A Special Provision for Writers in the Tax Law

By Gary A. Hensley, MBA, EA

It may be (and usually is) months or years before a writer, author or illustrator has something published and they are compensated for that work.  We generally associate sales as the acid-test for “being” in business.  But is a sale legally 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.”

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).

Special 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 IRC.   IRC section 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photographers, and artists” to deduct currently business expenses incurred in working on manuscripts that may or may not be published.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).

Congress and the courts have recognized some of the unique challenges involved in artistic endeavors and have responded with special legal relief.   IRC section 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 section 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

In addition, 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. You may need to share this information with your tax preparer.