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;
- 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.
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.