By Gary A. Hensley, MBA, EA
Warning: Grab a hot cup of coffee or tea before you begin reading this dry, although critical, unbuttered toast of a blog.
The title of this blog presents a straightforward question. However, for writers, authors, and illustrators the answer may seem elusive. A major part of this problem stems from the fact that writers are not “certified,” “registered,” or “licensed” like dozens of other professions. There is usually no tangible evidence to nail down the “moment” you become a “professional” writer. For example, lawyers, CPA’s, doctors, plumbers, cosmetologists and electricians are licensed which gives them a specific entry date into their profession.
It may be (and usually is) months or years before a writer, author or illustrator has something published (tangible evidence) and they are compensated for that work. We generally associate the receipt of sales (or revenue) as the acid-test for “being” in a business. But is a sale (or revenue) actually required to be in the “business” of writing? The short answer is “no.” Can you have “business” losses for several years and still be in the “business” of writing? The short answer is “yes.” [See a recent Tax Court decision on this point on my blog]. Also, refer to my previous blog “Professional Writer or Hobbyist?” for essential background information that will not be repeated in this blog.
Artistic Endeavors Take Longer to Bear Fruit
Congress and the Tax Court have both acknowledged that artistic endeavors take longer to bear fruit. The Internal Revenue Code (IRC) and the associated Treasury Regulations provide the statutory guidance in this area while various court decisions provide interpretations that are binding in all jurisdictions (such as U.S. Supreme Court decisions) or in only some jurisdictions (such as Court of Appeals decisions).
Tax Treatment of Prepublication Expenses of Authors
After many years of IRS entrenchment and contrary court decisions, Congress finally added section 263A(h) to the Internal Revenue Code (IRC). IRC § 263A(h) allows “freelance authors, photographers, and artists” to deduct currently business expenses incurred in working on manuscripts that may or may not be published. Prior to this, expenses had to be deferred (inventoried) and were only expensed at the time the manuscript was sold or started generating royalties (in many cases, years after they were incurred).
The rationale for this income and expense matching concept made sense for many other businesses that develop or construct assets over several years but not for authors that, heretofore, were subject to the same requirement. My point: Congress and the courts have recognized some of the unique challenges involved in artistic endeavors and have responded with special legal relief. IRC § 263A(h)(3) defines a writer as “any individual if the personal efforts of such individual create (or may be reasonably expected to create) [emphasis added] a literary manuscript, musical composition (including any accompanying words), or dance score.” This means that all of your business expenses incurred during the year (under IRC § 162), for short-term and long-term projects, are deductible in the current year as a professional writer (not a hobbyist).
More Than One Occupation
The Tax Court has, on numerous occasions, affirmed that one can be a full-time employee (or self-employed) in one occupation and also have a “business” in another occupation. Put another way, you are not limited to being in one business at a time. Excellent financial recordkeeping (including separate bank accounts and debit/credit cards) and your documentation of “time-on-task” are essential to substantiate your multiple business activities.
In Part 2, I will recap and expound upon the “entry” requirements to nail down your “professional writer” status and review the needed documentation.