Necessary and Reasonable--It’s Time to do Taxes! by CPA Lisa London
Writing is a business. Once we actually get paid more than $400 for our work, we are considered self-employed (or as the IRS likes to say, a Sole Proprietor). Wonder what that means to you?
First, it means you can no longer use the 1040 EZ or 1040 A (short form). To get the full benefit of being self-employed, you will file the regular 1040 with a Schedule C Profit or Loss From Business. The Schedule C is where you will show the income you received and the expenses that can be deducted.
Secondly, being considered a sole proprietor gives you the opportunity to deduct some expenses that you are already incurring so you can write. If you are in the 25% tax bracket (i.e. every additional dollar of net income is taxed at 25%), a deduction of $100 worth of paper and ink for your printer only actually costs you $75.
What are business expenses? Obviously, the IRS regulations can’t detail every possible expense for every business, but they still have guidelines and rules. You should stay out of trouble if you keep this in mind:
For an expense to be deductible, it must be both
necessary and reasonable!
If you are debating about whether something is deductible, ask yourself, “Is it necessary for my business?” If the answer is yes, then ask yourself if you could explain to an auditor why your purchase was reasonable. That is not to say a particular auditor will agree with you, but at least you would have a case to make.
For example, it may be necessary to keep track of the time, but it is not considered reasonable to expense a Rolex to do so. You may like to write in a secluded place, but charging your trip to the Virgin Islands is a bit of a stretch. If however, you are writing a travel piece, then going to the location for research may be deductible. Again, think “necessary and reasonable.”
I’ll highlight a few expenses that are deductible. If you write out of your home, you may be able to utilize the home office deduction. This used to be a real pain to compute, but the IRS now offers a simplified method. Basically, you take the square footage of your dedicated space (please note the word “dedicated”) and multiply it by $5. There are limits and exceptions, so check out IRS.gov.
Your mileage to seminars, book signings, the post office (for business purposes only), meeting with your editor, etc. is deductible at a rate of 54 cents per mile for your 2016 return and 53.5 cents per mile for 2017. In order to take this deduction, you need to document the miles driven. Keep a log in your glove compartment or download a free app like MileIQ that uses your phone’s GPS to track your trips.
When you travel overnight for your business, you can deduct 50% of the cost of meals and entertainment. You can use the Federal Per Diem rates that is listed by geographical area at https://www.gsa.gov/portal/content/104877 for the meals and incidentals if you don’t want to have to keep track of all the receipts. And if you are especially frugal, you may find these especially advantageous if you spend less than the federal guidelines. Remember, though, you can still only deduct 50% of the per diem amount.
Research costs are also deductible. This includes books you purchase to make certain your setting is correct, give you the background you need for your historical fiction, or writer’s guides to better word choices. I know my daughter became a bit concerned about my purchases when I was writing my WWII novel.—“Mom, why are you reading the Wit and Wisdom of Adolf Hitler???”, but an IRS auditor could understand that it was necessary and reasonable.
Your home telephone is not deductible, but long distance calls for business and/or a second line are. Your cell phone may be expensed if it is used for the business and not the primary line for the home especially if it is crucial to your business, i.e. you ship books from a mobile app to customers.
We all should have websites. The costs of hosting, design, any e-commerce fees, etc. are all deductible.
But there are responsibilities, too. Be sure that you report all the income you receive via your 1099s. The 1099 Miscellaneous forms will have your royalties and any freelance type income. The 1099K will show any income received via credit cards through another company (i.e. Amazon, your e-commerce credit card processor, etc.)
Even if you do not receive a 1099, report the income. If the person who forgot to send you the 1099 sends it to the IRS later, they will tie it back to your return. One of the primary reasons people get audited is not reporting all their taxable income.
Quarterly Estimated Taxes:
If your income exceeds your expense, YEAH! But you may need to start filing quarterly estimated taxes. The reason for this is that as a self-employed person, you don’t have a boss withholding the federal, state, Social Security, or Medicare taxes and the government doesn’t want to wait for the end of the year to receive them.
To make things worse, being the boss means you have to pay both the employer and the employee portion of the Social Security and Medicare taxes. At the beginning of each year, you will estimate the amount of tax you expect to owe. Over the course of the year, you will need to pay 90% of that amount in four payments. I walk you step by step through estimating your taxes and filing the quarterly forms in my new guide. By the way, I highly recommend putting back 1/12th of the annual estimated amount each month into a savings account, so you will have the cash available when the money becomes due.
I know it seems overwhelming, but keeping track of your finances and computing your taxes does have a “necessary and reasonable” aspect to it. Take the time to familiarize yourself with the required filings and, if you’ll excuse the shameless self-promotion, read BANISH Your Bookkeeping Nightmares—The Go-To Guide for the Self-Employed to Save Money, Reduce Frustration, and Satisfy the IRS. Being a writer myself, I include many examples of specific tips and deductions for writers.
ABOUT THE BOOK:
Good news, help is at hand. Let Lisa London, CPA, BANISH Your Bookkeeping Nightmares in 6 easy steps:
- Brief yourself — discover the insight you need to understand accounting and make it a partner in your business.
- Arrange your environment — tame the paperwork beast and learn simple tricks to stay organized.
- Network your data — find the right program, from free options to full-fledged accounting systems, that fits your needs.
- Import your transactions — automate everything possible and learn how an everyday tool can simplify your accounting and your life.
- Summarize your information — compile the data you need and, with London’s step-by-step instructions for filling out tax forms, learn what you can and cannot deduct.
- Head into next year — realize how to use your budget to track cash flow. Plan for the growth of your business with all the information at your fingertips.
You’ll save hours of time, reduce stress, find ways to automate time consuming and boring processes, and overcome your fear of IRS requirements so you can focus on making your business blossom.
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ABOUT THE AUTHOR:
She began writing her books after helping her church with an accounting system conversion. Lisa found very limited resources to help the office staff and volunteers understand their basic accounting requirements. She realized that if her church needed guidance, other churches probably did too.
That aha moment led her to create The Accountant Beside You series of resources. Her first book, QuickBooks for Churches and Other Religious Organizations, is being used on six continents and has been translated into Spanish.
When she’s not working on accounting books or spending time with her husband and four children, Lisa enjoys sneaking away to write historical fiction. Her debut novel, Darker the Night, which tells the story of a young woman growing up in Hitler’s Germany from the perspective of a German civilian, has become a popular selection for book clubs.
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