by Jenny Hansen
Taxes are a bummer for most people, but...we have to do them every year. If you haven’t already filed your 2018 taxes , it’s time to think about them. Before you make squinchy faces at me and say “Boo-hiss…TAXES." *shudder*, consider that some of the changes from the Tax Cuts Jobs Act (TCJA) might offer you more deductions than in previous years.
And I know I lured you in with that "easy" word in the title but, at least for this year, I think everyone should engage the services of solid accountant. Even if you normally do your own tax returns. Things are a little wild this year.
That TCJA has a Section 199A that is being called “the tax cut of the century.” Here’s what it is:
The Section 199A deduction gives sole proprietors, partners in partnerships, some real estate investors, and S corporation shareholders an extra deduction equal to 20% of their business income.
[This is a big deal.]
I had some examples, but Julie Glover told me they made her head hurt so I've moved them to the end of this article.
I work with accountants at my day job and their education time this year was two or three times higher than their norm. Many, many of the deductions have changed. In fact there were updates to this 199A just last week.
My advice: Do yourself a favor and leverage the 2018 tax prep of a good CPA. Be sure you ask them how much education they've had on Section 199A. You don’t want to pay extra or leave a great deduction on the table.
Tax Checklist for Writers
1. Make an appointment with your accountant
When you make that appointment, be sure to also get that tax organizer that makes your eyes cross. It will guide you as you gather documents. Set aside as much time as you need to fill it out.
Or do what I do and get an hour into the process, and start whining until your organized friend or spouse takes pity on you.
2. Gather your receipts and download the bank statements from your personal and business accounts. Put these into a spreadsheet if you can – it’s easier.
3. Make some important decisions
Decide whether you will claim the standard deduction or itemize in 2018. The standard deduction has gone up to $12,000 for single filers and $24,000 for married filing joint. This means many taxpayers will no longer itemize.
Review the changes to itemized deductions in 2018 below:
- Taxes are limited to a $10,000 deduction each year (this doesn’t include taxes related to your business or rental property).
- There’s no deduction for employee business or investment expenses.
- Interest on a home equity loan is only deductible if the loan proceeds were used to buy or improve your home.
- The interest deduction is limited to mortgages of $750,000 (post Tax Cuts and Jobs Act)
4. See if you are eligible for any bigger deductions
- Did you buy a car in 2018? If you use your car for business, this may be a huge deduction the year of the purchase.
- Do you have an education savings account for your child? 529 plans can now pay for elementary and secondary school tuition (limit $10,000 per year).
- Have your estate planning documents been reviewed in the last few years? The annual gift exemption is $15,000 per person in 2018 and 2019 and the estate tax exemption is $11.4 million per person or $22.8 million per couple. This is higher than is used to be.
Put on your Business Hat
Most writers are considered “self-employed” in regards to filing their taxes. In a taxpaying sense, this means that your “business” as a writer, and you as an individual taxpayer, are one and the same. There is no legal separation like there is in a corporation, partnership, LLC, or other legal entity. The writer usually files a “Schedule C” as part of his or her regular 1040 income tax form, which is where you report your writing income and expenses.
What expenses and income?
Thankfully, writers have a large group of basic expenses that easily fit the above criteria: education (classes and conferences), travel (hotel, meals, etc.), vehicle and transportation costs, equipment, supplies, home office expenses, legal and professional fees (includes membership fees to professional writing organizations).
A guide to keep track of income and expenses:
|Expense items||Income items|
|Travel expenses||Sales of your work|
|Office rental (even home)||Income from rented or leased work|
|Commissions/payment to managers or employees||Wages/salary for writing |
(includes stipends, honorarium, speaking fees)
|Grants, awards, fellowship funds|
|Auto insurance and repairs||Copyright royalties|
(published or distributed works)
|Supplies and materials||Advance payment for work|
|Legal and accounting fees or services||Sales taxes|
|Business and Bank fees|
|Utilities (ex: phone and Internet)|
|Publications, periodicals, |
|Fees for workshops and seminars|
|Membership / association dues|
|Shipping or mailing|
You should have the following information for each item:
- Reason for the income or expense/description
- Check number, invoice, tracking number, or indication of other form of payment
The biggest question…
IS your writing a business?
