Whether we want to admit it or not, we are running a business with our writing. Sure, some consider it a hobby, but if you are paying expenses and receiving income, then no matter how big or small, you’ve got yourself a business.
Last week, I gave you an overview of what your options are in regards to establishing a corporation. Today, we will focus on ways to leverage the advantages to being self-employed. It doesn’t matter whether you incorporate or remain a sole proprietor, all the tips today apply to both. I hope this will serve as a nice checklist for you when sitting down to do taxes.
Before I continue, let me put out a disclaimer (again), I am not an accountant or attorney. I have owned my own businesses for years. I have used tax professionals and prepared taxes myself at various junctures. The Internal Revenue Service (IRS) has audited me, so I speak with some experience, just not as a tax professional. Please, take whatever information you find useful, share with your tax consultant, and heed your own professional’s advice.
Some of you commented after last week’s post about deductions that you can take in your Business of writing. Those were great suggestions; forgive me if I repeat some of them today. One thing to keep in mind is that regardless of income, you should get into the habit of keeping the records that we will be referring to today. The number one issue with a tax audit is record keeping. Typically, we creative types are the worst at that.
What types of records should we keep? I’ll give you a simple answer—everything. I’ll get more specific as we uncover certain categories. So, let’s jump in with a list of some great ways to save on taxes.
Health Insurance: As a part of the Small Business Jobs Act, self-employed individuals may be able to deduct the cost of health insurance for themselves and their families IF they were not able to participate in an employer-subsidized health plan. This can amount to thousands of dollars of deductions and help offset the cost of expensive insurance plans.
Home Office: This has always been looked at as a red-flag in the world of the IRS. My feeling is that if you follow the rules, it is a legitimate deduction ESPECIALLY in the writing community where we plop ourselves in front of the computer for hours a day. The deduction is based on the percentage of your home that is used for business purposes.
If you have a room that you use as an office, you can deduct the square footage based on the percentage of total square footage of the house or apartment. For example, if your room is 10 ft by 12 ft that would be 120 square ft. If your home is 1,800 sq. ft, then you could use a 6.6% write-off on certain home expenses, including rent or mortgage, insurance (homeowners or renters) and utilities. You might want to check out IRS publication 587 for requirements and record-keeping necessities.
As a side note, when I was audited, the examiner requested to visit the house to view the home office. In the end, the deduction was 100% allowable because I followed the guidelines and provided an honest calculation as to the office’s percentage of the total square feet. Sorry for you metric-based individuals; I hope the talk of square feet and such doesn’t turn you off.
Office Supplies: You may deduct any office supplies that you purchase for your Book business. Keep the receipts for these items and if you have non-work related items on a single receipt, highlight the ones that pertain to your business. This includes paper, pens, pencils, paper clips, staples … you name it.
Equipment: You can deduct the cost of bigger items such as filing cabinets, bookshelves, printers, and computers. Once again, the key is, are you using these items for your business. Let’s say you pick up a laptop that you use primarily for your writing, but it also sits in a public area and the rest of the family uses it for other things as well. Here you would need to determine the percentage of use for business and only deduct a percentage. Publication 535 will give you more insight into the do’s and dont’s.
Advertising: Here I include many different things, from online ads to business cards. Anything that relates to getting the word out on your business, include it here. Once again, keep receipts on all of this. Did you make bookmarks for a book signing? Count it here. Did you pay for a book blog tour? Boom, deduction. Facebook ad? That’s an expense! Did you send out a book for a reviewer or for a giveaway? Deduct the cost of the book. You get the drift.
Car expenses: There are two ways in which to deduct auto expenses—actual receipts or mileage. The IRS publishes the rate per mile that you can deduct each year. For most, it is easier to use this method. This would include car maintenance in the mileage. If you elect to go actual receipts, then you would keep gas receipts for all business-related driving and keep receipts for any maintenance (oil changes, new tires, repairs.)
For me, it is safer and more convenient to keep track of mileage. Get into the habit of resetting you odometer before you head out for any business-related driving and record that in a log at the end of the day. I have an Excel spreadsheet where I record mileage.
A bit of advice here, make sure you keep some type of calendar that will back up your mileage log. If you said you drove 36 miles to research the mating habits of pigeons, then make sure your calendar indicated that you were out doing research—this is an area that many get into a bit of a sticky wicket with when audited.
There are great opportunities for mileage deductions. As writers, we have to do research, so almost any time I drive somewhere—I’m researching. Other things that would fall under the deductions would be book signings, library talks, writing group meetings, and classes.
Meals and Entertainment: This is a category that is largely forgotten in the writer’s world, yet it is an opportunity for deductions. Any meal that you have where your business is discussed, whether with an expert in the field, a fellow writer, or meals while attending a conference, can be used as a deduction.
Here is the big take away for this deduction. You MUST keep the receipt and write on it whom the meal was with and the “business” topic that was discussed. This is probably the biggest area that I was deficit in when undergoing a review. I had the receipts, and I had a schedule on Outlook where I was and whom I was with, but the IRS wants to have original receipts with the notations directly on the receipts. Credit card statements do not work—you must have original receipts.
Only 50% of your actual expense of meals and entertainment will be deductible; check out Publication 535 for details on how that works.
Travel: I separate this from meals and entertainment, because I can take the full deduction for the cost to travel to a meeting or conference, or even for a research trip. Airfare, train tickets, hotels, and transportation are all fair game in this category. There are situations where you may be able to deduct the full cost of a meal in this category, compared to the 50% in meals and entertainment.
Postage: Again, I make this a separate category from the office supplies or advertising category. I’ve learned from the IRS that anything you can do to make your record keeping look more organized and specific is a real plus. Any postage resulting from mailing your book to a reviewer or sending a giveaway or even sending a gift to an expert in the field who helped you with your research, would fall into this category.
Bank Fees: If you set up a separate bank account to handle your book royalties and expenses, you can deduct the fees associated with that account.
Things unique to what we do: I’ve covered many of the things that are associated with our businesses. Don’t forget some of the basics like: The cost of your cover art, editing, any fees associated with publishing your book. All these things and more can help reduce your tax liability. One of my favorite advantages: I deduct the books I buy for “research.” As a writer, I’m sure you buy lots of books!
Here’s a nugget, if you attend a conference, you can deduct the dry cleaning bill after you’ve returned from the conference! Normally, things like dry cleaning and washing your car are not deductible, but there are exceptions.
I know this got quite lengthy. Thanks for bearing with me to those who made it to the end. The IRS puts out a publication, Starting a Business and Keeping Records that can be found here, that you might find very helpful. Let me know if you have some nuggets that we haven’t touched on. Do you have a favorite deduction?