{"id":3045,"date":"2012-02-20T05:00:05","date_gmt":"2012-02-20T10:00:05","guid":{"rendered":"http:\/\/www.allandouglas.com\/blog\/?p=3045"},"modified":"2025-04-21T01:56:41","modified_gmt":"2025-04-21T05:56:41","slug":"about-writing-business","status":"publish","type":"post","link":"https:\/\/pineymountainfoster.org\/thoughts\/about-writing-business\/","title":{"rendered":"About This Business of a Writing Business"},"content":{"rendered":"
\"writing
iStockphoto image, all rights reserved<\/figcaption><\/figure>\n

I have a friend, a retired aerospace engineer turned artist, who hates bookkeeping.\u00a0 He sells his art at local art shows, and from his home.\u00a0 When he makes a sale, the money goes into a steel cash box.\u00a0 When he buys supplies the money come out of the box.\u00a0 When he wants to know how much money he has made from his art, he counts the contents of the cash box.\u00a0 This is elegant in its simplicity, but would be a nightmare should he ever be audited.\u00a0 Are you a hobby writer or a writing business?\u00a0\u00a0 <\/p>\n

A Writing Business<\/h1>\n

Whether you are a fledgling writer, just dipping your toe into the waters of publication, or have waded in up to your knees, and are seriously considering going for a full swim, looking at your writing as a business instead of a hobby will help you plan for the future. \u00a0Here are a few tips on the business of writing to make tracking your self-employed income and expenses easier.<\/p>\n

How Much Income is Income?<\/h1>\n

In the USA, the IRS says that if you earn less than $400 per year from a small business or hobby activity you do not need to claim it as income; anything above that needs to be claimed on your annual income tax report.\u00a0 Incomes from employment or investments<\/a> have very different allowances and vary by age and situation.<\/p>\n

What Form?<\/h1>\n

A recent IRS newsletter stated that the most common mistake that authors make when filing their income taxes is to use the Schedule E: Rents & Royalties<\/strong> form to report income from writing.\u00a0 While this would appear to be the perfect solution for you, the \u201croyalties\u201d referred to here are income received from leasing or selling water, mineral or oil rights on property you own, not payments from the sales of books and articles.<\/p>\n

The form we, as writers, should use is the Schedule C: Income and Expenses from a Small Business<\/strong>.<\/p>\n

If, like my friend above, you are allergic to all forms of bookkeeping you can claim your writing income as \u201cother income\u201d on your personal 1040 form.\u00a0 This allows you to stay out of trouble by paying taxes on the income, but does not allow you to deduct business expenses from that income before it is taxed.\u00a0 The Schedule C allows you to categorize expenses and deduct them from your gross income (total writing income received) and pay taxes only on the net income (income minus allowed expenses).\u00a0 In cases where you have invested heavily in a book and sales have not taken off yet, you may end up with a negative amount of income from your writing business that will offset personal income from employment or investments, thus reducing your overall taxes.<\/p>\n

The 3 of 5 Rule<\/h1>\n

However, the IRS can (and I stress the word can) invoke their \u201c3 of 5\u201d rule that says that any for-profit business that does not show a profit for three out of any five years can be forcibly declared a hobby and may not deduct business expenses.\u00a0 Non-profit businesses are not saddled with this, but must be registered and licensed as a non-profit corporation.<\/p>\n

This rule was implemented when tax advisors advised their rich clients to start a hobby\/business, and run it poorly, to generate a negative cash flow that would offset personal income.\u00a0 This way they could escape some of their tax liability.<\/p>\n

This rule is, however, not an automatic \u201cthree strikes: you\u2019re out\u201d run by the computers.\u00a0 The IRS knows that new companies may run at a loss for several years as they earn back start-up costs.\u00a0 Economic conditions can place strains on a company that will cause them to run at a loss for a time.\u00a0 Reorganization can cause a company to stumble for a while as it gets its\u2019 stride back.\u00a0 Therefore, they have a series of tests that can be applied should they flag your writing business as a potential tax dodge.\u00a0 They are:<\/p>\n

