Archive for February, 2013

Conferences are deductible.

Conferences are deductible.

The Tax Man Cometh

copyright 2013 by Sherry Garland

The tax man cometh and I hath no time to writeth a blog this month. But seriously, I actually enjoy “doing” my taxes every year. It’s a lot like putting together a puzzle. Some of my friends and relatives hate taxes so much they turn everything over to H&R Block and hope for the best, but I’ve always been a “hands-on” kind of gal. Who is going to fight for lower taxes more than me? Who is going to understand that a trip to the zoo is deductible as “research” because I wrote a picture book about hippos?

Like it or not, being a writer is being a business person, with unique circumstances. Here are ten tax  tips for writers:

1) Writers use Schedule C to report business income profit or loss. If Schedule C has a gain of $400 or more, you will also need to fill out Schedule SE (self employment taxes). Other forms you may need are 8829 (Business Use of Home) and 4562 (Depreciation). These are in addition to Form 1040 and any other sources of income such as interest (Schedule B), capital gains (Schedule D), W-2 wages, and others.

2) Keep all your receipts in an organized location and label them immediately into the recognized IRS categories, Speaking engagement supplies and props are deductiblesuch as office expenses, advertising, automobile, travel, and so forth. If you have some purchases that don’t fit into the standard IRS categories (like a miniature covered wagon and an antique butter churn I use in my school presentations about pioneer life or a pointed hat, lotus seeds, coconuts and bananas that I use in my Vietnam program) there is a place on the back of Schedule C to list “other expenses.” I created the categories speaking engagement supplies, professional conferences and research materials. For my receipts, I use an accordion folder divided into months. Some folks use a computer business expense program and enter their expenses daily, weekly or monthly. Divide your receipts into months. Also divide them into business and living. Then divide them into cash, check or credit card. This will make it easier in case you ever get audited and need to quickly retrieve a receipt.

3) Keep accurate records of your income, which is usually derived from three sources: publisher royalties, speaking engagements, and the sale of your books in person. Publishers and schools (speaking engagements over $500) will send you Form 1099 at the end of the year. If you also have wages from a “day job,” you will receive W-2 Forms from those employers. DO NOT include W-2 income on Schedule C.; W-2 income is reported on Form 1040, line 7. Profit or loss from your Schedule C is reported on Form 1040, line 12.

4) Use common sense when listing your Schedule C expenses. Although authors have a lot of latitude with deductions, don’t be greedy and illogical.  If you take an editor or agent out to a steak dinner and discuss your book and projects, that is deductible. If you go to dinner with a friend or relative and talk about your book, that is not. If you are a speaker at a conference in Denver, Colorado and afterward you visit a relative who lives there, the conference expenses are still deductible. But if you decide to ski down the slopes, those expenses cannot be deducted (unless, of course, you are writing a book set in Colorado with skiing scenes). If your spouse accompanies you, his/her airline ticket and meals are not deductible.

5) Automobile expenses are a huge part of your business overhead, especially if you travel a lot for speaking engagements. Keep a log of your daily car usage. A notepad is fine. To make the most of your car expenses, combine business and personal. For example, driving to the grocery store is not deductible, but if you drive to a SCBWI meeting that is deductible, so, on the way home, stop and buy groceries. Car depreciation (Form 4562) is a large deduction, but the formula for figuring out the depreciation can be complicated and you can only depreciate an automobile for five years. Also, you only depreciate the business percentage of the vehicle. Once you figure out the first year, following years are easy. As for cost of using the vehicle, you can either use the standard rate per mile (about 56 cents per mile right now) or use your exact costs for gas and repairs.

6) You can deduct your home office, but here again, use common sense. I have an office and also use three closets for storage of supplies. The office footage comes to 20% of the house’s total footage. So, when I fill out Form 8829 (Expenses for Business Use of Your Home) I am allowed to deduct 20% of my utility bills and 20% of maintenance and repairs. I also get to take 20% of the house insurance and property taxes. You may also be able to take a percentage of your mortgage interest

7) If you keep stock of your books to sell at events or even on-line, you need to keep track of your inventory and how many books you sold. The “cost of goods sold” calculated on Schedule C can be a nice deduction.

Keep track of your book inventory

Keep track of your book inventory

8) Set up a SEP-IRA (Simplified Employee Pension IRA). Every year you can contribute up to almost 25% of your business income to this tax deferred account. It’s optional — some years if you have a low income, you may choose not to add anything to the SEP. And eventually (age 79.5) you will have to start taking the money out, but it is a great way to save money and lower your taxes at the same time.

9) Self-employment taxes (Schedule SE) are not the same as Income Taxes. Self-employment taxes (sometimes called payroll taxes or FICA or Social Security taxes) must be paid if you report a profit of $400 or more on your Schedule C.  Let’s say your Schedule C reports $1000 profit in 2012. Your SE taxes would be about $123. (By the way, the President and Congress approved a rate increase of 2% for 2013, so the cost will go up to $141 SE taxes for that $1000). If your total income from all sources is very low, it is probable that, after all the qualified deductions, you may not be required to pay any income taxes at all.  But even so, you still have to pay the $123 in SE taxes.

10) Don’t be afraid and feel bullied by the IRS. Frankly, most authors don’t make enough money to pay high taxes and aren’t worth the bother for the IRS. If you are filing jointly and your spouse has a high income, the risk of being audited does go up. Also, if you report a loss on Schedule C, you are more likely to get audited. When my husband had his own business, we were audited every two years for about 15 years. They rarely found a mistake more than a $100. The main reason he was audited was because he lost so much money, not because he made so much. Chances are, you will never get audited, but if you keep good records and report honestly, you have nothing to fear.

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