I put this together for my writer friends from a presentation I did for the Authors Guild of Tennessee last week. I cleaned it up a bit, but it’s basically the speech I made, with the addition of links here for you. The last time I did a blog on taxes was January 2018, so I’m overdue!
[[It’s helpful to follow along with a 1040, a Schedule 1 and
a Schedule C.
https://www.irs.gov/pub/irs-pdf/f1040.pdf
https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
https://www.irs.gov/pub/irs-pdf/i1040sc.pdf
And this one, for home office deductions.
https://www.irs.gov/pub/irs-pdf/f8829.pdf
https://www.irs.gov/pub/irs-pdf/i8829.pdf
]]
I hope I can help you start off the new year right. We hope
a lot of things are different this year! But taxes—we have to do those every
year.
First of all, are you taking business deductions for your
writing business?
Show of hands. (Only 3 in the room were filing taxes for
their writing business!)
Let’s start by squashing the misconception, which is
sometimes even believed by tax professionals, that writers can only report a
loss and deduct expenses for 3 years, under the hobby law. Section 183 of the tax code lays out the “Hobby Loss”
exemption. This says that you cannot deduct expenses for side activities,
hobbies.
However, such people as visual
artists, musicians, writers, and dancers are exempt IF they can prove to
the IRS that they making serious attempts to earn a profit in the future, if
they’re not making one now. Good records
are a must. Keep track of all of your time and expenses. For us, it’s an
indefinite period, as long as you’re trying and you can prove it. The IRS
recognizes that it can take years to turn a profit doing these things.
https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business
https://arts4nh.org/arts4nh-blog/profession-or-mere-hobby-dont-let-the-irs-decide
https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses
This is not easy information to find! I have to look for it
every year that I do a tax presentation or blog post.
Here’s what you must do, detailed in those links:
You must generally consider these factors in determining
whether an activity is a business engaged in making a profit:
Whether you carry on the activity in a businesslike manner
and maintain complete and accurate books and records.
Whether you have personal motives in carrying on the
activity.
Whether the time and effort you put into the activity
indicate you intend to make it profitable.
Whether you depend on income from the activity for your
livelihood.
Whether your losses are due to circumstances beyond your
control (or are normal in the startup phase of your type of business).
Whether you or your advisors have the knowledge needed to
carry on the activity as a successful business.
Whether you were successful in making a profit in similar
activities in the past.
Whether the activity makes a profit in some years and how
much profit it makes.
Whether you can expect to make a future profit from the
appreciation of the assets used in the activity.
You may find more information on this topic in section 1.183-2(b) of the Federal Tax
Regulations.
This year, you can file from
January 24-April 18. Although you probably won’t have all of your income
forms until later than that. 1099s don’t
have to be out until Jan 31.
OK, we’ve established that you CAN take a loss and deduct it
from you income for your taxes. Now, what do you use for filing taxes as a
writer? It’s a form 1040, schedule C.
You’re trucking along
doing your 1040, either by yourself, or with software, and you end up with
line 15, your taxable income. Just above there, though, is line 8, which takes the figure from Sched 1, line 10. Sched 1,
line 3, is the one we like. That’s the figure from Sched C.
Now that we’ve gotten that tacked down, let’s talk about
that Sched C.
The Schedule C form can be found here:
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
Detailed instructions are at:
https://www.irs.gov/pub/irs-pdf/i1040sc.pdf
How many of you are
familiar with this form? How many of you file it each year?
You can do taxes several ways. You can do it all by
yourself, following the directions. You can use software such as Turbo Tax or
H&R Block. And you can have someone prepare your taxes.
This is when you need
to make sure the hobby rule isn’t used against you. Many tax professionals get
this wrong.
If you’re not claiming expense for writing and if you want
to, I’ll go over some of the line items. I’m using the lines that were from
last year. They may change a bit this year.
At the top, the proprietor is you, and your SSN goes beside
that.
A Principal
business. This will involve entering a code.
I use “writer” ad my profession, “Arts, Entertainment,
Recreation” as the business category and
B I use 711510 as the
code.
C I use my pen
name as my business name. My bank account is in that name as a DBA.
But if you don’t have a pen name, you can leave this blank.
If you have a name for your self-publishing business, I would use that.
D is your EIN. If
you’ve established a DBA, you’ll have gotten in EIN for the IRS.
F I use “cash” as
my accounting method. It’s the easiest to use for a simple business.
G Always say YES
you participated materially.
H This is where
you tell them it’s a brand new business, or that you paid anyone with a 1099. I
think that’s unlikely, unless you do have employees.
PART 1 is your
income
#1 Add up
everything you made and put that here.
I doubt you took returns,
but if you did, that goes in this section.
You will probably have “cost
of goods sold”. That’s what it cost you to make your books. That is
calculated below, in Part III, and
we’ll get to that.
PART II
Now we’re ready for the fun stuff, the expenses!
This is where you chop off the money you would owe without
doing this.
Advertising is straight forward. Everything you spent on PR.
