With tax returns in the U.S. due in 11 days, I thought a few tips from a CPA might come in handy. My friend, Stephen Book, CPA extraordinaire, kindly agreed to answer some of my questions and is allowing me to share them with you. Please note his disclaimer (and mine): neither Stephen nor I am intending this as tax advice. These tips are things to consider. Every situation has variables that could affect whether this information applies to you, so do your research or contact a professional for help if the laws seem unclear.
1. At what point in their career should a writer consult an accountant—before they start submitting, after they’ve made a few sales, or after reaching a certain income level? Does a beginner even need to think about taxes?
Let me first put forth a disclaimer and then answer your questions. I have always been conservative when it comes to accounting, and this includes taxes. If it’s income, I call it as such. If it’s a proper expense, I do the same. When it comes to taxes, I don’t wiggle around in the gray. Furthermore, most of what I write is general in nature and should not be considered tax guidance to anyone’s specific situation. With taxes, as with accounting, one small detail can change how the income or expense is treated. The important thing to remember is to ask questions.
The disclaimer out of the way, every writer needs to think about taxes regardless of whether they are published or not. Seeking a consultant, however, is a personal choice based upon the writer’s comfort level with preparing his own return and whether the writer wants to justify the additional expense of a professional. Public accountants can easily charge an hourly rate of $100 or more.
Furthermore, whether they use a tax professional or software, every writer should get acquainted with the guidance and publications available through the IRS website (www.irs.gov). A good place to start is http://www.irs.gov/businesses/small/article/0,,id=109807,00.html, which has a couple of links to important publications (see the next question).
2. What items may be considered tax deductible, and how do we show they are used for writing? For example, I buy ink for my printer, but my kids also use the printer; can I deduct the ink or the printer?
The link above is a good place to start, but here’s a good rule of thumb: if allowable, a writer should deduct any expense that was necessary to generate the income reported and which is also ordinary in the writer’s business. For a writer, this can include items like the printer and ink you mentioned, but can also include the computer, the software, the paper, the envelopes and stamps (to mail out manuscripts), business cards handed out at conferences, the cost of the conferences, and much more. I would argue that it can also include the cost associated with tax preparation as it relates to the business, and a good tax preparer should be able to break down that cost for you. Publications 334, 535 and 587 (see the link above) will provide more guidance on what’s allowable and how much.
3. What documentation should a writer save for tax purposes? How long do we need to keep the receipts or other records?
“Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.” (IRS Tax Tip 2009-08)
On expenses, you should keep any and all documents that may have an impact on your federal tax return (i.e., documents which support the numbers reported on the return), which include: bills, credit card or other receipts, invoices, mileage logs, canceled (or imaged) checks, and any other records to support the deductions or credits you claim. For earnings, I think some tracking documentation which lists the stories, the publication, dates, and the amounts earned is sufficient. Personally, I use a spreadsheet.
4. If we bought books or did research, does it only count in the year we pay for the book or trip, which may be before we sell the related article or story? Or does the expense come out of the profit we make later? Example: If I travel somewhere as research for an article, but don’t sell the article until the next year, what do I do?
How a writer treats expenses depends on accounting method chosen. Most people will use the “cash method” of accounting since it is easier for tracking. Under the cash method, an expense is deducted or capitalized in the year it is paid. In the example above, the writer’s expenses related to that research—travel and hotel, for two examples—would be deducted prior to selling the story. It should be noted that the IRS places limits on expenses considered to be meals and entertainment.
Even if the writer used the “accrual method”, I would argue that the expense as you’ve described it above should be deducted in the year it was paid. A discussion of the accrual method is probably a more expansive, not to mention boring, than you might want to publish in your blog.
5. What does “capitalized” mean?
Capitalizing an asset basically means the cost can be expensed over time, either through depreciation or amortization. The logic is that the cost actually benefits more than one tax year. One example is the purchase of a computer. While the computer is purchased in 2009, the taxpayer will actually use it for several years and depreciate, or expense, the cost over time. An exception is to take a Section 179 election, which allows the taxpayer to expense the whole cost in the year paid. This allows the taxpayer a choice to expense the item now or depreciate it over time in order to manage their tax liability. Your readers can find out more information on Depreciation by reviewing the information available at http://www.irs.gov/pub/irs-pdf/i4562.pdf
6. At what point does a writer need to pay estimated taxes as a self-employed worker? Do we also have to send in payroll taxes, unemployment, or worker’s compensation on ourselves?
According to the IRS, you do not have to pay estimated taxes if you meet all three of the following: (1) you had no tax liability for the previous year (this should NOT be confused with the fact that you received a refund, which means that you over-paid your tax liability), (2) you were a US citizen or resident for the whole year and (3) your previous tax return covered a 12 month period. For everyone else, here’s the “Safe Harbor” rule on paying estimated taxes: to avoid penalties, you need to pay the lower of 90% of the current year’s tax liability or 100% of the previous year’s tax liability. The tax liability includes any self-employment tax (SE Tax), which is also added to your total tax liability on Page 2 of your 1040 tax return.
Estimated tax payments are due at least quarterly, though they can be made on a weekly, bi-weekly or even a monthly basis. An important thing to note for any writer who also has a separate job: payroll deductions for income taxes are estimated tax payments. As long as you have enough deducted from your gross pay to meet the “Safe Harbor” requirements above, you should be okay.
6. Do you have any suggestions or tips on record-keeping or tax preparation for beginning writers?
I can’t under-emphasize that a writer needs to make themselves aware of the rules (a pound of prevention and all that). The alternative, I suppose, is to make friends with an accountant who won’t charge you for every tax question you have. Good luck on that. The link above and the publications mentioned will help. Also, be willing to talk to others who have been in the writing business a long time. They probably have some good insight (they might call it “battle-scars”) on business structures and deductible expenses that most of us have never thought about.
Wow, that’s a lot to think about, Stephen. I really appreciate you taking the time to explain all this. I’ll take a look at the site you pointed out after my brain absorbs what you’ve already mentioned. I’m also going to add it to my Helpful Links page so I’ll have it handy next tax season.
Stephen Book has been a licensed CPA for over 10 years, with experience in auditing, tax and financial accounting. Currently he works as a credit analyst for a financial company that manages over $4.6 billion in loan assets. Being a writer, though, is his first love and has been a dream of his since he was a freshman in college. Anyone who is interested can find out more about Stephen at: http://powderburnsandbullets.blogspot.com
Edit April 13,2010: Agent Rachelle Gardner posted some tax-time tips for writers on her blog. See http://cba-ramblings.blogspot.com/2010/04/tax-man-cometh.html