statute of limitation if you are lying about tax deductions, and you will pay a fine if caught. If you are lying about your revenues, the statute of limitation is longer, and you will go to jail.

This is all relative. If you are deducting pennies, the IRS won't come after you. If you are deducting thousands of dollars, however, you can raise a red flag to the IRS. If you can prove you are writing to SELL, then even after three years of no profit, you can continue to deduct reasonable expenses.

Ms. MacMeans does not recommend that writers incorporate themselves.  Ms. MacMeans then led the audience through her photocopies of sample tax forms filled out for a person in business for himself. She suggested that with a software package like Turbotax, writers can do their own taxes without the help of a CPA. The forms included:

1. A 1040 with one-half of the self-employment tax adjusted out of gross income. Ms. MacMeans noted that reducing your adjusted gross income is more desirable than increasing deductions, as it affects Ohio's tax returns as well.

2. A Schedule A of Itemized Deductions on which the home mortgage interest deduction is reduced by the amount deducted as a home office deduction on Form 8829. Regarding charitable contributions, time volunteered to your chapter is not deductible. Books given to an organization (libraries, literary groups, etc.) are considered charitable donations. Keep a record of the date, organization and the fair market value of the books. Books given to an individual, even one in the military, are considered gifts and are not deductible.

3. A Schedule C of Profit or Loss from Business on which subscriptions, books, research, promotion, and website expenses are notated. Ms. MacMeans recommends if you plan to deduct the cost of romance books you buy for market research, then keep records showing how you utilize them. Create a spreadsheet containing all the elements you need to research and record each book along with its examples of these elements. For example, record the line and publisher, how much of a book is dialogue versus narrative, what chapter the first kiss is in, what page the black moment occurs in, how many pages the book is, etc. Also, you can take deductions for automobile mileage (37.5 cents per mile) for miles driven for writing business purposes. If you buy a computer, it's 100% deductible as long as it's used for business. If you use the computer for other than business, calculate the percentage and deduct it.

4. A Form 8829 of Expenses for Business Use of Your Home, used for home office expenses. The home office space you claim does not have to be four walls "it can be one end of a dining table" but it can't be used for anything else. Measure the square footage of the working space, compare it to the square footage of your home, and deduct that percentage from the mortgage. Do the same for utilities and home insurance. Your biggest deductions (interest and taxes) are deductible anyway, so using this form just changes where you deduct the amount on your taxes. However, if you are not making a profit from your business, home office deductions don't do any good.

Ms. MacMeans concluded with a reminder that even self-employed authors should pay themselves with a retirement plan such as a Keough or SEP plan.

This article was first printed in the February issue of Lyrics, the monthly newsletter of the Land of Enchantment Romance Authors (LERA). Sister chapters may use it with appropriate credit.

The following article was first printed in the February issue of Write from the Heart, the monthly newsletter of Central Ohio Fiction Writers, chapter 48. Sister chapters may use it with appropriate credit.