Bookmarks, mailing out books to reviewers, online ads, etc. (Mailing can be
here or under postage—doesn’t matter, just be consistent from year to year.)
At the beginning of the C instructions, they tell you what’s
new for this year.
The first thing mentioned is almost always the mileage rate,
since that changes every year. For 2021, it’s 56 cents a mile, a decrease from
last year. To use this deduction, you have to know what your mileage is, of
course. I hope you’ve all kept track of the miles you drive to this meeting,
miles to buy paper and toner and supplies. Also miles to business meetings,
lunches, and dinners—which aren’t very many for last year, I’ll bet.
There is a worksheet
for line 9, car and truck expenses. If you didn’t keep track, it would be a
good idea to estimate them. You have to know what your total mileage for the
year was, to deduct car expenses. You can use the standard, or actual car
expenses, but your amount will be a portion, depending on the total miles
divided by the miles for business. If you don’t know your mileage on January 1st
of 2020 and 2021, you can estimate it. You
count mileage, parking fees, and tolls.
OK, that’s line 9,
mileage and car stuff.
I put my dues paid to the organizations I belong to on line 10.
My only other expense for 2020 was office expense, line 18
I put paper, toner, pencils, that sort of thing here.
Where you put the expenses isn’t as important as being
consistent from year to year. If you count postage as an office expense, always
put it there. If you put it under advertising, then keep putting it there.
Line 24, travel and meals
A is travel, b is
meals
A The best
deductions, for me, are conferences. That money adds up! Hotel, plane,
conference registration, sometimes promo material that I bring to give away. I
lament that there haven’t been any of these for the last two years. I’m hoping
that will change now.
B meals They have
always been deducted at 50% of the actual figure. However, there’s a change
this time. Restaurant business meals are
100%! I’ve never seen this before. That applies to “food and beverages
provided by a restaurant and paid for or incurred after December 31, 2020, and
before January 1, 2023. So all of last year.
Then we get to line
30, use of the home
I take the standard for this, doing it the simple way. You
enter the square footage of your house and the square footage of the office,
and there’s a standard deduction for normal utilities and house expense. There
is a limit of 300 sq ft for the home office. Use form 8829 for this. You add up all of your items, mortgage
interest, real estate taxes, insurance, rent, repairs and maintenance,
utilities, etc. And deduct the percentage belonging to your office space.
Once you use the simplified method, you are locked into it.
So, at the bottom of Sched
C, on line 31, you get your profit or loss.
That goes on Line 3,
of 1040 sched 1, contributing to line 10, which goes on line 8 of the 1040.
There are a few
things mentioned here for 2022:
When you buy new
equipment, electronics of office furniture, you can deduct those all at
once or depreciate them with section 179. I never depreciate these things
myself, just charge them in the year I purchase them.
Pub 946 has some details on this.
https://www.irs.gov/publications/p946
This says that, “For tax years beginning in 2021, the
maximum section 179 expense deduction is $1,050,000.” There is also information
on depreciating your race horses.
You can subscribe to tax tips:
https://www.irs.gov/newsroom/subscribe-to-irs-tax-tips
But be warned that
you’ll get lots of them, every day!
I hope this helps my writer friends who are new to this.
Good luck!
Other links that may be useful, or may not be
https://www.irs.gov/publications/p946
https://www.irs.gov/faqs/small-business-self-employed-other-business/income-expenses/income-expenses
https://arts4nh.org/arts4nh-blog/profession-or-mere-hobby-dont-let-the-irs-decide
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
https://www.irs.gov/pub/irs-pdf/i1040sc.pdf
royalties
https://www.irs.gov/forms-pubs/about-publication-525
http://travelswithkaye.blogspot.com/2018/02/taxes-for-writers.html
Website expenses, including site fees, artistic services, and annual costs for keeping domain names, are also deductible under Advertising.
ReplyDeleteGreat information, Kaye!
I would just add that a program such a Quicken will allow you to download your various credit card and bank statements, which helps loads in keeping track. Once a category is assigned--say, charges to the Post Office, or royalty income--the program will automatically suggest it forever.
And monthly and/or year-end reports help to see where you are in terms of income and expenses. This is especially helpful for self-employed individuals who have to make quarterly income tax payments, and for those who want to make periodic deposits to retirement accounts. (Which also reduces the tax burden.)
Thanks for adding all of this, Karen. There's a ton more detail I could have added, but I was trying, and failing, to keep it shortish. :)
DeleteI don't put site fees under Advertising, but you could. The important thing is to keep doing it the same way so there aren't big category jumps, IMO. I like to keep my own spreadsheets, but Quicken is good for some folks. I didn't get into quarterly taxes, which I do. For me, that's a holdover from when I was incorporated. Another thing that, once you start, you need to keep going with.
Good luck to all of us for tax season!
Excellent, Kaye, and most helpful that you included links where people can do some research--which they should! I've already checked them out as I'm getting ready for filing.
ReplyDeleteI'm so glad you find this helpful, Claire!
Delete