April 3rd, 2020

Tax-Time Chat for Authors

by Jenny Hansen

"You can't deduct a hobby." Many creatives hear these words from their accountants, especially if they don't keep the proper paperwork. You can trust me on this. First, because I am terrible at paperwork and secondly, because I work with dozens of CPAs. (They totally say this.)

If you do nothing else for yourself as a writer-preneur, find a partner-in-crime who keeps good paperwork or learn to do it better yourself. (I married my paperwork savant. He's amazeballs at paper.)

What about taxes?

Despite the horrors of this pandemic, there are positive notes on the tax front this year, and things are changing rapidly as laws like the Coronavirus Aid, Relief, and Economic Security (CARES) Act come out of Washington.

[Click here for a comprehensive summary of the CARES Act in English. I promise it's in English and not accounting-ese. I wrote the article.]

Why am I posting this in April, you ask? Because, while some writers have already filed their taxes (very few), most of you will wait until the final moments.

I almost hate to share this with the procrastinators...

Coronavirus has extended the tax deadline in the U.S.

  • The IRS has extended deadlines for tax filing and tax payments by 90 days. The filing deadline for tax returns and tax payments is July 15, 2020.
  • Quarterly estimated payments due on April 15 can be paid July 15 without penalty or interest. 
  • The second quarter estimated payment deadline was extended from June 15 to July 15.
  • Alas, property tax payments are still due on their regular due dates.
savings are sexy, taxes, writers
Why shouldn't saving be festive?

Additionally, IRS tax payment dates have been deferred. This is great news for people who are reeling financially from the coronavirus fallout.

  • Individuals can now defer tax payments for 90 days after the original due date, no minimum amount.
  • Corporations can defer tax payments for 90 days after the original due date, no minimum amount.

Further Reading:

If you are a California resident, the CARES Act article includes the FTB extensions. There is also a handy link to calculate the amount of the tax credit check (aka stimulus check) you'll be receiving from the government.

Here is an article breaking down the state-by-state financial and legal actions taken in response to the pandemic. There is an easy-to-use index to see what legislation your state has enacted, and what is pending.

p.s. If you're in California, be sure to ask them about AB5. (It's a new law that impedes creative freelancers, but in the wake of this pandemic strong enforcement isn't expected this tax season.)

Vital questions to ask yourself at tax time

Since the Tax Cuts Jobs Act (TCJA) was signed into law a few years back, it’s become more important than ever to establish that a money-losing activity (Ex: writing) is actually a for-profit business that has simply not yet become profitable.

I promise you can do this. Probably even without tears!

We're back to this pesky question...

Is Writing a Business or a Hobby?

Answering this question is one of the most important things you can decide for yourself as an author. If your writing is a business, you can write off your expenses; if it's a hobby you cannot.

Where do you start?

Do a quick "Safe Harbor" check.

The IRS's Safe-Harbor Rule is how they determine whether you can write off the expenses of your beloved hobby. The rule says to be a "for-profit business, you must produce a positive income for at least three out of every five years."

Don't despair if you don't pass this test. There are still options if you want to "be a business." And there's nothing at all wrong with having the IRS see your writing as a hobby if you can afford to absorb those costs yourself.

Best tactic: Diversify.

Don't put all your eggs in one writing basket. Teach a class, get a paying blog gig, or speak at a writers' meeting for pay. Set your writer self up as a business and add several income buckets to that business. Perhaps your website audits will offset your self-publishing costs. Perhaps it will be the classes you teach instead, or the manuscripts you edit. You know what your superpowers are.

There is zero reason that every writing dollar must be from your books. In fact, most authors say it takes them many years to make any net profit from their books. Income from those side gigs will help you continue to write off the expense of your writing until it makes money.

I couldn't afford to pay for my writing without putting my website, copywriting and training buckets under my Jenny Hansen umbrella. In a perfect world, the side gigs will improve your writing and vice-versa.

Other valid tactic: Show "intent" to make a profit.

It sounds so childlike, doesn't it? I was gonna clean my room, Mr. Tax Agent. But "intent" is a real thing with the tax people.

Even if you don't pass the safe-harbor rule, you might still be able to slide along as a for-profit business that can deduct those expenses. There are things that indicate you have an honest intent to make a profit.

7 Characteristics that show "intent to make a profit"

  1. You keep good records and search out ways to make a profit.
  2. You demonstrate writing expertise or hire advisers who do. (Editors!)
  3. You spend enough time to justify that the activity is a business and not just a hobby. ("Butt in chair" is a necessary concept to your status as a business.)
  4. You can demonstrate an expectation that the value of your books (aka sales) will increase. (Ads, swag, website, marketing campaigns - all visible expectations of sales.)
  5. You can show success in other ventures. (This is why I asked about your superpower.)
  6. A history of profits and losses that show a long term "up and down" with your books actually helps the tax people believe you. It's okay with them if you have a best seller, then crickets, then some okay books because there is a history of a demonstrable profit.
  7. The poorer you are, the more the tax people will believe you are serious about this writing business. Their logic is that “rich” folks can afford ongoing losses (hobby) while ordinary folks need to make a living (business).

Finally, unless you keep good records and file a simple tax form with no deductions, I highly recommend you engage a qualified accountant. I am absolutely not an accountant. However, if you have big questions, I can ask my CPA pals.

Do you get nervous at tax time? Have you found a paperwork savant? Do you have a non-writing superpower? Tell us about it in the comments!

*  *  *  *  *  *

About Jenny

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 18 years as a corporate software trainer, she’s delighted to sit down while she works.

When she’s not at her personal blog, More Cowbell, Jenny can be found on Facebook at JennyHansenAuthor or at Writers In The Storm.


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10 responses to “Tax-Time Chat for Authors”

  1. Thanks, Jenny. I wasn't ready to start writing off my expenses last year, or the years before that, but I do expect to do so this year. I'm mulling over my first book contract and am at that major fork in the road. Do I sign on with a publisher or self-publish? Is the record keeping the same either way?

    • Jenny Hansen says:

      Good for you, Kathleen! Paperwork is always the same - a clear record of income coming in and expenses going out.

      My best tip is to keep a receipt envelope and toss all receipts for the year into, especially cash receipts. It's astonishing how much those add up, especially if you are going to concerts or meeting your editor at Starbucks. Also, as a writer, the books you write and movies you see are education costs. Isn't that AWESOME? Keep those movie ticket stubs. 🙂

  2. ecellenb says:

    Super helpful post!
    I detest doing taxes. Thank goodness for tax programs.

    The CARES act summary is brilliant! I've passed it along to the hubby, our family paperwork genius.

    • Jenny Hansen says:

      I'm right there with you, Ellen! And thanks for passing on that summary - it was SO hard for this non-tax genius to write. However, it should be noted...writing articles like that helps me write off my fiction writing costs (and pay my bills). Income diversity is a blessing! 🙂

  3. Eldred Bird says:

    I'm lucky enough to have married my tax person, so I'll be passing this post on to her!

  4. dholcomb1 says:

    I give my receipts to my accountant, answer his questions, and he lets me know whether or not I can deduct or what to count. I keep thorough records.

    denise

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