#0047 Author Taxes

Surprise, surprise—it's a tax post during tax season! 

As an experienced tax preparer, I've got some tips to share for authors and other business owners. Here's a quick overview with some tax thoughts for all you entrepreneurs. While I am a CPA, the advice provided is my opinion and general information. It should not be relied upon for any specific purposes, as it may not be tailored to your situation. I always recommend having a licensed professional prepare your taxes rather than doing them yourself. However, it's also important to be aware of tax regulations so you can ensure that your preparer doesn't miss anything. They don't always know what to ask, so you should be informed about what to provide.

Entity Type Decision

Before filing your tax return, you've made a decision about the type of entity you are as an author. Most people, having made no elections or filed as any other entity type, will find that they're considered sole proprietors. ZanderverZ is an LLC, but ultimately the tax advice we're covering here is similar for every entity type. I think there may have been another blog entry discussing entity types.

Either way, if you haven't already, you should keep your business finances separate from your personal finances. This means opening up a separate bank account and getting a separate credit card. This will make the IRS happy. If you ever get audited, you'll have a difficult time convincing the IRS that your $100 purchase from Amazon was for business supplies and not personal items if everything is commingled. So start now if you haven't already. For everything related to the business, run it through your business bank account. Later, you can use that bank account to make many of the calculations below.

Income Reporting

First and foremost, those royalties you made during the year from Amazon as an author are taxable income. Where they get reported on your tax return can depend on whether you're running a business or not. Schedule E is used to report royalties, but if you're operating a business you'll want to put them on Schedule C. Both schedules allow you to take deductions. It's that simple: you make it, you report it. In many cases, you'll get tax forms from companies that send you money. For example, Amazon might send you a 1099-NEC or 1099-MISC. You may even get the elusive 1099-K from your payment processing company if you sell books directly. These forms report your income and should be reflected on your tax return. If you don't know how to reflect them properly, bring them to a professional.

Deductions

Now let's talk about deductions. Every dollar you spend for the business is generally deductible. If you traveled to a local book fair to research what other authors are doing, that's a travel expense. If you purchase a typewriter to use, that's an asset that gets depreciated. Did you and your editor go out to lunch? That's a business meal if you talked about your books. Do you buy books for research? That could be a deduction too. My biggest expense is advertising—and it's all deductible.

If you've done as I mentioned earlier and run everything through a single bank account, you can take those transactions and categorize them into types of expenses fairly easily. If you haven't run them through a separate bank account, you'll have a fun time calculating your expenses from difficult sources. Ultimately, you're responsible for collecting all of your business expenses together for the preparation of your tax return. You'll decide what is and isn't related to your business, but you'll need to be prepared to defend the fact that it's business-related if the IRS questions it. So be sure to keep good records. Even if you hire a professional, you're still responsible for what is on or is missing from your tax return.

Common Expenses

The most common expenses for authors will be advertising, contract labor (editing, formatting), software, office supplies, and potentially home office expenses—which would allow you to deduct a portion of your home mortgage interest, real estate taxes, and utilities—even take depreciation on your house! To qualify for home office deductions, you'll need to have a specific room that is exclusively used for your author work.

If you turn a profit (unlike me), you may even qualify for some health insurance and retirement deductions through your business.

Final Thoughts

If you're feeling overwhelmed—it's because taxes are complicated! Again, I strongly support using a professional to prepare your taxes. I've seen enough tax mishaps from people who failed to do their own taxes properly and received nasty letters from the IRS years later. I've also seen people miss out on thousand-dollar deductions because they didn't know what they were doing.

So don't leave money on the table and don't invite the IRS into your life—have a professional do your taxes but also be aware of what's happening on your tax return. Be aware of what's going on with your business and what gets reported to the IRS—don't be a bystander in the financial health of your authorship or whatever ship you're on.

Shameless Self-Promotion

Feel free to reach out to my CPA firm for tax questions—we're happy to help! We even offer free consultations for new businesses.

Best of luck with your business adventures!