Saturday, March 17, 2012

Tax Tips for Authors #3 – IRS Forms


by norriuke
So, now that you’ve identified your income and gathered all the information for your expenses, it’s time to start filling in the tax forms. But before you do that, have a nice sit down and a cup of coffee or a cappuccino. You've earned it.

Now for the disclaimer: As a reminder, everything you need to know about personal and business tax reporting is available on the IRS website ( My advice is not intended to replace that of your accountant; I hope simply to help you prepare for your annual tax filing.

Nice and relaxed? Good, let's get started:

Arrugh! All the letters! Do I use Schedule E or Schedule C?

Much debate rages over whether royalty income earned from book publishing is reportable on:

Schedule E – Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.), or

Schedule C – Profit or Loss from Business.

In fairness, it’s a confusing topic because royalty income is reported as, well, Royalties on your 1099-MISC.

Schedule C was my natural default for this one, but I wanted to make sure this was a good hunch, so I called the IRS. Surprisingly, the agent I talked to wasn’t an ogre. He was rather nice, in fact. My IRS agent, John, said:

If you are actively involved in the business of writing and intend to make a profit through your writing, complete Schedule C. You can claim all the expenses related to running your book writing and publishing business on Schedule C.
by dmpop

However, there are two times when an author would file a Schedule E:

  • if you are no longer actively engaged in the business of writing, but are still receiving royalties from your books, or
  • if you hold the royalty rights to a book you did not produce.

In both cases, the earnings from those books are considered passive. For example, after a writer dies, their books continue to sell and earn royalties. The person who inherits the rights to those royalties is not actively involved in the business of producing that product, therefore, the income is passively earned. Schedule E offers limited possibilities for deducting expenses related to earning passive income.

Schedule C, on the other hand, is designed to capture all the expenses related to running a sole proprietorship, which is what you, as an author, are until you form a partnership or a corporation in some form. Most of us will remain a sole proprietorship for our lifetimes.

by Henkster

What about the office in home expenses?

The IRS rules around deducting expenses related to a home office are documented in handy little tool called Publication 587. Ensure the six rules apply to you, and if they do, complete Form 8829 – Expenses for Business Use of Your Home.

Once you have the figure on Line 35, carry it to Line 30 on your Schedule C.

I’ve filled in my Schedule C or Schedule E, now, where do the numbers go?

The final figure from your Schedule C or Schedule E, whether a profit or loss, rolls to page one of the almighty Form 1040 – U.S. Individual Income Tax Return. There, it is added to your other sources of income to produce your Adjusted Gross Income figure, which is the bottom line on page one.

Make sense? Ask questions below, and I'll do my best to answer them.

Some helpful links:

Instructions for Form 1040

Be sure to check out other relevant posts: