Tuesday, April 3, 2007

Continuing With the Tax Topic

I had to chuckle reading Norms posting about taxes - especially about the postage - well put. I personally electronically file and have for many years. I'm one of those individuals who's a big believer in electronically filing and electronically paying my balance due or receiving my refund. So is the IRS. A little known bit of information is that the first year that taxpayers were allowed to receive their refunds by direct deposit the IRS saved about $35 million in postage and this was about a decade ago - the US Postal service has been losing business from the IRS ever since. Congress has actually insisted that the IRS get at least 80% of taxpayers to electronically file in the next few years but the last time I read the statistics they weren't as close as they want to be. Electronic filing also saves the IRS from having to hire extra personnel to key in those paper returns that are mailed.

Okay back to taxes and writers:

For more than a decade I worked for a leading tax firm preparing individual and small business taxes. I now lecture and write on the topic of tax tips for writers, and I often point out that the word taxing has a very negative connotation. I think we've all accepted that taxes are a necessary event - some would even say evil - but I think most individuals who decide to write don't realize that as far as the IRS is concerned they fall into one of three categories:

1 - the individual who writes just to write and receives no income of any kind for his/her writing and/or does not deduct any expenses related to their writing endeavor,

2 - the individual who writes as a hobby (doesn't intend to make a profit), or

3 - the individual who writes to earn money with a clear intent to make a profit. Basically this individual is a small business and will typically file what is called a Schedule C that becomes an integral part of his/her individual tax return.

Many will take door number 3 without making sure that they actually qualify as a small business. Yes, I said qualify as a small business - not as a writer per se - but as a small business who's product is a work of fiction, non-fiction, poetry, screenplay or other product of writing.

The IRS doesn't care if someone writes, however, the IRS does care (because Congress says it can) if someone earns money and doesn't properly report it or writes off expenses in a way that isn't according to the rules. And these are rules that are generated from the laws that Congress passes.

Now the IRS doesn't always get it right, after all the tax code is so long and so complicated that it's difficult for anyone to know everything about the tax code. Just like medical and other professionals, tax professionals are specializing more and more. So, if you take your taxes to someone else for preparation make sure they know something about not only small businesses but the types of income and expenses associated with a writing business.

For an eye-opening example of when the IRS got it part right/part wrong according to the US Tax Court go to www.legalbitstream.com and the ruling concerning the playwright of N. Joseph Calarco. Pay particular attention to the judges' rulings regarding reasonable and necessary business expenses vs. personal use AND what constitutes intent to make a profit.

So, the moral of this story is that writers aren't just writers - in many cases they are small businesses and as such need to be aware of more than just the next writing deadline.


Rob Walker said...

Terry -- great advice here. I have been doing it your way for years too, but I rely on a service as the forms make me go DUMB -- deaf, dumb, and blind.

Rob Walker

Terri Stone said...

and it (the forms) will only get worse - everytime a politician says they're going to simplify the tax code - look out!

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