Note to Readers – Every now and then, I will re-post a blog entry that has withstood the test of time. Whether you missed it the first time ‘round or read it years ago, I feel it’s worth sharing again. I chose Taxing Times and Footnotes from April 12, 2015 because it’s nearly tax time and the ranks of self-published authors continues to swell. Here’s what you need to know.
Shakespeare had it wrong. Instead of “Beware the Ides of March,” it should be “Beware the Ides of April.” April showers may bring May flowers but April 15th brings tax time; that dreaded date when fear grips our emotions as Uncle Sam grips our wallets.
If you’re a self-published author, or are considering becoming one, you may be wondering what impact your literary endeavors may have on your income tax liability. Or maybe you haven’t even considered the impact. An oversight could cost you, whether you make money or not with your book.
I am not a tax advisor nor do I pretend to be. Tax laws leave me loopy. But there are some basic tax facts every author should be aware of. The first is that even disappointing sales of self-published writing can mean money in your pocket, instead of Uncle Sam’s, come tax time. That’s because the IRS has shifted its view of what constitutes a business versus just a hobby.
The IRS used to consider income-producing activity as a hobby unless it showed a net profit in three of the five most recent reporting years. Now, it wants you to succeed so it can tax your income later. The U.S. tax code permits entrepreneurs to offset the losses of one business from another income as a way to encourage new business.
As a self-published author, you may pay considerable money to editors, designers, printers, publicists and other services to publish and promote your book. Let’s say you spend $6,000 for those services and earn $2,500 in sales. In addition to offsetting your book income tax by $2,500 worth of your expenses, you could also reduce your other income tax by deducting the remaining $3,500 of expenses against your other job income.
The key is to demonstrate a serious intent to operate the new business at a profit; otherwise, it is a hobby. Steps to establish your business intent include setting up a website, printing business cards and promotional materials as well as marketing yourself and your book through social media. Consider establishing a business name and attending conferences. Learn the basic tax rules and follow them, keep your business records separate from your personal records, and don’t hesitate to hire experts for help; these are also legitimate tax deductions.
Depending on where you file your taxes and how you plan to sell your books, other steps you may decide to take include getting a local business license and applying for a resale certificate. You don’t necessarily need to incorporate but you will want to consult a tax accountant to see if you should establish a sole proprietorship business and obtain a Federal Employer Identification Number.
You don’t have to rush into any of these steps and may choose not to unless you see that your book finances reach $5,000 or more. But knowledge is power and could mean more money in your pocket to continue pursuing your literary dreams.
Your best resource to learn about the tax implications of your self-published book is a tax accountant but other resources include:
Book: Self-Publisher’s Legal Handbook: The Step-by-Step Guide to the Legal Issues of Self-Publishing – Helen Sedwick
Blog article: Self-Published Author — Bowker
Setting up a DBA name.
Establishing a Federal Employer Identification Number.