I just submitted a post to the RWA-Romance Writers of America with some of this content. As I put that submission together, I realized there is little real information out there, specific to writers, which provides detailed information about Tax law in the United States: How it affects them, and how a lack of information can harm them.
This is 100% US Tax law…but if you are in another country consider it, and look into your local laws.
All information provided is general and does not qualify as specific advice about your personal situation.
When in doubt, consult a tax professional!
If you are a writer who is just starting out. A book that is not finished, not edited, and not for sale will NOT be sufficient to prove you are in business! This will all fall under START UP COSTS, which can be documented but not yet deducted. Think of it in terms of a retail store that is YET to open. They have to pay rent, staff, and inventory. All those things they need to get stuff on the shelf before they open…
Such is the writer’s first novel. You have expenses, you have costs, you have time, and effort, but nothing is for sale.
As such, none of this is deductible as a business expense.
Until that book, short story, novella, etc…is for sale all of this is start-up costs. They are valid, but not immediately deductible.
Once you have a book for sale, you can deduct them over 5 years as amortized start-up costs!
This is a complex issue, so if you have a great deal of costs or high income in your first year you may wish to consult tax professional. A 5 year straight line amortization utilizing Form 4562 is generally acceptable. 1/5 of qualifying costs over 5 years, easy to calculate, and easy to document.
Once you cross this threshold, all profits from book sales MUST be documented as Self-Employment on Form 1040 Schedule C.
Yes, they are reported as “Royalties” from your publisher, but they are not taxable as such.
You will need to play Self-employment, Medicare, Social Security, and Income tax on all royalties earned for book sales.
This IS being litigated. Currently, royalties from creative endeavors are always deemed self-employment eligible income from services rendered. However, this impacts some very highly paid members of the writing and acting fields, who can afford to pay tax attorneys to argue their position. This article details one such dispute.
As indicated in the article however, this lawsuit (no matter how it is settled) MAY or MAY NOT change the general rules. If a threshold is established, or a general guideline added to publicly available rules, I will update this post.
So, after we have all our income properly documented, now it is time to deduct valid business expenses.
The most important part of this is to document your expenses, their purpose, and their value. In other words, keep your receipts, and note in real-time what purpose they serve for your business. Keep a spreadsheet, and/or document them in an accounting software like Quicken or Quickbooks. Add notes!
When you determine a business purpose for something be VERY meticulous! Home offices, computers, and other items that COULD be determined to be general use need to be documented in detail, and may be disallowed if business vs. personal use time is not tracked explicitly and in real-time!
When in doubt, consult a Certified Public Accountant who specializes in TAX, or just don’t deduct it.
Better to err on the side of caution.
Report ALL income from Royalties earned as a writer as Self Employment Income from a Business on Form 1040 Schedule C.
Report and deduct ONLY those expenses you can document and explain.
If you have any doubts or questions consult a tax professional!