Q.
I am starting to have more success with my writing and am concerned
about what I need to do—tax-wise or business-wise—to call my
writing a business. At what point is my writing actually considered a
business?
A.
It's probably too late to start calling your writing a business for your 2014 tax return, but now is a good time
to start setting up the business and begin keeping records the IRS
requires for 2015. Here are a few of the things you need to know to
get started:
The
IRS will want to know if you are writing as a hobby or you consider
your writing a business—the difference being that you are either
doing it for fun or you have a profit motive. If you are doing it as
a hobby, you can deduct the expenses associated with your writing but
only up to the amount you actually made during the year.
If
you consider it a business, you can deduct most or all of your
expenses, even in excess of your income; but the IRS expects you to
make a profit three out of the first five years. For that reason, you
need to plan your switch to the profit motive when it looks like that
is likely to happen. However, you can get around that three-year
requirement if you can prove you have tried hard to make a profit and
have the evidence to prove it. Such evidence would include keeping
detailed financial records with receipts, submitting regularly, and
having the rejection slips to prove your submissions.
Learn
what the IRS considers legitimate deductions. These include such
things as postage, office supplies, business travel, conference fees,
and office equipment. For some of the trickier deductions, these free
IRS publications help you make those calculations: Publication 535,
Business Expenses; Publication 463, Travel, Entertainment, Gift, and
Car Expenses; and Publication 587, Business Use of Your Home.
Some
possible deductions have certain limitations on them, so checking out
these IRS publications is important. For example, some of the larger
deductions are allowed only if you make enough income to cover them.
As a self-employed writer, you may also be eligible to deduct a part
of your health insurance costs, as long as you are not eligible for
health coverage through your regular employer or that of your spouse.
One
of the more difficult deductions to claim is a home office. This is
one you will have to hold off on until your business is well
underway, and then you will need to carefully check out the
guidelines and restrictions for making such a deduction.
All
of the above are federal laws. State and local laws vary from state
to state, so check the laws for your city and state. Some states will
require a business license, payment of state taxes, etc.
By
the time your business is in full swing and you are making
significant income, you may want to hire an accountant to do your tax
returns. Just keep in mind that every accountant may not be familiar
with the tax laws as they relate to writing, so it helps if you can
find one who does tax returns for other writers.