The month of November is coming to an end and thousands of novels are coming close to their completion (as a first draft, anyway). Some of those novels will end up in the hands of literary agents and publishers and some will end up being self-published. Somewhere in the world, a writer will look in the mirror and say (as I did last year), that I CAN be an author…and so they will become one.
Probably the most important question asked of any author is “Why do you write?” The answers to this question vary from author to author, from project to project and from interview to interview and perhaps the greatest debate about the answers to this question is “Do you write for the money?”
This is precisely what the IRS wants to know about your writing activity and the answer can have a bigger impact on your tax return than you may know.
When I enrolled in the HR Block tax course, I was surprised to learn that there are a few ways writers can claim their writing earnings and expenses.
- Writing as a business
- Writing as a “Passive Activity”
- Writing as a Hobby
Writing as a Business
This is probably the most common method used for claiming writing income and expenses but, it’s not always the best way and it’s not always necessary. If you claim your writing activity as a business, you will file Schedule C: Profit and Loss from a Business, along with your regular 1040 return.
You will be allowed to claim expenses against your Writing proceeds and if you have a loss, the loss is deductible against other types of income (such as wages or interest). In the case of a business, however, you will be required to pay Self Employment Tax, which covers the cost of Social Security and Medicare for Self-Employed individuals.
Writing as Passive Income
Royalties from writing can also be claimed by filing a Schedule E: Passive Income Activity. Writers who file a Schedule E, will not be required to pay Self-Employment tax but Passive Loss from writing is only deductible against other Passive Income. So, a loss from writing as a Passive Activity will not reduce income from wages, interest or other income (but may reduce income from a rental or other Passive Activity).
If writing is purely a Hobby and the writer has no expenses, whatsoever, to claim against the profit from writing, the income may be entered directly on Line 21 of form 1040: “Other Income”. The full amount will be taxable and may result in a tax liability for the author (if the income is large enough to produce more taxes owed than was overpaid from other sources of withholding).
****Although losses from Hobby Income can be claimed on Schedule A: Itemized Deductions, this is often not the best route because the expenses would have to be more than the standard deduction for your filing status (along wiht other itemized deductions, of course).
How to tell if you’re writing for Business or Passive Activity?
The IRS defines a business as an activity “that which occupies the time, attention and labor of men for the purpose of livelihood or profit.” So, we see that the most important concept that separates writing as a business from writing as a Passive Activity is intent. Obviously, if you are a career author and you make your entire living from being an author, you are writing as a business.
However, if you are a self-published author, an independent author or you have other (more significant) sources of income, it may be a little more difficult to determine if you should file as a business or file as a Passive Activity. The IRS gives the following guidelines for determining whether an activity qualifies as a business or a passive activity (the full article can be read here)
In order to make this determination, taxpayers should consider the following factors:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
***The IRS notes that if a business activity shows a loss for 3 out of 5 years, it is (by defult) Passive Income (and vica versa).
In the end…
I wrote this, to educate Authors of their options but in the end, each situation is unique and it is important to have a Tax Professional look at your personal tax situation to determine whether your writing activity should be claimed as Business Income or as a Passive Activity.
I would also like to urge you not to attempt to file your own taxes, if you’re still not sure about what is your best option (or what counts as expenses). The great thing about the age that we live in is that you never have to leave your house to get quality tax preparation by a Tax Professional.
If you would like me (a fellow author), to prepare your tax return this year, all you have to do is email me your tax documents at my HR Block email: email@example.com. I can prepare your tax return and email your return to you for review. Once you give me the okay, I can electronically file your return, from the HR Block office, and you never even have to move out of your favorite writing chair. 😀
Either way, I am always open to help fellow writers and answer questions about all of this. My work email is: firstname.lastname@example.org and my personal email is email@example.com. Feel free to email me if you have a question which applies to your particular situation.