Loose Change

Guest Blog for Loose Change by Karen Woods

When Treva asked me to guest blog here on the subject of US federal income tax for writers, I didn’t hesitate to say ‘yes’. I’ve been around tax issues professionally since my first paying job as a teenager when I wrote machine language computer programs for an Enrolled Agent to use in his tax practice. Let’s just say that was a very long time ago.

Income taxes strike fear in the hearts of many writers. But if you take the time to keep good records and follow a few basic rules, nothing in the tax code should ever inspire terror for any writer. The basic rule in anything having to do with your federal tax return is simple;  never put down anything on your return that you can’t prove.  In case you are audited, you will have to justify each number on your return.

The two things IRS looks for in examining any return are the understatement of income and the overstatement of deductions. 

For most writers, understating income isn’t a problem. Most writers have a problem actually making a living writing. But that’s a subject for another time. 

In the best of all possible worlds, you’ve kept a good set of books and can see your income for the year at a glance. But if you haven’t done that, the next best thing would be for you to have saved your royalty check stubs and so you can reconstruct your income for tax purposes.  However, as a backup position, most publishing houses do send out Form 1099MISC for authors’ royalty income.  But, it’s never a good thing to depend on others for your business records. Keeping good records is a must, if you are to be seen as a business, and not a hobby.  Still, that’s a subject too detailed to explore in one blog entry.

When you receive your 1099MISC from your publisher(s), do double check the form when you receive it. More than once I’ve had an author friend tell me that a 1099MISC received from a publisher was for significantly more or less money than he/she actually was paid during the year. If there is any discrepancy between your records and the Form 1099 received, contact your publisher for clarification. Unless you get a corrected 1099MISC from your publisher, do not report less income than is on the original form you receive. The IRS gets copies of those 1099s from your publisher(s).  

Authors have other kinds of income other than royalties. Don’t forget to report any income you have from book signings, speaking engagements, workshop teaching, etc.

The issue of deductions is complex. But, the overall rule is if an expense is directly related to your business, it’s probably legitimate as a deduction. There are several exceptions to this. First, the cost of clothing you buy to appear in publicity photographs or to wear to events is generally not deductible as a business expense.  There might be a way to take a deduction for costumes you might wear at a convention to promote your books, as an entertainer.  However, that can be tricky. Second, never try to take a deduction for the basic cost of the first telephone line that comes into your home. That’s always a personal expense under IRS regulations.  Still, if you have a second line exclusively for business for your fax machine or a business line, by all means count that expense.  Third, the costs of going to events that you attend to promote your work, provided the events are in the North American area, are deductible if they are generally related to your business. But don’t try to count a trip to Europe to attend the London Book Fair, unless your books are sold in London so there is a direct benefit to your business of your being there. Further, there’s a limitation on the deduction you can take for an event held on a cruise ship. There are serious documentation requirements and several other rules for taking any deduction for a cruise ship event. Fourth, you have to have kept written records of the business use of your automobile if you want to take a deduction for either your actual expenses or business mileage.  Fifth, any equipment or off the shelf computer software you buy can usually be directly expensed under the Section 179 expensing rules. But, if you use the equipment for personal use as well as business use, then the situation isn’t quite so straightforward. There’s substantially more to business deductions than can be discussed in a blog entry.  IRS’s own booklets on the subject total several hundred pages.  

Because IRS’ writings on the subject are so involved,  I’ve digested them down to just what applies to authors and have produced a short book entitled, “It’s Taxing: 2008 US Federal Income Taxation for Authors.”  The book sells for $3.75, priced low to make it affordable to most authors. The book contains a more detailed discussion of business deductions  as well as four worked out examples of very different writing businesses.  The book is available directly from the publisher at http://www.sleepingbeaglebooks.com