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.

Tax Tips for Writers, Part 1 of 2 Parts

By J.J. Murphy

Dorothy Parker once said, “The two most beautiful words in the English language are ‘check enclosed.’” The witty Mrs. Parker also published a book called Death and Taxes. I’ll let you connect the dots.

Then again, you may find that connecting those dots isn’t so easy. Let’s face it—we’re writers, not accountants. To that end, I took the opportunity to ask for a few tax tips from Carol Topp, a certified public accountant and a writer. Carol is the author of an upcoming book, Business Tips and Taxes for Writers (Media Angels), which will provide nuts-and-bolts advice on topics such as income tax, sales tax, self-employment tax, tax deductions, financial planning, bookkeeping and — last but not least — mistakes that authors and publishers make. Here’s the Q&A with the C.P.A.

Q: What’s the best business (or tax) tip that, in your experience, most writers don’t seem to know?

A: Only one? Here’s one tip: Calling your writing a hobby — when you have been paid — can be detrimental to your pocketbook. In other words, you may be paying too much in income tax because, unlike a business, many expenses for hobbyists are not tax-deductible.

It's fairly easy to convert a hobby into a business. You simply have a profit motive and conduct your writing as a business — meaning you keep records, consult a professional when needed, and improve your knowledge in the area of writing, as a business owner would do.

Q: What’s the bottom line on the home office deduction? Is it an automatic red flag, or is there something in a tax filing that makes it become a red flag?

A: The I.R.S. does not reveal its algorithm for choosing tax returns to audit, but C.P.A.s know from experience that the home office deduction is frequently audited. So here’s a warning: excessive home office expenses without corresponding income can look very suspicious.

Q: You make a distinction between a writer who’s a “hobbyist” and one who’s a “professional” (in a business sense). Let’s say the self-publishing hobbyist makes a nice $500 in one year and the professional makes a very nice $50,000 in a year from writing. Are these amounts fundamentally taxed differently, or is each writer taxed comparably for their income?

A: The income is not taxed differently, but the expenses are treated differently for a hobby than for a business.

A business can deduct necessary and ordinary expenses and reduce taxable income. A hobby must report all its income, but may be unable to deduct the related expenses due to limitations in the tax code. Hobby expenses are deducted on Schedule A itemized deductions under miscellaneous deductions, subject to a 2% of adjusted gross income threshold. This threshold means that a taxpayer can deduct miscellaneous deductions that are greater than 2% of their adjusted gross income.

For example, Mary has income of writing of $250. Mary’s only expenses related to this income are paper, ink, and postage of $50. Mary’s expenses can be deducted on her itemized deductions under miscellaneous deductions, subject to 2% of her adjusted gross income. As is common with many taxpayers, Mary’s expenses of $50 were too small to overcome the 2% threshold to be deductible. She received no tax deduction for her writing expenses, yet pays tax on all the income.

Additionally, the I.R.S. does not allow hobby expenses to exceed hobby income. In other words, losses from a hobby are not permitted on a tax return. A business can have a loss and it can be deducted on a tax return, but not a hobby loss. If John, a hobby writer, had income from writing of $400 and attends a writers' conference that costs $900, he could deduct his expenses (as miscellaneous deductions) up to $400 (his hobby income), but no more. The extra expenses of $500 are considered personal expenses that John incurred for the love of writing.

To be continued...


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, visit www.roundtablemysteries.com.