Tax Deductions for Writers

by Carol Topp, CPA

“Can I take a tax deduction for my car, a writers conference, the books I read, etc.?”

Writers frequently ask me questions about what they can deduct on their tax returns. Like all Americans, they wish to legally reduce their tax burden every way they can. There are several ordinary expenses that a writer use to reduce their taxes.

• Advertising and promotional costs including your website, ads, bookmarks, and business cards that serve as advertisements.
• Commission and fees. If you have an agent who is paid a commission, record it here. Additionally, some authors prefer to put their Paypal or shopping cart fees from book sales in this category. Alternatively, the IRS also allows merchant fees to be included in cost of goods sold. Some authors prefer merchant fees to be visible so they know what they are spending on merchant fees.
• Car expenses. Use a mileage log or a calendar to record trips with a business purpose. The IRS requires the records be kept contemporaneously, meaning you should not rely on your memory. Estimates are not allowed; there must be actual mileage records. The IRS sets the per mile rate and adjusts it annually. For example in 2011 the mileage rate for business miles was $.51/mile for January through June and $.55/mile from the latter half of the year.
• Contract labor for your editor, graphic designer, or anyone you hire as an independent contractor.
• Depreciation applies to purchases of computers, furniture or equipment that will last longer than a year. Depreciation is an accounting term meaning that the value of the equipment is deducted on the tax return over several years. A Section 179 expense means that the full cost of the equipment is deducted in the year it was purchased. Your CPA can determine whether you should depreciate your equipment expense or deduct all of it as a Section 179 expense. Depreciation calculations can be complex. Give your CPA information on your purchase including the cost and the date of purchase and he or she will calculate the correct deduction to use on the tax return.
• Insurance on your inventory or professional liability insurance on your business.
• Legal and professional services to lawyers and accountants. Other professionals are listed under contract labor.
• Office expenses including postage, paper, ink, envelopes, etc.
• Taxes and licenses including sales tax paid to your state from book sales and business or vendor’s licenses.
• Travel, meals, and entertainment for business including writer’s workshops and conferences. Deduct the mileage or car rental cost, lodging and one-half of the meals spent while on a business trip. If you take your spouse or family, only the portion for you, the business owner, is deductible.
• Utilities such as telephone, cell phone and internet service charges. The first phone line into a home is considered a personal expense and not deductible as a business expense. See my caution below about mixing personal and business use of telephones and the internet. Only the business portion is a tax deduction.
• Other Expenses. Some common business expenses for authors to include in this category include:

• Books, magazines, and subscriptions. Any publication that helps your writing and publishing business or used in researching your book is deductible. The cost of this book is a tax deduction.
• Professional organization dues.
• Professional development to make you a better writer including classes, conferences and writers workshops.
• Fees to purchase an ISBN, a Library of Congress Number (LCCN) and bar codes, for your self-published book.

Carol Topp,CPA, author of Business Tips and Taxes for Writers, specializes in tax preparation, small/micro business accounting, and nonprofit accounting. Through her writing, speaking and consulting, Carol converts tax rules and business language into clear, easy-to-understand English for readers. Her website is TaxesForWriters.com.

Should You Incorporate Your Business?

By Carol Topp, CPA

The most common business structure for authors is the sole proprietorship. A more complicated, but potentially beneficial business structure is the corporation. The main benefit of corporate business status is limited liability for the owners. The corporation offers a shield of protection so that the author’s personal assets are protected from business liabilities. Additionally, corporate status may offer some tax benefits for writers and publishers.

Corporations are desirable business structures for authors who form a publishing company, hire employees or do very well financially. (I consider “doing well financially” to mean earning at least $50,000 annually or enough to support your family. Your accountant may define it differently)

There are two types of corporations—S corporations and C corporations. An S corporation is named for a section of the tax code, but I like to think of the S as meaning small. S corporations have a limited number of shareholders (100), so indeed many of them are small corporations, but many times an S corporation has only one shareholder, the owner. On the other hand, C corporations can have an unlimited number of shareholders, are typically run by a board of directors, issue stock and distribute dividends.

