#Authors! Make Love to the #Tax Man - Get Your Paperwork in Order...

Yeah, I know. Nobody thinks "sex" when the tax man shows up. That was a cheap ploy to get you here because everybody hates tax time...






I'm a CPA and this time of year, I step out of the Cass Elliot Crime Series to work in a tax office. We see hundreds of clients every year, and most of them pay more for our services because they don't take the time to organize their paperwork. (We have one trainable client - he tossed all his paperwork in a boot box and brought it to us last year. It took a couple of hours to sort through it all, and when we gave the boot box back to him, everything was bundled together by source: farm income and expenses, royalty income, itemized deductions, etc. This year, he did the organizing himself, saving us two hours and himself some cold cash.)




I know, I know. Authors are creative types and all this tax nonsense brings us down. It's not that bad, really. If you haven't kept track of your writing expenses during 2014, it may take a little longer to pull everything together, but it's worth the effort because every legitimate business expense you identify lowers your total writing income, which lowers your tax bill.



You'll need to:

gather your 1099-MISC statements from Amazon, Apple, Smashwords, B&N, etc. Ensure your name is spelled correctly and your Social Security number is accurate.

summarize any fees you received for speaking or other engagements.

summarize the income you earned from selling books directly (at book signings, book fairs, or direct from your website). Remember to add up the cost of all those books including shipping, any postage related to shipping them to buyers, and do a count to see how many books you have left in inventory at the end of the year.

prepare a simple schedule summarizing all the expenses related to your writing business (we have four businesses, use an Excel spreadsheet for each, and update them regularly). Use the expense section from Schedule C as a guide. (Read this post if you're not sure about using Schedule C over Schedule E.)

remember to include the miles you drove related to your writing business. If you take a royalty check to the bank, take a writing related package to the post office, visit a book club, or pick up paper and toner, all of these miles are legitimate business expenses. The easiest way to track them is to keep a mileage log in your vehicle, and write down the date, purpose of your trip, and starting and ending miles each time you make a business related trip (the IRS wants you to use a log and keep it as documentation). Failing that, estimate distances and number of trips. This year, start logging.

remember to include the cost of hotels, plane tickets, cab fares, parking, and meals when you travel for writing related purposes. If you attend writing conferences, the fees to attend are deductible.

include the cost of memberships or dues paid to writing related organizations, and the cost of writing related subscriptions.

if you write at home, measure the square footage of the area you use exclusively for your writing and the storage of writing related materials. You might be entitled to take an 'office in the home' deduction. Ask your tax preparer.

calculate the cost of health, dental, and long term care insurance for yourself and your family. If your writing business is profitable, you may be able to deduct some or all of these costs.

And that's pretty much it, folks. Your tax preparer will love you, or, if they're the no-personality type, not hate you. If you self-prepare your taxes, it'll make the process much smoother.

Leave your questions in the comments and I'll do what I can to help.




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To Schedule C, or to Schedule E? That is the Question. #authors #taxes

It's that time of year again, when I reluctantly leave imaginary Forney County where the Cass Elliot Crime Series lives, and step into that soul-sucking experience we call US income taxes.

If you're an author, you're in the same boat. Those beautiful 1099-MISC forms from Amazon, Smashwords, B&N, Apple, etc. are arriving via mail and email, and it's time to decide how to handle your writing business for tax purposes. You'd think it would be a straightforward matter, wouldn't you?

 

Settle in. We've got some talking to do. At this point, consumption of caffeine is appropriate. This post is a long but important one.



There's much debate in the author community about IRS forms, and most of the discussion revolves around whether you should use:

Schedule C - Profit or Loss from Business (Sole Proprietorship), or

Schedule E - Supplemental Income and Loss (From rental real estate, royalties, partnerships, etc.)

to report income and expenses related to your writing business. In fairness, it’s a confusing topic because royalty income is reported as, well, Royalties on your 1099-MISC.

I use Schedule C, but I wanted to make sure I was giving you good information, 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.

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. Because this income is passive, it and any related expenses are reported on Schedule E.


To add credibility to non-ogre John's comments, the instructions for Schedule E state (on page 6, first column):

If you are in business as a self-employed writer, inventor, artist, etc., report your royalty income and expenses on Schedule C or C-EZ.

Schedule C 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.

Since the IRS says those of us who are actively engaged in the business of writing should file Schedule C, and the instructions for Schedule E even say we should file Schedule C, why the debate? It all comes down to that nasty self-employment tax.

Here's the rub: net income reported on Schedule C is subject to the 15.3% (in 2014) SE tax. In reality, you pay half that amount - you can (and should) deduct the employer portion of SE tax on page one of your Form 1040 (line 27).

Income reported on Schedule E is not subject to SE tax.

Makes Schedule E tempting, doesn't it?

Filing Schedule E means you can save 7.65% (your half of SE taxes) in taxes. However, in addition to the fact that we're supposed to use Schedule C, there's a good reason why filing a Schedule C makes sense for those of us who are self-employed.


