Is Your Writing a Business or a Hobby?

By Kelly James-Enger

Chances are you began writing because you loved to capture your words on the page. Then, as you continued to write, you may have decided to pursue publication. What could be better than seeing your work in print? Why, discovering that you could get paid—sometimes well—for your writing.

Whether you write for love, or for money, or for both isn’t simply a rhetorical question. The answer may have a significant impact on whether you can deduct your writing-related expenses under U.S. law. Read on to learn what you need to know to determine whether your writing is a business or a hobby— and why that distinction is a critical one.

Let’s start with the basics. As a U.S. citizen, the money you make from your writing counts as ‘reportable income.’ Legally, you’re required to report the amount as income on your taxes, regardless of whether your writing is considered a business or a hobby.

But if you’re operating your writing as a business, instead of a hobby, you can deduct legitimate business deductions from that income. That reduces the amount you pay taxes on at the end of the year. On the other hand, if you’re pursuing writing as a hobby, you still have to report the income you make but you can’t take advantage of any business deductions (because you have a hobby, not a business.) Get it?

Let’s say your first year of freelancing, you sell several articles for $800 and win a writing contest which awards you $500. Your writing-related expenses including postage, office supplies, telephone charges, books, and other materials total $200. If you’re operating as a business, you’re allowed to deduct $200 from $1,300 and pay taxes only on the $1,100. If, however, you’re operating as a hobby, you’ll pay taxes on the entire $1,300.

So what’s the difference between a business and a hobby? After all, even if you’re writing to make money, you probably enjoy your craft, right? The key for the Internal Revenue Service comes down to something called ‘profit motive.’ Profit motive essentially means that you’re writing with the intention of making money from your writing—not simply pursuing a pleasurable activity.

How can you convince the IRS you’re writing with a profit motive—to make money, in other words—if you ever are audited? The IRS considers a number of factors, but some of the things you can do to prove this include:

  • Submitting your work only to markets that pay. You’re writing for money, not for exposure.
  • Dedicating significant time and effort to your freelancing career—not approaching it in a sporadic or haphazard fashion.
  • Setting annual financial goals for your writing business, and aiming to maintain or exceed them over time. (Making a profit doesn’t absolutely prove that your writing is a business, not a hobby, but it certainly helps.)
  • Keeping records of your submissions, assignments, income, and expenses like you would with any other business.

The Bonus of a Writing Business

Once you pass the ‘writing as a business’ test, you’re entitled to deduct all ordinary, necessary, and reasonable expenses related to trying to make a profit in your business. According to IRS regulations, those expenses are the ones that are common, accepted, helpful, and appropriate for your writing business. For most freelancers, those expenses would include:

  • Computer and software purchased and used for your business;
  • Paper, letterhead, pens, printing cartridges, and other offices supplies; Postage and mailing expenses (and these can add up fast!);
  • Telephone expenses including long-distance charges (while you can’t deduct your primary phone line, a second one used solely for business is deductible); Travel and entertainment related to your business, such as lunch with an editor or trip to attend a writing conference (note that you can only deduct half of your meals); and
  • Writing-related classes and events.

You may also be entitled to a home office deduction if you use a section of your house or apartment solely and exclusively as your place of business, and to deduct the cost of traveling from your home office to other locations for business reasons— such as mailing manuscripts, conducting face-to-face interviews, meeting with clients at their offices, and attending a networking event. With automotive expenses, you can choose between the actual expense method or the more commonly used standard mileage deduction to write off allowable operating costs.

The bottom line is that if you’re writing with the intention to make money, keeping good business records and maintaining expense receipts can support your ‘profit motive’ position and reduce your tax liability. As a smart, savvy writer, you want to make as much money as possible—but pay as little tax on it as you legally can.

Freelance journalist and speaker Kelly James-Enger is the author of books including Six-Figure Freelancing: The Writer’s Guide to Making More Money (Random House, April, 2005) and Ready, Aim, Specialize! Create Your Own Writing Specialty and Make More Money (The Writer Books, 2003). She can be reached through BodyWise Consulting.