To comply with the IRS, a writer must consider if their writing is a business or a hobby. Writers often have financial losses—expenses that exceed their writing profit, at least for the first several years.
When does the tax code determine your writing is a business as opposed to a hobby? Basically, when you are earning a profit from it.
In my humble opinion, this just means that you should make sure you do a few articles, teach a few classes or some other sort of paid writing activity each year, even if you aren’t selling books.
The IRS looks at whether you make a profit at this business three out of five consecutive years. They’d also like you to be able to answer yes to most of the following criteria (this is from the IRS site):
- Do you carry on the activity in a business-like manner? (Refrain from sharing that you write in your pajamas. With bedhead.)
- Does the time and effort you put into the activity indicate you intend to make it profitable?
- Are you depending on income from the activity for your livelihood? (Try not to laugh if someone asks you this.)
- Are your losses from the activity due to circumstances beyond your control (i.e normal start-up losses)?
- Do you change your methods of operation in an attempt to improve profitability? (Just say "yes." After all, sometimes you write at Starbucks in clothes, instead of at home in your pajamas.)
- Do you have the knowledge needed to carry on the activity as a successful business?
- Were you successful in making a profit in similar activities in the past? (Yes, I made this kind of money babysitting. In the Eighties.)
- Does the activity make a profit in some years, and how much?
- Can you expect to make a future profit from the appreciation of the assets used in the activity?
You may have to prove to the government that you have made a genuine effort to earn a profit, so keep meticulous business-related records.
Note: I'm terrible at being organized so I simply keep a legal-sized envelope and a receipts folder on my computer. If it is paper, it goes in the envelope. If it's electronic, it goes in the folder. I sort it out at tax time.
If your activity can be classified as a bona fide business, you may be able to deduct the full amount of all your expenses by filing a Schedule C. As rude as it is, tax law stipulates that you can’t use a “hobby” loss to offset your day job income. But as a business, you can deduct a net loss from other income you earn, such as wages and salaries.
Note: This article is not meant to constitute legal or tax advice. All situations are different, and all tax questions should be taken to a professional.
Which tax camp are you in? Done in January or waiting in the April 15th line at the post office? Do you use an accountant or do your own? Share your tax-time woes with us down in the comments!
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About Jenny Hansen
By day, Jenny provides training and social media marketing for an accounting firm. By night she writes humor, memoir, women’s fiction and short stories. After 20+ years as a corporate software trainer, she’s delighted to sit down while she works.
- Tax planning: 2018 Year-end Checklist
- Artists to Reap Rewards of Major New Tax Deduction Aimed at “Pass-through” Businesses
- The 2018 Tax Cuts and Jobs Act for Creative People
- Tax Cuts and Jobs Act - Insight and Analysis
- Helpful TCJA Bulletpoint List of Changes
- Tax Reform and Section 199A Deduction
- Latest 199A Update: Update On The Qualified Business Income Deduction For Individuals
Examples of deduction scenarios related to Section 199A are below.
You earn $100,000 as a sole proprietor. In this case, you potentially get a deduction equal to 20% of the $100,000—or $20,000.
The only rub for the typical taxpayer? The Section 199A deduction can’t exceed 20% of your taxable income.
You earn $100,000 in a sole proprietorship but you use the $24,000 married-filing-jointly standard deduction and shelter $26,000 in a 401(k). In this case, your taxable income equals $50,000. You don’t get a Section 199A deduction equal to 20% of the $100,000 of sole proprietorship profits ($20,000) but instead get a Section 199A deduction equal to 20% of $50,000 ($10,000).