Do You Have a Writing Hobby or a Writing Business?
I. Taxes
I’m not versed in tax law. I only pay them. This section will focus only on how best to handle your dealings with the government. Specific tax strategies should be taken up by a qualified professional.
Are you a writer or someone who plays around with creating stories?
The answer may not matter to you, but it does to your family, your friends, your future financial health, and to the IRS. Particularly the IRS.
As you set up your business, you need to compile records that you’re running it like a business and not a writing hobby. This is an important distinction to the IRS.
A business is something you devote money and time to on a regular basis, with the intention of earning money from it eventually.
A hobby is an indulgence, a pleasure, a plaything, a way to pass the time and express your creativity without the intention of making a profit.
The IRS cares about you only when the fruit of your labors creates income or expenses that you declare on your tax return. If you treat the money as part of a business — if you declare your losses as part of a business — then the IRS could audit you to seek proof that you are, indeed, operating a business.
If you do that, you should make sure that you have in place a plan to prove that you are operating a business.
IMPORTANT NOTE: Don’t be afraid of the IRS. If you respect them, take them seriously, follow their rules, and don’t take shortcuts or resolve to explore uncharted frontiers in tax law, you should be fine.*
* Just remember that I’m not a tax attorney. Always consult with your adviser before you do anything with your financials.
What Becomes a Business Most?
Here’s what you need.
1. Regular Recordkeeping
Basically, any records can be used to back up your claim that you are working regularly on creating and marketing your writing. It could be a calendar on which you keep track of your projects. It could be a notebook with a page devoted to each day, recording what you did as part of the business. It could be a database of your story submissions, rejections, and sales.
Another important thing to record is anything you’ve done to learn how to run a successful publishing business. Classes in advertising, courses in writing ad copy, consultations with book cover designers, hiring a website designer: This will show the IRS that you’re running a business.
So there is no one set of records you have to keep but a lot of different things. For example, I have a notebook in which I keep track of each day’s work. I also have a big year-long calendar on the wall showing my business appointments. I have my books which show how many I publish each year. I have files, images, printouts, and photographs which show how much work I’ve put into each book.
Fortunately, the IRS is open about the standards you need to meet. Search online for “IRS business hobby deductions” to get the latest information. For example, in guidelines published in 2007, the IRS asks these questions:
• Does the time and effort put into the activity indicate an intention to make a profit?
• Does the taxpayer depend on income from the activity?
• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
There is another rule to keep in mind. If you’ve been in business for more than five years, the IRS will look at whether you made a profit. Doing so in three of those years supports your case that you’re running a business.
More Clues
Here are other ways you can support your claim that you’re building a business:
1. Keep regular track of your income, expenses, and sales.
2. Keep track of your business-related phone calls.
3. Advertise your books.
4. Attend classes to improve your skills.
5. Keep a checking account solely for use of the business.
6. Draw up plans to expand your business, such as a book production schedule.
Another possible area to slip up is in not keeping track of mileage for conventions and author appearances. The IRS allows filers to deduct a certain amount per mile of travel for business trips. Keep a record of your travel, listing your mileage, dates, locations, and the purpose of your trips. These have to be kept up throughout the year and they have to be detailed, including the names of people you visited. Again, consult the IRS’s website for particulars.
They Fought the IRS and the IRS Won
Not every deduction passes the IRS sniff test, as we see from these examples:
* For 17 years, an employee for the City of New York worked on his writing in his off hours. The sum total of his work was a single manuscript, which he failed to sell, and a biography of his mother, for which she paid him $700. In his 17th year, his attempt to deduct his office space was audited. When asked if he wrote for profit, he called the question “an insult” because it was obvious that writers write only to make money. The court looked over his collected works and concluded that he wasn’t trying hard enough.
* The wrong way to deduct travel expenses: Fly to Japan to visit your son, and then carry on around the world. Edit your diary into a manuscript and fail to sell it to a publisher. Deduct $6,487 from your income taxes (this was in 1959, by the way). Court cancels their tickets to ride on the taxpayers’ backs.
* Our candidate for the most dedicated researcher goes to Ralph Vitale Jr. who wanted to write a book about Nevada prostitution. Like any conscientious author, he did his research. For two years, he visited Nevada’s finest brothels, taking notes and talking to the girls about their profession. His novel “Searchlight, Nevada” earned him $2,600 in royalties and he claimed nearly $11,000 in deductions, including $3,480 in cash payments to the girls. The court allowed most of his expenses, but harrumphed that paying prostitutes in cash was “inherently personal” and disallowed it.
If you’re sincere in making a career out of writing and selling books and stories, you’re most of the way there to satisfy the IRS. You just need to keep track.