Expenses for Writers: Dues and Subscriptions

Self-employed writers, illustrators, editors, researchers and others in the publishing world are allowed to deduct the expenses related to their income-generating business activity on Schedule C.  Two of these expense categories are dues and subscriptions.

Dues to local, state and national professional organizations are deductible on Schedule C.  For instance, I am a member of the National Association of Independent Writers and Editors (NAIWE) and I take a deduction for my membership fee.   Dues to the chamber of commerce, business leagues, trade associations, and civic organizations are also deductible.

Subscriptions to business and professional publications are deductible.  However, if you are on the cash basis (which most of you are) and prepay subscriptions for longer than one year (you buy and pay for a three-year subscription to a trade paper or magazine this year), you should deduct the amount for one year in the current year and an allocable portion of the subscription cost in each succeeding year.

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Writers and Charitable Contributions

I know what you’re thinking.  People should be giving you money to support your writing endeavors.   However, for those that can give to charity, I want to clarify how that is handled when you are self-employed in the publishing arena.

First, you need to know that donations of your time and effort to any charity are not deductible.  Next, if you are an unincorporated business, using Schedule C at the end of the year as a sole proprietor, you cannot claim a deduction on Schedule C for any cash or property contributed to a charity (even if you wrote the check out of your business account).  A donation to a charity out of your business checking account functions as a nondeductible owner’s draw.

However, you can take the donations from your business account and your personal accounts (including donations via credit card) and combine them and take the entire amount on Schedule A – Itemized Deductions on the charitable contributions line.  Charitable donations from your business account are not deductible business expenses but they are included as part of your overall charitable giving on Schedule A.

When your business donates to a worthy cause, with cash or property (for example, a used computer), it not only helps the community (local, national, or international) but, if donated in the business name, also gives your business added visibility and good public relations.

Correcting Mistakes “After” You Have Filed

Using Form 1040X

Your original return has been filed, manually or electronically, and now you discover an error such as unreported income or one or more expense items you forgot to include (or that you just found out are deductible) or calculated incorrectly on your Schedule C.  What do you do?   You prepare and file a separate Form 1040X – Amended U.S. Individual Income Tax Return to make the needed corrections for each year you are amending as soon as possible.

Form 1040X has three columns on page 1 – A, B, and C.  The “A” column is used to report your original return amounts, the “B” column reports your adjustments, and the “C” column shows the corrected amount.  At the bottom of the “C” column, you will determine whether your adjustments require an additional payment of tax (likely when you add previously unreported income) or they produce a refund due to you (based on newly discovered or corrected expenses).  You will complete these three columns on page 1 of the Form 1040X, write a brief explanation of the changes you made and why on page 2 along with your signature and date.  Attach to the Form 1040X your “revised” Schedule C and, if necessary, Schedule SE (self-employment tax).

Amended returns should generally be filed for “open” years — returns within three years of the original due date or the extended date (if an extension was filed in a particular year) or within two years after the date you paid the tax for that year, whichever is later.  Right now, the “open” years are 2009, 2010, and 2011.  To clarify, the 2009 Form 1040 was due by April 15, 2010, and, therefore, its three-year open status will expire on April 15, 2013.  If you filed after the original due date, using an extension request, your three-year open status expires three years from the date you filed.  If you filed your return before April 15, the April 15 date is still used for this purpose.

If you find an error on a 2008 or prior return that would generate a refund for you, it is barred, with few exceptions, by the statute of limitations.  In the past, some taxpayers who “knew” they had a refund coming would wait several years to file their returns (treating it like some kind of savings account).  Congress (with IRS urging) got tired of these laggards and changed the law to limit the time period to file and receive a refund.

You cannot e-file an amended return; it must be mailed in.  Also, if you are amending your federal return, you will most likely need to amend your state return for the same year.  Some state statutes go beyond three years.

Form 1040X is not a substitute for the required original return for any year.  If you have not filed for a particular year, you would file an original return for that year.

If your Form 1040X indicates you are due a large refund ($5,000 or more), there is a better than even chance that your return will be reviewed with you as part of an office audit or a field audit before you receive payment depending on the current examination workload in your area of the country and current examination priorities.  If your adjustments are legitimate and you have the supporting documentation, this possibility should not concern you.

