The Big Heat: Tax Tips for Authors #2

UPDATED WITH LINKS TO 2012 IRS FORMS

So, let’s move on to everybody’s favorite topic, expenses… (get a cup of coffee or tea, this post is a bit longer).

The disclaimer: As a reminder, everything you need to know about personal and business tax reporting is available on the IRS website (www.irs.gov). In these posts, we'll cover income, expenses, and which IRS forms to use. My advice is not intended to replace that of your accountant; I hope simply to help you prepare for your annual tax filing.

by bubbels

Worried that you’ll have to slice off a thick slab of the writing income you’ve worked so hard to accumulate and give it to the tax man? Well, you might, but not before you deduct the reasonable expenses associated with running your writing business.

Like what kind of expenses?

All sorts! Before you start rubbing your hands in glee, images of tax refunds dancing in your head, take a look at what the IRS says about expenses (included in a handy little tool called Publication535 – Business Expenses - it's still titled "2011", but don't worry, the only change is in mileage rates. For 2012, they're .555 per business mile.):

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

There are three categories of expenses that you, as an author, need to consider:

Deductible – costs that are deductible this year

Capital – costs that must be spread over several years through depreciation

Cost of goods sold – if you carry an inventory of physical books, you will calculate the cost incurred in producing the books sold during the year to arrive at the true value of your sales (it’s not as complicated as it sounds)

Aww man, this is hard. Can you make it easy?

I’ll try. Here we go:

Deductible Expenses

Most of your business expenses will be deductible in the current year because you’re expected, generally, to get benefit from them for only one year.

Common items include:

Advertising
Car and Truck Expenses, or Mileage – that’s right. If you give a presentation at a book club, bookstore, or school, or make a trip to purchase an item for your business, the cost of the miles that you travel for business purposes is deductible. That means that you need a list of the trips you’ve made for business purposes and the total miles traveled
Commissions and Fees – paid to your agent or other representative
Contract Labor – related to editing, formatting your book, cover design, recording / producing an audio book, secretarial support
Office Expense – toner or printer cartridges, pens, paper, files, subscription to online backup facility, copyright, ISBNs
Rent or Lease – applicable if you rent a room or office for writing or storage purposes, or rent equipment specific to writing (renting a laptop for travel, for example)
Repairs – to business related equipment such as your computer, printer, fax machine
Supplies – business cards, blank CDs for backing up your work, laptop case
Travel, Meals, and Entertainment – costs related to overnight travel for business purposes, including airfare, hotel, meals, parking, taxis
Other Expenses – business portion of cell phone cost, internet subscription, dues for professional organizations, fees for attending conferences, post office box used for business purposes
Business Use of Your Home – a delicate subject, but if you write in your home and can define the area that is used for business purposes only, you may be able to deduct a portion of your utilities, property taxes, home insurance, etc. Talk to your accountant about whether this deduction is appropriate for you

Capital Expenses

You’ll classify some expenses as ‘capital’ because you’ll use them for more than one year. Your smart phone, computer, printer, and fax machine fall into this category. Any office furniture purchased specifically for your business, such as a desk and chair, would qualify, as well. If you buy a block of ISBNs and don’t use them all in one year, the remainder might be considered a capital asset – ask your accountant.

by jnatiuk

Instead of taking the full cost of these items as an expense in the year in which they are purchased, you will capitalize them and take a portion of the cost as an expense over a number of years.

For example, as of the 2012 tax year, computers are considered seven year property. (I think this is waaaay too long, but nobody asked me.) That means that the $1,000 you spent on your laptop will be divided by seven, and you’ll expense $142.86 on your tax return each year for seven years.

Cost of Goods Sold (COGS)

This expense is only relevant if you maintain an inventory of physical books or audio books for sale. If you only publish in ebook format, or use a print-on-demand service such as CreateSpace, you won’t need to worry about COGS.

Getting your COGS calculation right is important because it’s a reduction to your gross sales, which reduces your taxable income. The equation is simple and documented on page two of IRS form Schedule C, which we’ll talk about in the next post:

Beginning inventory (books on hand at beginning of year) $1,000

Purchases of additional books + $500

Less books withdrawn for personal use (perhaps as gifts) - $200

Gives you books available for sale during the year $1,300

Less your ending inventory (books on hand at end of year) - $200

Gives you Cost of Goods Sold $1,100

The COGS figure carries to page one of the Schedule C, and you subtract it from gross sales to arrive at your gross profit. For example, if you earned $3,000 from the physical books you sold, your gross profit is $3,000 - $1,100 = $1,900.

THE MOST IMPORTANT THING TO REMEMBER ABOUT EXPENSES

If you’ve read this far, you’re serious about the business of writing and, hopefully, about getting your accounting and taxes right. The most important thing to remember about your expenses is that they must be documented. If the IRS audits your tax return, they may ask to see evidence supporting the expenses you’ve claimed.