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.