Business Gifts – Deductible?

In the course of your business, you may give gifts to your editor, researcher, photographer, illustrator and literary agent.  The cost of business gifts is deductible, within limits.

You may only deduct up to $25 per person per year.  This rule applies to both direct and indirect gifts.  An indirect gift includes a gift to a company that is intended for the eventual personal use of a particular person or a gift to a spouse or child of a business customer or client.

Incidental costs, such as wrapping , insuring, or shipping the gifts do not count as part of the $25 limit.  You do not have to count the cost of engraving on jewelry either as part of the limit.  Of course, you can always spend more for a business gift but the deductible amount per person will be capped at $25 per year (this dollar amount has not been changed since 1962).

Items clearly of an advertising nature that cost $4 or less (such as pens, plastic bags, calendars) with your company name imprinted on them that you distribute to existing or potential customers/clients are not gifts and are a separate deduction.  Signs, display racks, or other promotional materials given for use on business premises are not gifts but a separate deductible business expense, regardless of the cost (IRC Section 274(b)(1) and Treasury Regulation 1.274-3).

The Giving and Receiving of Form 1099-MISC

A Low Filing Threshhold

As an independent writer, illustrator, author, editor or researcher filing a Schedule C as a sole proprietor, you are likely to receive one or more Form 1099-MISC’s from your customers/clients (those that paid you $600 or more during 2012) shortly after the year-end. You also will need to prepare and issue this form to any subcontractor (if they are unincorporated) you paid $600 or more during the year for services received and rents paid for the use of business propertyThis form is also used to report royalties paid to authors of $10 or more (see below).  Copies of the form are sent to the IRS and will be matched to the recipient’s tax return to check reporting compliance.  If your gross receipts reported on Schedule C are less than the total amount of 1099-MISC income reported to the IRS, you can expect a letter of inquiry.

Author Royalties

Box 2 of the form is used to report royalty payments from intangible property such as patents, copyrights, trade names, and trademarks.  The reporting threshhold here is $10 or more.  Publishers are required to report gross royalties (before reduction for fees, commissions, or expenses) paid directly to an author or literary agent, unless the agent is a corporation.  The literary agent (whether or not a corporation) that receives the royalty payment on behalf of the author must report the gross amount of royalty payments to the author on Form 1099-MISC (whether or not the publisher reported the payment to the agent on its Form 1099-MISC).

Your Reporting Requirements

You are required to file Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid at least $600 in the course of your trade or business.  You report the amount paid in box 7 of the form. Box 7 is labeled “Nonemployee Compensation.”  According to the IRS, if the following four conditions are met, you must report a payment as nonemployee compensation:

  1. You made the payment to someone who is not your employee;
  2. You made the payment for services in the course of your trade or business;
  3. You made the payment to an individual, partnership, estate, or, in some cases, a corporation; and
  4. You made payments to the payee of at least $600 during the year.

At year-end, it is your responsibility, even if you hire your accounting firm to prepare Form 1099-MISC, to provide the information needed, from your books and records, to do that.  You will need the name, address and tax-identifying number (usually the person’s Social Security Number [SSN]) of the individual and the amount they were paid during the year.  The forms must be distributed to payees by January 31, 2013 for payments made during 2012.  You have until the last day of February to file them with the IRS (or March 31 if filing electronically).  If you need extra time to file these, file Form 8809.  All of your 1099’s going to the IRS will be summarized on Form 1096, Annual Summary and Transmittal of U.S. Information Returns.   There is a penalty for each Form 1099-MISC filed late.  Penalties are not only expensive, they’re not deductible either.

Recommended Documentation

As a business, you should have vendor files.  Independent contractors that you hire should have a folder as a vendor.   Before you engage or make a payment to an independent contractor, you should make sure they have supplied you with a completed Form W-9 – Request for Taxpayer Identification Number and Certification.  You should supply this form at the beginning of the relationship and indicate that you must receive it back before services begin and also indicate that no payments will be made until it is received (if you have a contract, this provision should be included).   If the subcontractor refuses to give you a completed W-9, you may want to select another vendor (for various reasons).  View and print Form W-9.

