Thousands of dollars in taxes can often ride on a single question: is a writer a professional or an amateur?Whether you are a novelist, blogger, freelance journalist, poet, technical writer, copywriter or non-fiction writer, if you earn your living by writing copy on spec or on assignment, how your craft is defined by the tax authorities makes a big difference.
Amateurs or hobbyists – writers who keep a journal to help them make sense of life, for instance, or those who write fan-fiction that is not intended to earn money – are not entitled to tax deductions for the costs incurred in their writing.
Professional writers – those who support themselves and their families in whole or in part from the income earned from their writing, or hope to do so within a few years – can deduct the costs they incur while creating their work. At first glance, it might seem like an easy question to answer.
However, even the most professional writer knows that writing is one craft where more than a small portion of every writer’s time is spent in activities that are without payment. And, as with so much else in the tax code, there are some surprising twists in the rules about when writers qualify for tax deductions, especially in state and IRS rules on tax deductions.
A new white paper from 1800Accountant.com is filled with practical tips to help writers keep more of the money they earn by claiming legitimate tax deductions and satisfying the IRS and state tax authorities about their status through good recordkeeping. The white paper has tips for:
- Freelance copywriters
- Independent Journalists
It’s called Taxing Questions: What Makes a Writer or Blogger a Professional? The document includes sections on:
- What Makes a Writer a Professional?
- Defining a Professional Writer
- What if I Fail the Profit Test?
- Manage Your Writing Like a Business
- Consider Incorporation
- Why Tax Deductions Matter
- 5 Tax Rules Professional Writers Can’t Afford to Ignore
- Additional Tax Deductions for Professional Writers
- Additional Tax Deductions for Professional Bloggers
The new white paper is now available for free download on the Resources page of the 1800Accountant.com website. There’s a companion document for graphic artists, performers (actors, dancers, singers, musicians) and other creative freelancers as well.
No matter how successful or unsuccessful you are as a writer, or how many tax deductions you are claiming, here are five tax rules that no writer can afford to ignore. Not following the rules can result in serious and costly penalties.
Report Every Penny of Income
First, don’t fail to report all of your income. Don’t overlook (or discard) a single Form 1099, K-1, or other payment you receive for your writing, no matter how small.
This seems obvious, but more than one writer who received a K-1 (royalty income statement) looked at it and ignored it or threw it out when they saw a royalty payment for a very small amount. Don’t make that mistake.
Even a few pennies in royalty income must be claimed on your income tax statement – and the publisher paying royalties is required to report every K-1 to the IRS. It’s the same for any income reported on a Form 1099.
Payments made to a blog through PayPal or another online payment service, and money you earn selling works online through services like Lulu or The Fiction Store must be reported as income even if you do not receive a form 1099 or K-1.
Take Care With Deductions
Don’t get greedy with tax deductions. If you make a non-cash tax deduction to a 501(c) (3) tax-exempt organization, scrupulously follow the rules, and file a Form 8283.
It’s perfectly legitimate for an author to donate books to charities, and many writers do so. But don’t get too greedy with valuations, and expect scrutiny, especially on big numbers. Deduct your actual cost for the books you purchase from your publisher – not the full retail price for the books if you paid a discounted price. And don’t try to deduct the cost of advance reader copies (ARCs) or other free copies you receive.
You can’t deduct the value of your time if you volunteer to write copy for a non-profit, so don’t try to offset income by trying.
Don’t Confuse Capital Gains & Ordinary Income
There are two types of taxable income: ordinary and capital gains. Typically, income you produce through writing is ordinary income. Some writers are under the impression that manuscripts and copyrights are capital assets, and therefore that royalties or the sale of ancillary rights such as motion picture rights should be taxed at the capital gains rate. This can be a costly myth for anyone who tries reporting income at the lower capital gains rate.
The tax law specifically excludes copyrights, artistic and literary material held by the taxpayer who created it from qualifying for capital gains treatment. Therefore, royalties from your publisher are considered “ordinary” income, as are grants, prizes, and awards.
Don’t Deduct for Non-Payment
Writers can’t deduct for non-payment. Most writers will someday sell a story or an article to a publisher that goes out of business or simply doesn’t pay. A common misunderstanding in writing circles is that this is a bad debt, for which the writer can take a tax deduction. That isn’t true for most writers who are cash method taxpayers (That is, they don’t report the income until they receive payment.)
Don’t Forget Depreciation Rules
Don’t deduct costs that must be depreciated. Some expenses – such as computer hardware and software, office furnishings, and other tangible assets – decline in value each year. Therefore, instead of deducting 100% of the cost in the year that the item is purchased, taxpayers should deduct a percentage of the cost of the depreciating asset in each year. Talk to your tax advisor about how depreciation works, or reach the IRS fact sheet on depreciation.
Don’t get too excited if you read the IRS depreciation fact sheet and notice that copyrights and other intangible property can be depreciated and taken as tax deductions. This applies to businesses and individuals who buy copyrights from others – not to the creator of the work protected by copyright. As with the capital gains rule, tax law specifically excludes copyrights, artistic and literary material held by the taxpayer who created it from qualifying. So if you buy a copyright from someone else, it can be depreciated. Copyrights for your own work can’t be depreciated.
Read the complete checklist of tax deductions for writers, bloggers, and journalists by downloading the white paper now. The companion white paper for other creative freelancers is available at this link, and a tax checklist for anyone who works as an independent contractor (with earnings reported on a Form 1099) is available at this link. All three of the white papers are available for free download, and contain practical tips and advice that can help freelancers, independent contractors, and the owners of small creative businesses keep more of the money they earn by paying less in taxes.
Photo credit: The photograph of the hands on the keyboard is by photographer Dee Lee. This photo is published under a Creative Commons License from Flickr.
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