07 August 2015

Author Tips: Understanding and Recording Expenses for Federal Income Tax Returns

Author Writer Income Tax Expenses With the year over half gone, remember when you were doing your 2014 taxes and swore an oath that “next year will be different”? If you did, you’re in good company. While the accounting department at Grave Distractions Publications ban the practice of using shoeboxes for receipts sometime in the not so distant past, we took a good look at our practices over the past tax year. After this fit of introspection, we thought we’d share some of the tools and tips that are sure to help out the writers and freelancers in the coming tax year. Please keep in mind that we’re just giving friendly advice and you are strongly advised to seek the counsel of a licensed tax or accounting professional.

Most people think that you have to get complicated tax programs or amass a vast knowledge of double entry accounting to maintain good records for income tax preparation. Nothing could be farther from the truth. The key to smooth tax preparation is being disciplined about your record keeping. That’s easier said than done, but you have to carve out time on a scheduled periodic basis to keep your books. If you do not spend a little time each week or two making records, you will lose and/or forget information that could reduce your income tax bill.

The key to reducing your debt to Uncle Sam is to claim all of your legitimate business expenses. If you’re an author that hasn’t set up a company for your writing endeavors, or only write part-time and have a day job, you’re probably classified by the IRS as self-employed for your writing efforts. This means that you’re probably mingling your personal finances with your business finances. We strongly suggest opening a separate bank account that your writing income and expenses are deposited and paid from. This will make tracking your cash expenses much easier than trying to break those expenses out from your personal living expenses. If you’re not interested in opening up a separate bank account, try using a single credit card for all of your business expenses. With either method, download your statements every month to a spreadsheet and you have an easy to keep up with expense record.

Understanding what constitutes a legitimate business expense is the second key to claiming every business deduction due to you. Expenses can be classified as either cash or non-cash. Cash expenses are easy to understand. You purchase a good or service that is directly related to your business of generating income through writing. Some examples of cash expenses that could be considered a legitimate business expense are:
  • Communications (Skype credit purchased for overseas interviews and cell phone usage. Cell phone usage is a thorny area if you use your cell for both business and personal use. You’ll have to keep a record of how much time you spend on business calls versus personal calls to be able to ascertain what portion of your cell bill is deductible. You might consider a second cell phone for business purposes or a VoIP service that is only used for the writing business to sort business for personal cell phone use.)
  • Office supplies (Pens, paper, printer ink, post-it notes, software, etc.)
  • Postage (Sending promotional materials, review copies, and contracts.)
  • Professional organizations dues (These have to be directly related to the business of writing. If you belong to the Rotary Club, unless you’re writing about the Rotary Club, you couldn’t deduct your membership dues.)
  • Professional services (Accounting services, editing, cover design, layout, publicists, and website design / domain names.)
  • Promotional copies (Both print and eBook editions of your book sent to reviewers.)
  • Reference books and materials (Used for researching a book project. Even if you haven't finished a book in a given tax year, you may be able to claim research materials.)
  • Travel (Hotel room and meals for an out-of-town book festivals, book signing, interview, or research. Travel expenses can get hinky in the IRS codes, so check with your accountant on what is allowed.)
Non-cash expenses are a little more difficult to wrap your mind around. These are items that negatively impact the business of writing, but you don’t actually lay out any greenbacks for. Some of these non-cash expenses are:
  • Bad debts (Have you been stiffed on payment for an article you wrote or royalties owed to you?)
  • Depreciation (This is a whole ball of wax that needs, like everything else in this article, needs to be discussed with your tax professional. Basically, depreciation is an element of the tax code that rewards you for purchasing new durable goods like computers or printers. The mentality is that a durable good loses value over time and, therefore, the expense can be metered out over what the IRS considers the “useable life” of that good. In most cases, it’s better to depreciate out a durable good rather than taking the expense for purchase on the front end. Once again, talk to your accountant about this one...)
  • Home office (You can deduct a portion of your rent/mortgage, utilities, property tax, and insurance for a space in your home solely used for business purposes. This is one of those expenses that is a hybrid cash and non-cash expense. Since you’re paying for a home anyway, claiming a home office acts like a non-cash expense. Like depreciation, you need professional guidance on this one. Usually, a home office is linked to a proportion of the square footage in your home your home office takes up. So if you have a 2000 sq. ft. home and your office takes up 200 sq. ft., you can deduct 10% of your rent and utilities for that office. If you overestimate the value of your home office, you’re committing tax fraud. If you underestimate a home office, you’re paying tax dollars you shouldn’t. So be very careful with this classification of expenses.
  • Mileage (This has a cash component of gas and vehicle maintenance, but the IRS allows a flat rate for each mile you drive for your business. The rate can change, so check for this year’s rate. You can claim either gas and maintenance or the flat IRS rate. It’s generally better to take the IRS rate and that’s why we’ve considered it a non-cash expense. The IRS has strict record keeping guidelines for mileage, so keep your records to IRS standards. Some places you could claim mileage for is: banking, book signings, driving to meetings with those providing professional services, and post office runs could count as legitimate mileage expenses.)
Talk about all of these expense classifications with your accountant to see what you can and cannot deduct on your federal income tax. Just remember that every dollar you can claim as a legitimate business expense will reduce your gross income and, therefore, will reduce your overall tax bill. Yes, it’s a pain to keep up with all of this. However, trying to make money at writing is hard enough without leaking your hard-won profits to “the man.” Just make sure you’re claiming expenses that are within IRS guidelines, consult an accountant or tax professional, and keep good records. After all that, don’t forget to write!

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