Tuesday, July 26, 2011

Tax Tips for Writers, Part 2 of 2 Parts

By J. J. Murphy

The conversation with certified public accountant Carol Topp continues:

Q. Is it true that a writer (or anyone) who experiences a substantial increase in income in a single tax year can refile past taxes (up to five years back) to flatten the tax liability in the high-income year? Is that a worthwhile project?

A. Sorry, but income averaging has not been allowed since 1987, except for farmers and fishermen. Now, taxes are due on income the year in which the income was received.

On the other hand, if a business suffers a loss, the owner may choose to carry back the loss. The loss can usually be carried back two years. Recently, Congress has allowed a carry-back of a loss up to five years (it’s called an NOL, or Net Operating Loss).

Q. When should a writer hire a CPA?

A. Good question! Here are times when a CPA can really help a writer:
  • When you receive a letter from IRS, especially if it involves an audit or something you do not understand.
  • When you need help with record keeping.
  • When you start to make self-employment income of more than $400 a year.
  • When you make good money and fear you’ll owe taxes at the end of the year. Ask your CPA about “estimated payments” to the IRS and your state.
  • When you sell books or e-books and have to collect and pay sales tax.
  • To assist you in preparing payroll taxes and filing payroll reports.
  • At least every three years to review a tax return you prepare. The IRS can audit back three years, so I recommend getting a CPA to review your self-prepared return at least that frequently.
  • When you purchase equipment for your business and want to take a depreciation expense.
  • To understand the pros and cons of forming a partnership or becoming a corporation.
  • When you are not sure if you need to pay self employment tax or sales tax.
No one is an expert at everything, so I encourage you to focus on what you do best — writing — and leave tax and accounting matters to those who know them best.

Carol Topp’s Tips to Find a CPA

Seek out an accountant who has the ability teach you the financial side of your business. You should feel comfortable with him or her and feel free to ask questions. If you leave a meeting with an accountant feeling confused, you need to find another accountant. To find a helpful professional, ask other small business owners in your area for their accountant’s contact information or call your state CPA society. Find a listing at www.taxsites.com/cpa-societies.html.

Topp's Tips on Business and Taxes

Carol's book, Business Tips and Taxes for Writers, will be available through her website (where she offers sample chapters and also lots of other free information) at: http://taxesforwriters.com.

J.J. Murphy is the author of the Algonquin round table mysteries (Obsidian), featuring Dorothy Parker as the wisecracking sleuth. The second book in the series, You Might as Well Die, comes out in December, 2011. For more information, see www.roundtablemysteries.com.


Sheila Connolly said...

I have an MBA in Finance, and I've always managed my own taxes (and not made enough money, after expenses, to make a difference). But I'll be happy to say that I could benefit from a CPA or tax consultant who is better versed in current tax laws (which change regularly). But having said that, I've also heard that there are many otherwise competent CPAs who don't understand how the regulations apply to writers. How easy is it to find one with that specialization?

Varun Nithya said...
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