Friday, June 10, 2011

Money & Writing II: The big tax debate - WHEN

Don't ya just love taxes??  I know... dumb question... of COURSE you do! *wink*

The million dollar tax questions many unpubbed/newly pubbed writers ask are these:

When can I start writing off my writing expenses on my taxes?


What expenses can I write off?

While I'm no expert (my expertise is more in the payroll side of taxes vs the reporting side), I can give you a few clues and point you in the right direction!

The When (I'll talk about the what in my next post...)

As a very general rule of thumb, you can write off expenses when your writing turns from hobby to business.

WHEN that occurs is subject to a LOT of subjection!

It doesn't necessarily have to be when you are "making money" from your writing. This is when you are spending money to try to "make" money. Many writer's spend years writing their first novel, or for four novels, before they actively start trying to make money from them. So it's kinda hard sometimes to know when you've flipped over from hobby to side-job.

Questions to ask:

Do you have an agent?
Is an editor seriously considering publishing your work?
Are you writing articles and getting payments (even small) for them?
Are you actively writing on a continuous basis, not just when you "feel" like it, and tracking your hours?

If you answered yes to most of these questions (not just one...), then you might have a "business."

But then again, you might not.

The thing about taxes is this: It's not really black and white. Not this particular issue anyway. There are many things left up to interpretation, and an auditor could side either way.

So beware, if you claim your expenses as business expenses and write them off with no income associated to them, this may raise a red flag with the IRS. If this is your situation, I'd HIGHLY recommend consulting with a tax professional when filing your return, especially if taxes make you a wee bit nervous!

The other note is that you can only file a return writing off expenses with no income for a short period of time (I believe 3 out of a 5 year period...). On one hand, if you are spending a lot of money THIS year, and see the fruits of your labor NEXT year, it would stink not to be able to write off those expenses. On the other hand... writing them off TOO early might be to your detriment too (see note about IRS red flag earlier.)

Have I mentioned how much I love taxes? *grin*

Regardless of if you think you can write off your expenses yet... start tracking them NOW! Get a system down, track your hours (good proof that you are spending dedicated time on a regular basis... points to more of a business vs hobby) and keep your receipts.

You'll be much more prepared for when you DO start rolling in the dough. (Here's to dreaming!)

Discussion: Have you started to track your expenses yet? Don't you just LOVE taxes??


Katie Ganshert said...

Since I'm making money this year, I'm saving receipts. I'm supposed to file taxes quarterly, I think.....right? I need to check in with my agent. Make sure I'm doing this right!

patti.mallett_pp said...

Thanks for this post. It's something I have frequently wondered about.

Keli Gwyn said...

I talked about this with our CPA when I first started writing. He said as long as I wasn't a hobbyist but was writing with the goal of publication, I could deduct my expenses even though my income was minimal. (A few articles paid for and a few monetary contest prizes.) He said the IRS realizes it takes time for a new business to begin making money. My CPA used the five-year guideline.

My debut novel sold in the last month of those five years. I was thrilled to tell my CPA the news. Now I have a whole new set of tax considerations, though. They never go away, do they? =)

Faith said...

This is great advice and I always wondered about how it worked. Great post. I don't know if I like taxes or not yet but I'll find out in a couple years!

Krista Phillips said...


You CAN file taxes quarterly. However, you can also just contribute more taxes out of your "paying" jobs to make up for it and not have to do estimated taxes. Personally, if you and your hubby are working full-time jobs, I'd go that route, just make sure you contribute ENOUGH more to cover it. (you change your W-4... you can elect a flat dollar amount extra per pay, which is what I'd recommend.)

*disclaimer* I am NOT a certified tax professional, so even though I give suggestions, you should talk to a tax professional to be sure. However, I am doing contract work myself, so contributing more taxes through regular paychecks is fully what I plan to do, at least for a little while.