When I began writing, I wasn't necessarily thinking of supporting myself in my old age with income from the activity. However, when I got that first check for $25 from Upper Room, you can bet that I made a copy and shoved it into my "income" folder for my CPA. Unfortunately, there were lots more things in the "expense" folder at that time than on the "income" side. When this month's newsletter from the CPA firm I use contained an article about deducting expenses for a business that's non-profit (not by choice or due to one's innate generosity--it just didn't make a profit), I thought some of the writers who read Random Jottings might appreciate seeing it. The standard disclaimer applies: This isn't tax advice. It's general commentary. Consult your own accountant for advice regarding your situation.
My thanks to Lindsay Sacco at Middleton, Burns & Davis, Dallas, Texas, for permission to publish the following:
According to the IRS, incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that sum up to about $30 billion per year in unpaid taxes. In general, the ordinary and necessary expenses incurred while conducting a trade or business are deductible. The IRS defines an ordinary expense as an expense that is common and accepted in the taxpayer's trade or business. A necessary expense is defined by the IRS as an expense that is appropriate for the business. An activity is usually considered a business if it makes a profit during at least three of the last five tax years, including the current year. An exception is breeding, showing, training, or racing horses. Such activity is presumed to be a business if it makes a profit during at least two of the last seven years. The above "rules of thumb" are not by themselves determinative of business versus hobby. Rather they are simply rebuttable presumptions. The following list of questions will help make the determination whether the activity should be considered business or hobby:
-Does the time and effort put into the activity indicate an intention to make a profit?
-Does the taxpayer depend on income from the activity?
-If there are losses, are they due to circumstances beyond the taxpayer's control or did they occur in the start-up phase of the business?
-Has the taxpayer changed methods of operation to improve profitability?
-Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
-Has the taxpayer made a profit in similar activities in the past?
-Does the activity make a profit in some years?
-Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
Just a couple of editorial comments. For most of us, all the time spent getting that first contract could certainly be considered "start-up." Other than that, our failure to get paid for what we do definitely represents circumstances outside our control--i.e., the opinion of the editors and pub board. And goodness knows we've all tried to change the way we do things to make our writing successful. Don't know if the IRS would agree with our reasoning, though. (And isn't it interesting that they recognize that breeding race-horses is riskier than trying to write for profit).
Again, this is just furnished for your information, not as the springboard for a debate. Talk with your own CPA. Meanwhile, I hope your writing is so successful this next year that it puts you in a whole new tax bracket. We should all have such a problem.
Come back on Thursday for an interview with DiAnn Mills and information about her new book, When The Nile Runs Red.