The Business-Savvy Writer

By Jodi Brandon

For most of the year, I think of myself as a writer. As I calculate my estimated tax payments and meet with my accountant, though, I am reminded that what I really am is a businesswoman. Most writers, I assume, are like me: more interested in—not to mention better at—the craft of writing (the creative aspect) yet forced to tackle the business elements of writing (namely, marketing, promotion, and advertising; growing your business; and taxes). Writing is, after all, a business. As is the case in any industry, the competition is stiff. The U.S. Bureau of Labor Statistics’ most recent (February 2001) findings show that about 9.4 percent of all American workers are either self-employed, temporary, or contract workers. In other words, there are quite a few of us out there vying for the freelance jobs that are available. All the more reason to be business-savvy about your writing career.

Marketing, Promotion, and Advertising

Sales are generated by marketing plans, promotion efforts, and advertising campaigns. Writers can’t think of these tasks as belonging exclusively to their publisher. Doing so hurts you where it counts: your royalty statement. You must consider your own marketing and promotion initiative. Ideally, your publisher would handle your project’s publicity efforts completely and effectively. Realistically, however, only a handful of books (think those of James Patterson, Anne Rice, and John Grisham, books that would probably sell themselves off the shelves anyway’go figure) are given the money for full-scale, knock ’em dead initiatives. Take what you can get from your publisher and supplement it as best you can. If you aren’t in a financial position to send yourself on a first-class, nationwide media tour, then consider a radio tour, which you can do from your home. (And remember that you can likely write off much of the expenses you accrue while promoting your work.)

Articles (and other shorter works) are a different story. Media tours, book signings, and such aren’t things you’ll be exposed to, but that doesn’t mean that marketing and promotion aren’t important to the work you do. You’ll likely be handling the work yourself (unless you outsource it yourself, that is). Send a press release to writing e-zines and magazines, which often list articles, books, etc. recently published. Use the clip as a way to promote you and your writing ability. (Better yet, use that clip to generate a new sale by way of a reprint.)

No matter what type of writer you are, your work warrants publicity’whether it’s generated by you or someone else. If it falls on your shoulders, then consider it a learning experience. Think of the media contacts you’ll make, the people you’ll meet, and the exposure your work will receive. That exposure will leave your readers waiting for your next piece of work, so the business side of your writing life really is important, isn’t it?

Growing Your Business

No writer is happy with the status quo. We’re constantly generating new ideas. Those ideas morph themselves into new markets. As a businessperson, think of those markets as potential clients. Put another way, then, writers are always looking for new clients to grow their business.

Growing and expanding a writing business is different from other types of businesses. You need to balance the creative aspect with the practical aspect. You need to take care of the tasks you’re already doing (sending out queries, attending workshops and conferences, researching markets, etc.) as well as some tasks that don’t seem all that appropriate to you as a writer at first glance. For example, join your local chamber of commerce or small-business association. You might not have much to say to these more “traditional” businesspeople at first, but you’ll soon find that you face many of the same challenges they do. Awkward? Perhaps. Anyone who’s ever moved knows how it feels to be the new kid in school, but you also know that the feeling passes. The same is true here. An added bonus is that you might get some clients that you never even knew existed from the contacts you make through business associations and organizations.

Taxes

Taxes are, without a doubt, the thorn in every writer’s side. They don’t have to be. (I swear!) If you don’t feel like or think of yourself as a businessperson, tax season will surely change your viewpoint. I try to look at the bright side: The more taxes I’m paying, the more I must be making, right? I realize it’s a small consolation, but it’s all I’ve got. Here are a few tips to tame the tax beast.

  • Get a good accountant. The money he or she will charge you is worth it. I don’t know about you, but I’ve got much more important things to keep track of than tax law—let alone the tax law changes each year. Not only that, he or she knows what you can and cannot deduct, what will and will not raise the IRS’s eyebrow, and so on. Try to find someone who specializes in or works regularly with freelancers (freelance writers in particular, if you can find someone).
  • Keep your receipts—all of them, from all year. As I just noted, your trusty accountant will tell you what you and cannot deduct, and the more backup you have for anything you do deduct, the safer you’ll be. After a couple years, you’ll get the hang of it. There are still occasions when my accountant surprises me with something that’s deductible, and I’m always happy to have the receipt. You can deduct just about anything—as long as you can prove that it’s “ordinary” and “necessary” to your business. These are the IRS’s key words here.
  • If you’re going to take a home-office deduction, make sure you read IRS publication #587 (Business Use of Your Home) to find out what the IRS allows and what it doesn’t. This deduction often raises a red flag in the eyes of the IRS, so it’s best to be as careful as possible.
  • Take the deductions you’re allowed to. Your accountant (if he or she is a good one) will ask you for receipts for such expenses as dues for trade organizations (such as the Society of Professional Journalists or the National Writers Union), business cards and stationery, conference expenses (registration, plane ticket, transportation while in Chicago, hotel, and meals). In my first year as a freelancer, I had no idea I could deduct a trip I took to Chicago for an editing class. I ended up missing out a hefty deduction because I hadn’t done my homework. It never occurred to me, as a new writer, that I even had expenses. That sounds silly now, but what did I know at age 23, having never even done my own taxes before? I simply handed the paperwork to my mom in previous years, and the form came back with a note for me to sign and mail it.

