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.
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| 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.
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| 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.
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| 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:
Spring's a great season - new life, fresh growth, clean air and hopefully, mild temperatures. More importantly, tax season is over and life can get back to a normal rhythm. Or back to what passes for normal around here, which means weird writing hours, even weirder music hours, and ranching in between it all.