Self-employed individuals (Schedule C filers) can deduct the cost of health, dental, and qualified long term care insurance (maximum deduction amount established by age) for themselves and their dependents to the extent of their net income from self-employment (see IRS Pub 535 on this topic). The premiums must be paid out of your pocket, not paid by an employer. Schedule E filers are not considered self-employed and cannot take this deduction.

Here's a rough example of how it works (hang with me, it's not as hard as it sounds):

You earn $15,000 in royalties from your writing business in 2014. Expenses related to that business in 2014 total $7,000. Your net income from writing is $8,000 ($15,000 minus $7,000). You'll pay $612 in SE tax ($8,000 x 7.65%).

You are a married individual and pay $5,500 in health and dental insurance premiums (out of your pocket, not paid by an employer), and $1,500 in long term care premiums for you and your spouse. Because the total of your health related insurance premiums, $7,000, does not exceed your self-employed net income of $8,000, you can deduct the full $7,000 on page one of your Form 1040 (line 29).

In this case, it benefits you to file Schedule C, despite the SE tax. "Above the line" deductions - those taken on page one of your Form 1040 - reduce your tax liability by your tax rate. (Keep hanging on, we're almost done.)

Let's say you and your spouse jointly earn $40,000. That puts you in the 15% tax bracket. The $7,000 deduction for health insurance premiums saves you $1,050 in taxes ($7,000 x 15%). Yes, you're paying $612 in SE tax, but you're also saving $438 on your total tax bill ($1,050 minus $612).

If you and your spouse earn $75,000, that tips you over the edge into the 25% tax bracket. Your $7,000 in health insurance deductions saves you $1,750 in taxes ($7,000 x 25%). You're paying $612 in SE tax, and saving $1,138 on your total tax bill ($1,750 minus $612).

To get a better idea of how this deduction works in your situation, see the IRS tax brackets for 2014, here.
 
The information included in this post is not intended to replace the advice of your tax accountant, but I hope it helps clear up the debate.

Now I'm headed back to Forney County for a little mayhem and murder. Come join me. Nothing reduces tax-related stress like killing off a few characters.


Helpful links:

Schedule C in pdf form / Schedule C Instructions

Schedule E in pdf form / Schedule E Instructions

Form 1040 in pdf form / Form 1040 Instructions


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Tax Tips for Authors #3 – IRS Forms

UPDATED WITH LINKS TO 2012 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 (www.irs.gov). 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 Schedule C

Instructions for Schedule E

Instructions for Form 8829

Instructions for Form 1040


Be sure to check out other relevant posts:

• sorting out your income,
• everybody's favorite topic expenses, and
• calculating your self-employment tax.

Tax Tips for Authors #2 – Expenses

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.

by Gerbera

The easiest way to document your business related expenses is to keep your receipts and document your mileage. 

Yup, that’s it.

Ask your questions below and I'll do my best to answer them.

 

Be sure to check out related posts on:

• sorting out your income,
• navigating the dark waters of IRS forms, and
• calculating your self-employment tax.

Tax Tips for Authors #1 – Income

UPDATED WITH LINKS TO 2012 IRS FORMS

It’s a cringe-worthy topic, I’ll grant you, but if you’re earning ANY income as an author you need at least a passing knowledge of how to prepare for tax season. And I’m just the gal to help you out.  

A crime fiction writer? Indeed.

In my other life, the one where I’m not finding creative ways to slaughter fictional folk, I’m a CPA. During tax season, I prepare a few returns and audit tax returns for a local accountant before he sends the files off to that hellish entity called the IRS. 

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, self-employment tax, 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.

So, let’s begin at the beginning:

by jnatiuk

Filthy Lucre (i.e., Sources of Income)

Gold, shekels, hard cash, or payment via Paypal. If you’ve got it coming in, the tax man wants part of it.

But how do I know how much to report?

Never fear, the IRS has a rule for that. For authors, our royalty income is documented on an IRS form called the 1099-MISC (follow the link to see the form). The payer (Amazon, Smashwords, your publisher, etc.) will send you a 1099-MISC to document your royalty earnings for the prior year. You should receive your 1099-MISCs by mid-February.

A copy of the 1099-MISC goes to the IRS, who will match it against the income you report. So it’s important to ensure that you receive a 1099-MISC from each outlet where your books are sold, and to include the royalty income on your tax forms.

And what about all the hard copies of my book I sell to friends and relatives?

by lusi

Good point. Authors also earn income from hawking our wares (physical books) at launches, fairs, book club meetings, signings, etc. You must track the income from these sales yourself, and report it on your tax forms.

You might also earn income from speaking engagements or running workshops (online or face-to-face). If you perform this work as a consultant, each organization that you provide the service for should send you a 1099-MISC if they pay you $600 or more during the year. If you organize the events yourself, you must track this income and report it on your tax forms.

Make sense? If not, feel free to ask questions below and I’ll do my best to provide answers.

Be sure to check out related posts on:

• everybody's favorite topic, expenses,
• navigating the dark waters of IRS forms, and
• calculating your self-employment tax.