Q: Are there special tax breaks for writers?
A: Well, there is no line item on the Form 1040 labeled tax credit for writers (we wish there were!), but there are plenty of tax deductions and situations that writers need to know about such as the business use of the home, deductions for start up expenses, and research expenses.
Q: How does the IRS see authors?
A: The IRS could classify an author as a hobbyist, a sole proprietorship, partnership, or corporation. Or even as a nonprofit organization, in come situations. It depends on the facts and circumstances of each unique situation. My book, Business Tips and Taxes for Writers, covers all these possible business structures and explains the tax implications of each alternative.
Q: What kind of situations are red flags to the IRS?
A: The IRS get suspicious if a business has losses in several consecutive years. They also look for excessive travel or entertainment expenses without any income. There are a few more red flags such as using the incorrect form for reporting royalties or the incorrect line for expenses.
Q: I don’t have any income from my writing yet. Do I still file a tax return for it?
A: A writer with a profit motive can and should file a Schedule C Profit or Loss from Business with their personal Form 1040 and claim their legitimate business expenses. Some writers prefer to accumulate these start up expenses and only file a tax return when the business actually starts earning income. In the first year of a business, the owner can deduct their start up expenses.
Q: I read a lot. Some of the books are to study other writers or my genre. Are the books I read tax deductions?
A: This is a gray area. The books must serve a business purpose to be a tax deduction. Just keep your business deduction for books reasonable and they could probably be justified as business deductions. My book, Business Tips and Taxes for Writers, is definitely a tax-deductible expense!
Q: I like to be around people when writing and usually write at my local coffee shop. Is the mileage to the coffee shop a business deduction?
A: Your choice of location to write is a personal preference and not a necessary business expense, but rather a personal expense. The mileage is not deductible.
Q: I hired a transcriptionist/cover designer/editor. Is it a tax deduction?
A: Yes; you might put the expenses under Contract Labor or Other Expenses on the Schedule C tax form.
Q: What's the bottom line on the home office deduction? Is it an automatic red flag, or is there something in a tax filing that makes it become a red flag?
A: The home office deduction used to be a red flag and excessive home office deduction without corresponding income can look very suspicious. But, now so many people work from home and especially writers, that the deduction is not a red flag any longer. As a matter of fact the IRS created a simplified method for the home office deduction a few years ago. Now it's a flat $5/square foot (maximum $300) that a business owner can deduct. There is no detailed record keeping of the utilities, mortgage payments, etc like in the past.
Q: What’s a tax deduction that most writers don’t know about?
A: Gifts given to business clients or your agent, editor or publicist are deductible. The IRS lets you deduct up to $25 per person per year for business gifts.
Q: Will becoming an LLC reduce my taxes?
A: No. LLC (limited liability company status) is not a tax status, but rather a legal status granted by your state to limit your liability. It is disregarded by the IRS for tax purposes.
Q: I didn't know about a tax deduction last year. Can I include it in this year's tax return?
A: No. You must deduct the expense in the year it occurred. You can go back up to three years and amend a tax return using Form 1040X.
Q: When should a writer hire a Certified Public Accountant (CPA)?
A: Good question! Here's some times a CPA can really help an writer:
• When you receive a letter from IRS, especially if it involves an audit or something you do not understand.
• When you need help with record keeping.
• When you start to make self-employment income of more than $400 a year.
• When you make good money and fear you'll owe taxes at the end of the year. Ask your CPA about “estimated payments” to the IRS and your state.
• When you sell books or ebooks and have to collect and pay sales tax.
• To assist you in preparing payroll taxes and filing payroll reports.
• At least every 3 years to review a tax return you prepare. The IRS can audit back three years, so I recommend getting a CPA to review your self-prepared return at least every 3 years.
• When you purchase equipment for your business and want to take a depreciation expense.
• To understand the pros and cons of forming a partnership or becoming an LLC or a corporation.
• When you are not sure if you need to pay self employment tax or sales tax.
No one is an expert at everything, so I encourage you to focus on what you do best—writing—and leave tax and accounting matters to those who know them best.
Q: How can a writer find a good CPA?
A: Seek out an accountant who has the ability teach you the financial side of your business. You should feel comfortable with him or her and be free to ask questions. If you leave a meeting with an accountant feeling confused, you need to find another accountant. To find a helpful tax professional, ask other small business owners in your area for their accountant’s contact information. Or try Dave Ramsey's Endorsed Local Providers and Quickbooks Proadvisors. A lot of CPAs listed on these sites specialize in small businesses.
Carol Topp, CPA is an author of 12 books and Certified Public Accountant. Her book Business Tips and Taxes for Writers is a quick and easy-to-understand guide for writers, authors and bloggers. Available at Amazon or TaxesForWriters.com.
Authors are writers who don't necessarily understand business, however, Carol Topp, CPA is both. As an author, she appreciates making money from her writing and sharing the important information to save money on taxes and keep careful records for tax time.