As we all become more serious as writers, there comes a point where we will inevitably consider the tax ramifications of our careers. As far as the IRS is concerned, writing can either be a business or a hobby. The purpose of a business, generally speaking, is profit, while the purpose of a hobby is recreation.
For businesses, income and losses are generally reported on a Schedule C, and the profit or loss is then carried over to the taxpayer’s Form 1040. Being able to deduct losses against against income is the big advantage of operating your writing as a business. On the other hand, the U.S. government does not permit a taxpayer to deduct hobby expenses but does require income to be declared. (And here’s a warning: Beware articles written prior to 2018 about hobby expenses. The Tax Cuts and Jobs Act of 2017 changed the way hobbies are treated by the IRS.)
The IRS provides some factors as guidance on whether you’re operating a business, and I’ve adapted them to be more writer-focused:
• Whether you carry on your writing in a businesslike manner and maintain complete and accurate books and records. Do you keep accurate records of all your income, royalties and expenses? Do you advertise? Have a separate checking account for your business? Attend conferences or classes? Keep receipts for all business expenses? All of these can help establish your claim to the IRS that you are operating a business.
• Whether you have personal motives in carrying on the activity. Yes, for most romance writers, we write because we were driven by some amount of passion. However, there’s a difference between a writer who, for example, only hopes to publish one novel just to say she is published and a writer who plans a career of multiple novels, marketing, and generally learns the rules of the business. If you find yourself in the former category, the IRS may say your writing is a hobby. Having a profit motive is the most important factor the IRS looks at when determining whether your writing is a business.
• Whether the time and effort you put into your writing indicate you intend to make it profitable. The more time you dedicate to your craft, the less it looks like a hobby. Are you spending time on your writing that is comparable to what a full-time corporate job requires?
• Whether you depend on income from writing for your livelihood (or intend to rely upon it). Let’s say you make $50k from your non-writing job, have a large savings account, and you made $1200 from writing last year, the first time you’ve ever made a profit on writing. This will probably trigger IRS scrutiny as it would be difficult to argue that you rely upon that money for your livelihood when you make significantly more income from your non-writing job.
• Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of the writing business). Ask yourself if you could have made a profit but for factors in the book marketplace. Examples of losses beyond your control might be the cancellation of a book contract by a publisher or the failure of a publisher to pay royalties. If you find yourself in that situation, point out to the IRS what you did to mitigate or contain costs.
• Whether you have the knowledge needed to carry on the activity as a successful business. (Good thing you joined KRW!) Do you have the knowledge to carry on your writing as a business? Are you keeping records, keeping an eye on profitability? Making changes when necessary to increase profitability?
• Whether your writing makes a profit in some years and how much profit it makes. The rule of thumb is generally it needs to be profitable three out of five years to be presumed profitable. However, there are always exceptions to the rule. If you can show a trend of decreasing losses over the years, and you’re getting closer each year to being profitable, you might convince the IRS that your writing is a business even though it doesn’t meet the Safe Harbor rule of profit in three of the last five years.
Be encouraged, hobbyists. While the hurdles to becoming a “business” may seem daunting, today’s hobby can easily become tomorrow’s bona fide business with dedication. Yes, the IRS does put a lot of scrutiny on writers, mainly because for many writers it’s a labor of love and not profit. But writing can be a passion that brings you income with some work.
Disclaimer: I’m not a tax expert by any means! This article is only meant to get you thinking about the tax implications of your career. Please consult a qualified tax preparer for updated tax laws and further advice about how these rules might apply to any individual tax situation.