Throughout my career as a writer, every expense was a tax deduction (a business expense). Initially I had full-time employment elsewhere, later my writing became a full-time endeavor. I will explain what I did, how I did it, and how I remained legal. Keep in mind that claiming your writing expenses as a tax deduction comes under the purview of the Internal Revenue Service. Additionally, both state and local regulations may also apply. Appropriate resources are listed at the end of this article.
Having writing expenses as a tax deduction is not a complex matter. To be safe, a writer should understand applicable IRS rules that regulate what you want to do. One must also be very adept at record keeping as that fact often separates winners from losers when justifying what you do to the federal government. To me, the biggest part of claiming your costs as a writer as a tax/business deduction is to be honest. Scheming to declare your writing expenses as a business deduction when they are not, is just looking for trouble. Additionally, defending your business practices can be time consuming and expensive.
Here are some fast IRS rules. To claim your writing costs as a business expense, then obviously, one must have a business. It can be full-time or part-time. A business should be designed to earn a profit (i.e., not a hobby). A business must be created to operate in a manner to make money. Now there is no federal law requiring any business to be profitable, but the assumption is that the owner is doing everything possible to be profitable. For many businesses, the path to making money may take years. For example, USA Today took almost five years to find income exceeding expenses.
What is an acceptable expense? The IRS says ordinary and necessary. Ordinary means common to managing the business. If one makes shoes, purchasing leather is an ordinary expense. Necessary refers to the cost of something that is helpful or appropriate to run the business. If one delivers fuel to gas stations, having a tanker truck is necessary. Being necessary does not mandate it to be indispensable or requisite for the business. An example is a business has a shaded patio outside the office. This is not directly related to what the business does. But indirectly it can be a business expense as it provides a safe place for employees to eat lunch and keeps them out of the hot sun while taking a break outside.
What constitutes a business? For tax purposes there are several forms such as a sole proprietorship (you are the only owner), partnership, and distinct types of corporations. For me, I was always a sole proprietor, requiring me only to say, I am in business (although state and municipal laws may have their own regulations to follow). If protection of personal assets is a concern, consider a Limited Liability Company (LLC). The structure of an LLC is governed by state statutes. As a writer, one should consider the liability assumed from your writing efforts and what you are worth. The greater your net worth, the greater the personal risk may be.
My net worth is substantial. My writings (publications) are not of a nature that someone will sue me. As a nonfiction writer I deal in facts. What I state in print is backed by proof, so I am not concerned in being sued for saying something out of school. Yet I also carry writer’s liability insurance, so I am protected. My form of business is as a sole proprietor.
My writing career began because I read an article in a firearms magazine I did not agree with. I wrote a letter to the editor voicing my opposition and was invited to write an article defining my position. I did that and was paid a lot of money. Thus began my writing profession.
Soon thereafter I also began writing for other periodicals. Since I had no employees and my job paid my Social Security contributions, bookkeeping was easy. If you do not have other sources of income than you must pay your own Social Security contributions, income tax withholding, and any other taxes or fees necessary (typically paid by an employer).
I keep a file on every article or book written. Another file on income earned and a third file on expenses. These files can become tricky as the IRS may change what can qualify as a tax-deductible expense. As a writer though, the expenses are easy to justify. Usually, they are costs associated with writing such as computer upkeep, programs, maintenance, ink and paper, postage, copy costs, Internet costs, phone charges, research, other people paid such as a typist, books, magazines, memberships, travel expenses, publishing and marketing costs, and the list continues.
The calculations of expenses, depreciation, etc. can be complex. That is why I always use an accounting firm and a CPA to do my taxes. Three times I have been audited. All three times were triggered by administrative errors, none because of tax reports filed by me. The second time the IRS demanded a full examination of my last two years in the Army. For this audit, my wife and I (with our records) spent 8 hours a day for 5 days being scrutinized at a nearby IRS office. This consisted of us justifying all claims cited and then proof of it being displayed. When it came to my plane (I was a pilot and owned a plane which I had flown on Army business), the examiner noted all my claimed expenses and asked what flying I did. When I explained I flew for the Army in my own plane she then asked, “Did the Army require you to own a plane to fly for them?” I replied no, explaining, “The Army does not require me to own Amtrac, American Airlines, or Greyhound, it just orders me to go somewhere on Army business, how I get there is my business.” She asked if I had copies of those orders, which I showed her. All indicated travel by private air authorized. That ended any further inquiry into the plane as a deduction by the IRS. When I retired from the Army, I became a free-lance aviation writer, so my plane became a business expense. Therefore deductible.