S Corporations

If you are considering corporate status for your writing or publishing business, start by learning about S corporations. They may be easier to establish, understand and manage than a C corporation. This is where a tax professional and attorney can be an important asset.

Taxes for S Corporations

S corporations, like partnerships, are “pass through” entities, meaning that all profit or loss is passed to the shareholders and reported on their personal tax returns. An S corporation files a tax return, Form 1120, and each individual shareholder reports their share of income on their own tax returns. The tax preparer for the corporation will issue each shareholder a Form called a K-1 to be used in their individual tax preparation. The tax preparation and record keeping for corporations is quite complicated and expensive.

Sometimes S corporations save on paying taxes, particularly self-employment tax, by taking some of the profit as wages for the owner and some as ordinary income from the business (called “distributions” by the IRS). This is very common with single member S corporation where there are no shareholders. Distributions from an S corporation are not subject to self-employment tax.

Example: Elaine ran her business as a sole proprietorship for many years. Last year she had net income of $50,000. Her tax adviser recommended that she form an S corporation. Elaine determines that she provides services worth $40,000 to her S corporation and takes a salary of $40,000. The remaining portion of $10,000 is from passive income sources and is considered a distribution, not wages. Elaine and the S corporation will pay Social Security and Medicare taxes on only $40,000, not the full $50,000.

When to Consider S Corporation Status

• You wish limited liability to protect your personal assets
• You wish to reduce self-employment taxes because part of your income is from passive sources.
• You can pay yourself reasonable compensation from your businesses
• You are prepared to deal with the legal and financial complexities of a corporation
• You can afford the cost of a business attorney to incorporate your business and a CPA to prepare your payroll and tax preparation.

Need help deciding if S corporate status is right for you? I offer a business and tax consultation service for writers if you do not have a local CPA. Contact me at TaxesForWriters.com

Carol Topp,CPA, author of Business Tips and Taxes for Writers, specializes in tax preparation, small/micro business accounting, and nonprofit accounting. Through her writing, speaking and consulting, Carol converts tax rules and business language into clear, easy-to-understand English for readers. Her website is TaxesForWriters.com.

When to Hire a CPA for Your Writing Business

by Carol Topp, CPA

Some writer-business owners might delay working with an accountant until they think they can afford it, but this can be harmful to a new business. Knowledge that is too little or too late can be very costly.

Linda, an author, was audited by the Internal Revenue Service (IRS) for her self-prepared tax returns going back three years. Unknowingly, she had made several mistakes that any CPA (Certified Public Accountant) would have caught. The audit was an unpleasant and expensive experience and she wished she had used a professional to prepare her tax return three years earlier.

A CPA can help a writer:

• When you receive a letter from the IRS, especially if it involves an audit or something you do not understand.
• When you need help with record keeping.
• When you fear you will owe taxes at the end of the year.
• When you sell books or ebooks and have to collect and pay sales tax.
• At least every 3 years to review a tax return you prepare. The IRS can audit back three years, so hire a CPA to review your self-prepared return at least every 3 years.
• When you purchase equipment for your business and want to take a depreciation expense.
• When you are not sure if you need to pay self employment tax or sales tax.
• Explain the pros and cons of forming a partnership or becoming a corporation.
• Help you take all the deductions to which you are entitled.
• Determine eligibility for the business use of the home deduction.
• Help you prepare 1099MISC reporting for independent contractors you hire such as editors and graphic designers.
• Assist you in preparing payroll taxes and filing payroll reports.

No one is an expert at everything, so focus on what you do best—writing—and leave tax and accounting matters to those who know them best.

Tips on finding a CPA

Seek out an accountant who has the ability teach you the financial side of your business. You should feel comfortable with him or her and be free to ask questions. If you leave a meeting with an accountant feeling confused, you need to find another accountant. To find a helpful professional, ask other small business owners in your area for their accountant’s contact information or call your state CPA society. Find a listing at https://www.taxsites.com/cpa-societies.htm

Carol Topp,CPA, author of Business Tips and Taxes for Writers, specializes in tax preparation, small/micro business accounting, and nonprofit accounting. Through her writing, speaking and consulting, Carol converts tax rules and business language into clear, easy-to-understand English for readers. Her website is TaxesForWriters.com.