* * *

All of the ideas covered here are important to your writing business. Keeping the business in order enables us to do what we love best: write.

In her role as president of JBedit, Jodi Brandon has edited and/or contributed to a number of high-profile book projects, including The Barnes & Noble Guide to Children’s Books (3rd Edition), The Buzz on Beer anthology, the Frommer’s Irreverent Guide travel series, The 50 Best (and Worst) Business Deals of All Time, and Copyright Plain & Simple. In addition to her editing responsibilities, she has also completed a number of writing projects on behalf of national and regional clients, including Arcadia Publishing, Inc., Amateur Chef magazine, The Newark Star-Ledger, Bride’s Guide magazine, Lebhar-Friedman Books, The Pathway School, and TheOddSpot.com. You can find her at JodiBrandon.com

Profit Vs. Pleasure: IRS Rules Strict on Losses

By Julian Block

Those obliging folks at the IRS allow write-offs to ease the pain for losses you suffer in ventures entered into make “profits.” But long-standing rules disallow deductions for losses incurred in pursuing “hobbies.”

Because of that distinction, the feds program their computers to bounce returns that show full-time salaries and other sources of income offset by losses from sideline undertakings that turn out to be hobbies — writing, photography, and painting, to cite just some of the activities that are likely to draw the attention of the tax collectors.

How do IRS examiners determine whether your intention is to turn a business profit from, say, your writing — or just to have fun? They get their cues from Internal Revenue Code Section 183, which provides guidelines on how to distinguish between a hobby and a business. To take advantage of Section 183, you have to establish a profit motive.

To cut down on disputes, the law presumes that you are engaging in a business rather than a hobby — with the IRS as partner who is entitled to a portion of your profits — as long as you have a net profit in any three out of the last five consecutive years. Net profit is IRS-speak for an excess of receipts over expenses. (By the way, Congress, in its wisdom, decided that writers and the like are not as deserving as individuals involved in the breeding, training, showing, or racing of horses. It conferred an easier standard on the latter: two out of seven years).

So, usually, not to worry when you have at least three profitable years during the last four. Satisfy that stipulation and you are entitled to fully deduct your expenses this year, even if this is a loss year.

A QUESTION OF “PROFIT”

What if you have red ink in more than two out of five years?  A much misunderstood point is that flunking the three-out-of-five test is not fatal. You still can establish that you conduct a “for-profit” business, provided you pass an IRS “facts and circumstances” test.

These are some of the circumstances that the IRS takes into account in determining your intention to make a profit:

  • The way you conduct your writing activities — for instance, membership in writers’ organizations.
  • How much time and effort you expend in the conduct of your writing career. The burden of proof to establish that is on you, not the IRS. To back up your deductions, in the event of an audit, save such records as queries to publishers and programs from writers’ conferences. Note, too, that employment full time in some other field (as is the case with most freelancers) does not trigger an IRS refusal to classify you as a professional writer.
  • Your success in carrying on other business endeavors.
  • The amount of occasional profits, if any, that are earned.
  • The elements of personal pleasure or recreation.
  • Your history of income or losses from writing. In particular, is there a string of losses?

Your activity has to be real work; you can not use a hobby that has no income and lots of expenses to offset other income. If you want to write the Great American Novel and have been at it 30 years, if there is no income, there are no deductions.

Copyright ©2004 Julian Block. All rights reserved

Julian Block is a syndicated columnist, attorney and former IRS investigator who has been cited by the New York Times as “a leading tax professional” and by the Wall Street Journal as an “accomplished writer on taxes.” This article is excerpted from his Tax Tips For Freelance Writers, Photographers And Artists. His publication covers key changes introduced by the 2003 tax act, shows how to save truly big money on taxes — legally — and explains the steps you should take to reduce taxes for this year and even gain a head start for future years. Julian Block has a website. His books are available on Amazon.