The audit took a week, and we owed the IRS $40 (for a mistake by the accounting firm regarding expenses on an apartment building we owned and managed). The examiner commented on the preciseness and accuracy of all our files. The audit of the second year was cancelled and I was never audited again for any reasons by the IRS. The lesson learned is that the accuracy and depth of files backing all claims is extremely important. I cannot emphasize that enough. A word of caution, not everyone should represent themselves before the IRS. Often your CPA or a tax attorney will do a better job of convincing the IRS your business as a writer is legitimate.
Some words of caution, using an accountant familiar with the business taxation and IRS regs governing such usage can be vital, as opposed to doing your own taxes. Also keep in mind that every year the IRS Code may have changes that impact you.
All my writing business was created to make extra money (which it did) in enterprises which I enjoyed (such as aviation, firearms, military, business, travel, motorcycles, etc.) and the tax returns were honest. I maintained extensive files on every transaction involving my work. I possessed incontrovertible evidence to support every claim presented in my returns. This is the honest part.
Since I was always a sole proprietorship, all business taxes were filed, using a Schedule C as part of my personal tax return. Another suggestion: the IRS provides ample resources on how to create and manage a small business. But more information may be found through various writing-related associations, or the Small Business Administration national network of organizations created to help small businesses such as SCORE (Service Corps of Retired Executives) and SBDC (Small Business Development Centers), and of course writing membership organizations.
So how does one create a writing business? First, you must write and attempt to sell what you write. Do you have to make money on your writing to be a legitimate business? No, but you must show you are making an honest attempt to do so. Is that hard to do? No. All you must prove is that you are doing everything to make a dollar.
To be in a writing business, one must write and try to sell what they write. Note I said “try,” not have to. There is no IRS regulation stating a business must make a profit, an honest attempt suffices. You write and send off inquiry letters to book publishers or magazine editors and just receive rejections. Keeping the rejection letters is proof of trying to sell what you write.
Another thought is to offer what you write to magazines, etc. for free, just to get published. Now you can show in your query letters, you are a published writer. Suppose you have authored a book and you have a contract with a publishing house. It has taken you two years to produce your book and your costs for an editor (for your manuscript) and computer, etc. add up to $3500. And your royalty amounts to $1.00 per book sold. Assume the first year 70 books are sold for an income of $70 against the expense (deduction) of $3500. Can you claim this? Yes.
If you self-publish, keep meticulous records of all costs and income. Also keep in mind that your state may require you to collect a sales (or gross receipts) tax on all books sold. You may need to establish an account with the state taxation department. Additionally, where you live (or sell your books) may require you obtain a business license.
If you want to write as a business but have no knowledge of how to create or establish contact your local SCORE or Small Business Development Center (Las Cruces has both), schedule an appointment and visit a business counselor for accurate advice on what you need to do to start your business as a writer. Your CPA should also be able to help you.
Better yet, attend this seminar hosted by the Las Cruces Writers on writing as a business.
Suggested references for a writer wanting to be a business.
All are available on the Internet.
IRS Publication 334 Tax Guide for Small Businesses
IRS Publication 463 Travel, Entertainment, Gift, and Car Expenses
IRS Publication 535 Business Expenses
IRS Publication 583 Business Start-up
https://www.irs.gov/businesses/small-buisnesses-self-employed/audit-techniques-guides-atgs This is a guide for IRS examiners to use during an audit to insure the business owner has proper documentation to support compliance with IRS rules and regulations. A helpful guide for business and tax planning.
Outline for writing as a business seminar
I. IRS guidelines on operating a business.
II. Selecting a business form: pros and cons.
a. sole proprietor
d. limited liability corporation
e. business plan
III. Home office vs out of home office.
a. pros and cons
b. getting started
IV. What type of writing.
a. fiction or nonfiction or poetry
b. books, magazines
c. writing for free
d. resources needed
e. market research
IV. Records needed.
c. proof of attempts to make money
V. Keeping it legal.
a. business license
b. GRT account
c. separate business checking and credit card account
d. housing or zoning restrictions
e. promotions (press releases, social media, other)
f. legal protection (copyrights and insurance and proof of facts)
g. signed releases (other options)
VI. Questions and Answers