Extras: Taxes and Writers – The Basics

Before we begin, allow me to issue this standard disclaimer.  I am a licensed certified public accountant in Ohio.  While I can speak with some authority on federal tax rules for the United States of America, I cannot address taxes of any other country or of any other state.  My purpose is to introduce concepts and inform you of some basic principles.  Any decision you choose to make about your business should be discussed with your own tax professional or attorney who is better suited to know your needs and your history. 

#1  ACT LIKE THIS IS A BUSINESS (and why this is important)

I have assisted many writers with their tax returns.  Some view their writing as a hobby, some view it as a business.  There are some considerable tax implications between these two assumptions and I urge you to understand the difference.

If you write as a hobby, then you can only deduct enough expenses to offset income earned through that hobby.  You cannot generate a loss to offset other forms of income, like a W2 from another position, or a spouse’s W2 if filing a joint return.  If your writing is a business then you can do these things.  Being a business can lead to substantial tax savings.

So let’s look at the nine factors that help determine if your writing is a business.  You don’t have to have all of these, but the more you have – the stronger your case that you are a business.

  • Do you carry on your activities in a business like manner?  Do you maintain a system to keep track of your expenses/income? (We’ll talk about record keeping in another post)  Do you maintain a separate checking account or charge card for business purposes? (I urge you to do so ASAP) 
  • Is the time and effort you put into writing indicative of someone attempting to sell a manuscript for profit? (A good reason to track your writing time) 
  • Do you depend on the income generated by your writing for your livelihood?  
  • Are your losses due to circumstances beyond your control (i.e. the market) and normal in the start-up phase of a writing career?  (FWIW, it took me ten years and several full manuscripts to learn my craft sufficiently to sell one.  Ours is a career loaded with rejection, but as long as you keep trying to improve, trying to establish yourself as a professional writer, a long period of loss is acceptable.) 
  • Have you changed your method of operation in an attempt to be more profitable? (Perhaps you’ve changed genres or shifted from selling to New York to self-publishing or vice-versa). 
  • Do you have, or are you trying to obtain, the knowledge necessary to carry on a profitable writing career? 
  • Have you been successful in making a profit in similar activities in the past? 
  • Have you generated a profit from your writing in prior years, and was the profit sufficient?  

9)  Do you anticipate making a profit on the appreciation of the assets (past manuscripts) generated in your writing endeavors?

There is no requirement in the tax code that a business must make money.  Many don’t.  One has only to witness the high turnaround in restaurants and retail shops to see that this is true.  You need to know and believe you are in business as there are tax accountants who will look at your writing as a hobby and not a business.  In that case I would suggest you write out in-depth answers to the above nine points and present them to your accountant, or find a new accountant who has a working knowledge of the writing industry.