Books aren’t the only thing self-published writers can write. Everything from printer paper to paper clips is a potential tax write-off. The trick is staying on top of expenses and knowing where to draw the line.
In the words of Peter Frank, a partner at CPA firm Cornick, Garber & Sandler, LLP in NYC: “Just because you had a good time doesn’t mean it’s not deductible.”
But before getting excited about potential deductions, the first thing indie authors need to do is get organized.
“Authors have to think of themselves as a business -- you’re a creative artist, but you also need to remember that you’re in a business,” says Robert Pesce, a CPA and partner at Marcum, LLP in New York. “It’s essential to keep good records so you can get your taxes done efficiently and hopefully get the best possible result.”
Have a System
While indie authors need to keep track of what they're spending as it relates to their writing, record-keeping doesn’t have to be onerous.
“There are some easy strategies to accomplish this without going from being a book writer to a bookkeeper,” Pesce says.
First off, keep receipts. Whether indie authors stash them away in a shoebox at the back of a closet or store them digitally with a tool like Quicken doesn’t matter -- just don’t toss anything away prematurely.
“My general rule of thumb is that if you think an expense has something to do with your business and you think you might have some way to deduct it, then keep track of it and ask your accountant about it later,” says Pesce, who makes biennial presentations on tax tips for the Authors Guild and the Association of Textbook Writers. “If you decide on your own that something’s not going to work and you don’t keep a record, then there’s no opportunity to have that discussion later on.”
But indie authors don’t have to do all the heavy lifting yourself. Pesce suggests letting banks and credit card providers do some of the work
“Have one bank account that you use exclusively for your business,” he says. “All the money you collect from the sales of your books, speaking fees, or whatever else you’re doing as a creative person can go into that one account.”
If indie authors make that account the same one they use to pay for all business-related expenses, then a checkbooks effectively tells the history of a business. The same goes for credit cards.
“You probably have three or four credit cards in your pocket right now, so choose one and make that into your business card,” Pesce says. “Every time you use it, you’re declaring that this card is for business only, and then, at the end of the year, you have a nice statement of all your business expenses, which makes life a little easier.”
It’s also vital for indie authors to keep documents and careful records in case they’re hit with the big A -- an audit.
“The decisions you make can be valuable in the form of deductions and you also need an easy way to capture them and document them in the event you’re ever audited,” Pesce says. “Hopefully you’re successful with your writing, but there is a cost of success, and that cost is taxes.”
To Deduct or Not to Deduct?
A good rule of thumb when considering what is and isn’t deductible is this: If an expense is related in some way to the business of writing, you should be able to write it off -- and we’re not just talking about pencils and paper. Of course, there is a line, and the IRS would prefer you didn’t cross it.
“The IRS has two words to describes business expenses: They must be ordinary and necessary,” says Frank.
Ordinary refers to something useful used in the regular course of business; necessary means the deduction is indispensable to your doing your work. The tax code doesn’t provide a list of what is and isn’t considered ordinary and necessary, so it’s up to the taxpayer and the accountants of the world to make those considerations without going too far.
Research and any form of media consumption is deductible if it helps you with your work. That includes an Internet connection, subscriptions to periodicals, trips to do research in other cities or states, editorial services, marketing services, and cover design. You can even deduct health insurance as long as you’re self-employed.
However, it's important that indie authors only make valid deductions. The biggest advice Frank would give a client deduction-wise is to be reasonable: “Deducting your trip to the Dominican Republic to do research for your historical novel about 12th-century Prague might be stretching it.”
Also deductible are meals out with other writers, sources, literary agents, or potential subjects, but the same rules apply: you can only deduct 50% of the cost of what you spent on yourself.
“Accountants talk through with our clients which expenses cross the line between personal and pleasure,” Frank says. “For example, I might say, ‘I know I use my Internet connection for work, but also use it for my personal needs, so rather than deduct 100%, I’ll just deduct 70%.' That kind of thing.”
Should I Worry About Sales Tax?
The simple answer to this one is yes and no. If indie authors are selling work through self-publishing platforms like Amazon or Createspace, then the third-party should automatically take care of any sales tax related to the sale of the work.
However, self-published writers do need to be aware of sales tax if they’re selling books at speaking engagements, at tradeshows, or through their own website. Sales tax is an end user tax, but it’s up to the seller to collect it, and the rules vary state by state -- and, if indie authors are regularly selling books through their own portals, they'll likely need to register as a business with the state’s tax department.
Business or Hobby?
It is possible for indie authors to make deductions related to their work without reporting profits. In fact, writers can take deductions and expenses even if they report a loss. However, there is a wrinkle: If authors don’t make a profit in at least three out of five tax years, the IRS may start to take a dim view of the deductions and consider the author's work a hobby rather than a business. The IRS defines a hobby as an “activity not engaged in for profit.”
In addition to his day job as a CPA, Frank is a practicing musician. He plays guitar, writes songs, and gigs around New York singing rock 'n’ roll and the blues. It’s a passion, but he also considers it a business. He often posts annual losses, but he still takes deductions regardless, and he hopes to make a regular profit from it someday. The same can be said for self-published writers waiting for their break.
“The hobby rules apply no matter what you are, be it a musician, a writer, a gambler, or a photographer. The IRS looks at certain so-called careers with a little more scrutiny,” Frank says. “The rules are there to separate the hobbyists from the pros.”