    \n
  1. You carry on the activity in a businesslike manner,<\/li>\n
  2. The time and effort you put into the activity indicate you intend to make it profitable,<\/li>\n
  3. You depend on income from the activity for your livelihood,<\/li>\n
  4. Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),<\/li>\n
  5. You change your methods of operation in an attempt to improve profitability,<\/li>\n
  6. You, or your advisors, have the knowledge needed to carry on the activity as a successful business,<\/li>\n
  7. You were successful in making a profit in similar activities in the past,<\/li>\n
  8. The activity makes a profit in some years, and how much profit it makes, and<\/li>\n
  9. You can expect to make a future profit from the appreciation of the assets used in the activity.<\/li>\n<\/ol>\n

    Test number 1 means (in part) keeping a pristine set of books.\u00a0 Slipshod or nonexistent bookkeeping just screams that you are not serious about your business of writing and will likely result in increased taxes, penalties and late fees should you be audited.<\/p>\n

    DIY or Hire-out?<\/h1>\n

    Some authors say that they are really, really busy writing; they don\u2019t have time to track income and expenses and file receipts.\u00a0 No problem; hire a bookkeeper.\u00a0\u00a0 Your Yellow Pages will have all manner of bookkeeping services listed to choose from.\u00a0 You don\u2019t have to pay the high prices of a CPA if you don\u2019t want to.\u00a0 People who are employed as bookkeepers in a business will often offer their services to a limited number of clients on their own time and can work fairly inexpensively.\u00a0 Your only responsibility will be to mark receipts as to what they were for and put them in a shoe box to be delivered periodically to your bean counter.\u00a0 Understand, however that hiring an incompetent bookkeeper will cause you all manner of heartache \u2013 check references.<\/p>\n

    If you\u2019ve got more time than money, a basic bookkeeping program for your computer can be acquired for around $39.\u00a0 A used copy may be had even cheaper from EBay, Amazon, or some software stores.<\/p>\n

    Most writers are not going to need the high-end features included in the high priced accounting software packages.\u00a0 If you do no work-for-hire (just write books) you don\u2019t even need invoicing, just a General Ledger with report generating capability.<\/p>\n

    Simple bookkeeping can be done on a spreadsheet program (like Excel) or even on paper.\u00a0 But doing it manually on paper will be the most time consuming and will require some knowledge of accounting procedures to get the calculations right.\u00a0 Software eliminates the need for anything but a basic understanding.<\/p>\n

    Next Time<\/h1>\n

    In the next episode I\u2019ll talk a little about setting up a basic chart of accounts for your writing business and what you need to watch for in categorizing your expenses.\u00a0 Along the way I’ll discuss some aspects of business start-up.<\/p>\n

    Was this helpful to you?\u00a0 If so please leave a comment below.\u00a0 Questions?\u00a0 Same thing.\u00a0 Thanks for reading!<\/p>\n","protected":false},"excerpt":{"rendered":"

    I have a friend, a retired aerospace engineer turned artist, who hates bookkeeping.  He sells his art at local art shows, and from his home.  When he makes a sale, the money goes into a steel cash box.  When he buys supplies the money come out of the box.  When he wants to know how … Continue reading “About This Business of a Writing Business”<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[10],"tags":[47,34,29],"class_list":["post-3045","post","type-post","status-publish","format-standard","hentry","category-tools","tag-bookkeeping","tag-business","tag-writing"],"_links":{"self":[{"href":"https:\/\/pineymountainfoster.org\/thoughts\/wp-json\/wp\/v2\/posts\/3045","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pineymountainfoster.org\/thoughts\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/pineymountainfoster.org\/thoughts\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/pineymountainfoster.org\/thoughts\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/pineymountainfoster.org\/thoughts\/wp-json\/wp\/v2\/comments?post=3045"}],"version-history":[{"count":1,"href":"https:\/\/pineymountainfoster.org\/thoughts\/wp-json\/wp\/v2\/posts\/3045\/revisions"}],"predecessor-version":[{"id":21608,"href":"https:\/\/pineymountainfoster.org\/thoughts\/wp-json\/wp\/v2\/posts\/3045\/revisions\/21608"}],"wp:attachment":[{"href":"https:\/\/pineymountainfoster.org\/thoughts\/wp-json\/wp\/v2\/media?parent=3045"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/pineymountainfoster.org\/thoughts\/wp-json\/wp\/v2\/categories?post=3045"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/pineymountainfoster.org\/thoughts\/wp-json\/wp\/v2\/tags?post=3045"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}