In the subcontractor vendor file, you should have the original completed W-9, a business card or letterhead from the vendor, any advertisements or brochures from the vendor and a copy of the contract (if used).   You may need to prove that the payments were to a subcontractor (and not a disguised employee) and these documents will help greatly in that regard.  This employee/independent contractor issue will be covered in a future blog.

Remember, all business income needs to be reported on your tax return whether you receive a Form 1099-MISC or not.  It’s amazing how one IRS audit will “flush out” payments made to others.  I know of one case where the taxpayer, as part of the examination, had to prepare approximately 100 Form 1099-MISC’s for the current year and the same amount for two prior years.  Now, those 100 forms per year were put on the IRS data base and into each taxpayer’s record for each year.  Then, all the income for each year, including the added 1099 income, was compared to their original return to see if the 1099 income had been included.  One possible clue that there might be an income reporting problem for some of the 100 recipients was the fact that they were fighting the taxpayer’s representative before giving up their Social Security Numbers.

You’ve Still Got Time

That’s right.  You’ve still got time in 2012 to get this business requirement in top-notch order.  Of course, the preferred method of documenting independent contractor services was discussed above.  However, it’s not too late to secure those Form W-9’s from this year’s independent contractors that you have or will pay $600 or more.   By reviewing copies of invoices, credit card statements, and your check register, you will be able to identify the “600 and over” club.   Be ready to hear some moanin’ and groanin’ from those that like to stay under the radar.

Use These Six Digits to Avoid Contact with the IRS

That’s right!   These six numbers – 711510 – will help you avoid contact with the IRS.   Why?  Read on.

As an independent author, editor, illustrator, researcher or writer, you will most likely file a Schedule C (Profit or Loss From Business), used by sole proprietors to show business income and expenses for the year.  Schedule C is attached to Form 1040 and becomes part of your overall tax computation.

At the top of Schedule C you are required to identify your type of business.  Box A requires you to identify your “principal business or profession” which would be author, writer, illustrator, etc.  Box B asks you to “enter code from instructions” and requires the filer to enter six numbers.  A large percentage of taxpayers (and, sadly, even paid preparers) leave this box blank, put in the wrong number or enter “999999” to dispense with this requirement. In the case of paid preparers, this is inexcusable, since they just increased your odds of IRS contact.

As an “independent artist, writer or performer,” your North American Industry Classification System (NAICS) code is 711510 and should be shown in Box B of your Schedule C.  The codes, for all types of business and professional activities, are found at the end of the Schedule C instructions.  Make sure you or your preparer use this number.

Ok, so why is this so important?  Schedule C’s are evaluated and scored by the IRS using the NAICS code shown on the form.  The NAICS code you use determines the data base your Schedule C will be compared against to determine if your income and expense amounts fall within the “norm” for that business or profession.  So, if you (or your preparer) put in the wrong code number, no code number, or 999999, your income and expense numbers cannot be properly evaluated and this will, most likely, raise your return score.  The higher your score, the more likely your return will be selected for “further view” by the audit selection team, a rotating group of seasoned auditors who will visually scan your return to determine if an “office” or “field” audit should be scheduled.  More about the differences in an office and field audit in a future blog.  For the moment, let me just say if you are selected for a field audit, your entire return will be reviewed, not just Schedule C, at your home or business location.

Finally, do not combine separate businesses on one Schedule C. This just adds fuel to the fire.  You may be a sole proprietor of two or three distinct and separate business activities during the year.  The revenues and expenses for each business should be tracked and reported on a separate Schedule C, using the appropriate NAICS code for each one.

Use the proper NAICS code and lower your audit risk.

Professional Writer or Hobbyist?

IRS Criteria

By Gary A. Hensley

There is more to writing than the study of the craft itself.  Most of you reading this have attended writers’ seminars, read books and numerous articles, visted Web sites, and attended college writing programs to learn the fundamentals (and perhaps even a few secrets) of professional writing.  It’s a good start, but it’s not the whole story for the aspiring professional writer.

