This post and my response are from a great LinkedIn group: Authors, Writers Publishers, Editors, and Writing Professionals
There are possible tax advantages to NOT being a business when you publish. As I recall, under the US Tax Code you can write off losses on your writing and take your income as a hobby, which you may do for three years before they insist you start paying as a self-employed person, with stricter rules on deductibles and a sizable SSSE tax as well. Talk to your tax preparer about the ramifications. Unless you had an instant self-published blockbuster on your hands, you may find it easier and cheaper to continue your writing, for tax purposes, as a hobby only.
Sorry, but Peter has it wrong. I’m a CPA and an author.
I should be working on tax returns right now, but I had to correct some errors in Peter’s comment.
The are no tax advantages to declaring your book business a hobby. Hobby income is fully taxable, but the expenses are rarely deductible. Hobby expenses are deducted on Sch A Itemized deductions subject to a 2% of Adjust Gross Income floor, meaning that only the expense above 2% of your AGI are deductible. So if you don’t itemize, you cannot deduct your hobby expenses. If you can’t get over the 2% AGI threshold, you can’t deduct hobby expenses. Yet you’re still supposed to report all the income!! That’s why a hobby business is not a good tax situation.
Hobby losses are not deductible. Only losses from a business are deductible and can offset other income.
Also, you do not have “three years before they insist you start paying as a self employed person” as Peter wrote. Peter is misunderstanding an IRS guideline on when an activity is determined to be a business, not a hobby.
(and by the way if you have self employment income from a business, you pay Self Employment tax from day one, not after three years)
The IRS states (http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions): “The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year.”
That means that if you make a profit, your activity will be deemed a business-which is what you want. If you are not showing a profit for three years, then read the IRS website to see if other factors come into play so that your writing can be treated as a business and not a hobby. You can losses for many years and still be considered a business.
Please folks, get accurate advice. My website will help TaxesForWriters.com. Understand that hobby income is fully taxable and rarely are the expenses deductible. It is usually advantageous to consider your writing as business, not a hobby.
Read the first chapter of my book, Business Tips and Taxes for Writers on “Writing as a Hobby.”
OK, I’m headed back to doing tax returns!
Carol Topp, CPA