In addition to developing your writing expertise, you must be aware of and follow the rules regarding your writing business. The headlines and television networks have been filled with stories about undocumented workers in the United States.  Are you an undocumented writer (defined as a writer who falls willingly or unwittingly into the IRS category of a person who writes only as a hobby)?

What’s the difference?  Who cares?  You should, if you are truly serious about establishing professional writer status both in print and before the IRS.  Remember that all income received from your writing efforts is taxable income, whether you consider yourself a professional or operate as an on-again, off-again sporadic writer.

The benefit of professional status is on the expense (or deduction) side of the ledger.  The professional writer can deduct all reasonable and ordinary business expenses (Internal Revenue Code Sec. 162) incurred during the year (even if this results in a business loss).  The writer who functions at the hobby level can deduct only expenses up to the amount of income received that year from writing activities, and those expenses can be taken only on Schedule A as itemized deductions.  If the hobbyist does not itemize deductions on Schedule A (but takes a standard deduction), the deductions are worthless.  But (and you knew this was coming), all income received from writing (even as a hobby) goes on page one of Form 1040 (as Other Income) and becomes part of adjusted gross income (AGI) subject to income tax.  Thus, the best-case scenario for a writer deemed to be functioning as a hobbyist (and not as a business) is breadeven (no profit and no loss), assuming he or she uses Schedule A.

The professional writer, on the other hand, uses Schedule C to report income and expenses, which assures that deductions and expenses will be used to reduce writing income and will result in net income or net loss (expenses exceed income) before that amount moves over to page one of Form 1040.  Schedule C is used by sole proprietors (an unincorporated business) and is attached to the annual Form 1040.

Most people, including new entrants to professional writing, don’t start a business or profession with the intent (a key factor used by the IRS to determine your status as a professional or hobbyist) of perpetually incurring annual losses.  But it is hardly unusual not to “throw losses” in the early years in any new business.  Thus, for the beginning professional writer, these losses, coupled with a healthy dose of sweat equity, are actually his or her capital (financial) investment (not in the strict accounting principles sense but by looking at substance over form) needed to launch a long-term profitable business.

Professional writers, using Schedule C, will use the cash basis of accounting.  This means they will recognize (report all) sales or fees when they are actually received, and they will deduct related expenses when they are actually paid.  Receivables (money earned but not yet received) are not recognized until received. Payables (expenses incurred but not paid yet) are not deducted until actually paid.

Internal Revenue Code (IRC) Section 183 covers activities not engaged in for profit.  Remember, income from any activity is taxable whether or not the activity is engaged in for profit.  As explained earlier, the provisions of IRC Section 183 limit the deductions related to an activity not engaged in for profit (in other words, a hobby).  A key consideration in deciding if your writing is a business or hobby is that the taxpayer begins and continues the activity with the intention of making a profit.

Treasury Regulation 1.183-2(b) contains nine relevant factors that are to be used to evaluate the profit motive of a business activity.  The factors are not all-inclusive.  No one factor is more important or more weighted. The nine relevant factors used to evaluate the profit motive of a business activity are:

  • Businesslike manner;
  • Expertise;
  • Time and effort devoted to the activity;
  • Expected appreciation;
  • Taxpayer’s success with other activities;
  • History of income and losses of the activity;
  • Amount of occasional profits earned, if any;
  • Financial status; and
  • Personal pleasure or recreation.

If your tax return is selected for examination by the IRS, these factors will be used (along with any other relevant information) to make a business or hobby determination.  By looking at these factors in advance, the professional writer will be able to discuss each one intelligently and provide documentation to support his or her professional status.

In the beginning, the professional writer should seriously consider a one- or two-hour appointment with a professional tax advisor to help set up financial books and records, a day planner for documentation of business activities, a business mileage log book, and documentation needed for travel and entertainment expenses.  This will be money well spent–and it’s deductible.

If nothing else, the successful professional writer is disciplined and tenacious.  These same attributes will serve the professional writer well on the business side of his or her enterprise.

Be a total professional.

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This article originally appeared in WRITERS’ Journal, March/April 2008, pp. 13-14.   This article may be cited with attribution and a reference to this website.