In each part of this series, it is necessary for me to post the following legal disclaimer. Like this or not, we live in a very litigious society. Therefore, in self-defense, it is incumbent on those of us who blog on business and legal issues the place a disclaimer like the one that follows somewhere on their blog to protect ourselves from unintended prosecution.
The information available on this website is based on the author’s experiences and that of other writers with whom he has communicated. It is not intended to be legal advice, nor a substitute for obtaining legal advice from competent, independent legal and accounting professionals. It is not designed or intended to be relied upon as authoritative financial, investment or professional advice. Since individual circumstances vary, the reader is encouraged to contact accounting and tax professionals regarding his/her own unique circumstances.
Two Types of Writers:
In the world in which the Internal Revenue Service (IRS) lives, there are only two categories if writers – Professional Writers and Hobbyists. Each of these two categories is governed by their own tax law. In the world of the IRS, a hobbyist can deduct his/her deductions only to the extent of income. If the total writing expenses for the hobbyist was six hundred dollars and the income they received was two hundred dollars, then they can only deduct two hundred dollars and watch the remaining four hundred dollars as it disappears into the void, never to be seen again.
The Professional Writer is treated much differently by the IRS. Using the same scenario, two hundred dollars in income and six hundred dollars in expenses, the Professional Writer can deduct not only the two hundred dollars allowed to the hobbyist but the remaining four hundred dollars from his other income. That is the way the system has been designed by the three branches of our triune government: Legislative, Judicial, and Executive.
So what is the true difference between the hobbyist and the Professional Writer? The Hobbyist is writing for the pure joy of creation of the written words while the Professional Writer is engaged in the Business of Writing to make money from the expenditure of his time and money. This profit motive is the true difference. The Professional Writer must also operate his business in a professional manner.
Preponderance of evidence rule:
Simply stated, this rule means is there more evidence to show that you are a Professional Writer than shows that you are not a Professional Writer but indeed a Hobbyist. Evidence is the condition of being evident or something that makes another thing evident, something that tends to prove. Evident means easy to see or perceive, clear, obvious, plain, apparent. Not all evidence carried equal weight.
To visualize the preponderance of evidence rule, visualize the statue of Lady Justice. Lady Justice is shown blindfolded and carrying a scale on which she weights the evidence. This scale is a simple pan balance held in the center of a rod with two pans supported by string or chain. When empty, the two pans are of equal weight and are at the same height. As evidence is placed on either pan, the heavier pan drops downward, pulling the lighter pan upwards. After all the evidence has been placed on either of the two pans, the side that carries the greater mass of the evidence decides the manner. As another example, visualize a tether totter in the park play ground where children can sit and play. The side with the greater weight of the children would be on the ground pulling the side with the lesser weight skyward.
The IRS jealously guards their system for weighing the evidence. Sometimes, the weight that the evidence is given over time changes. When I first started out deducting business expenses [for my wife’s handmade jewelry business in the early ‘80’s] one key piece of evidence was making a business two years out of the first five. I began deduction my writing expense in the 1997 tax year. Around the 2001 or 2002 tax year, this making a profit in the first five years was greatly reduced when they introduced another piece of evidence that most other business had, THE BUSINESS PLAN. The financial community reported on this shift in weight and that they were heavily beginning to give the Business Plan high weight in the preponderance rule.
How does one become designated as a Professional Writer?
The process is quite simple. Unlike other professions, where you have to have course work before you can begin working in the business, or pass some sort of certification testing, like a Certified Public Accountant or a Professional Engineer, working as a Professional Writer is a matter of self-declaration. Writing is a business that you learn on the job. As you write, you are learning the craft of writing as well as the business side of writing. Like the pat answer to the question of “How do I get to Carnegie Hall?” The answer is “Practice, Practice, Practice.” There are no exams to take, no national certifying organization, and no drafts to select you as a professional sports player.
Simply announce to the world that you are a professional writer entitled to all the rights and benefits that the profession bestows on the writing practitioners. After you make this self-declaration, just operate in a professional manner in operate your business. This includes paying you taxes on your earnings and deduction your expenses is you are operating with a negative cash flow.
What’s the catch?
There is a catch to this. If the IRS questions your self-declaration, then they will audit you. It is up to you to provide the proof through the preponderance of the Evidence Rule that there is more evidence of higher weight than evidence of lower weight that you are not a professional writer. We will cover audits and the various types of evidence in a future blog post.
What I learned in my graduate tax course
As I mentioned in the section concerning my qualification to teach the course HOW TO DEDUCT YOUR WRITING EXPENSES FROM YOU TAX RETURN. I have a Master of Business Administration (MBA) degree I earned from Cleveland State University in 1974. As part of that course of study, I had to take a course on Income Taxes. I was fortunate enough to have an adjunct profession whose day time job was as an appellant judge for the IRS. Two things that he shared with us on the first day of class were (1) within the IRS system, you are guilty until you prove yourself innocent, and (2) the tax laws are not black and white, but are various shades of gray. Always interpret the Tax Code in favor of yourself; the IRS will be doing the same – interpreting the tax code in their favor. When we get to the part of this blog concerning audits, I will share with you what he said concerning audit negotiation.
The one trick that I will share with you now is keep good records and documentation. How do we keep these records? There are three computer programs that I urge you to purchase. The first one is required for your writing. This is the MS Word Office Suite (Microsoft Word, Excel Spread Sheet, Power Point, etc.). The second is an accounting program, such as Quicken (I use the deluxe edition). The third is tax preparation software like Turbo Tax to prepare your tax return. Again, I use Turbo Tax deluxe. The reason I suggest Turbo Tax is that they walk you through the return step by step suggesting other deductions that you might chose to use. They also offer an audit defense package that I have been buying for the last three year. In event of an audit, they will pay for a tax attorney to assist me with the audit. I will cover record keeping in more detail in a later blog.
Questions and comments:
It is my intent to make this blog interactive. If, after you have read it, please feel free to send me any comments that you have to Fred@FredAAiken Writer.com or to my personal email account at America on line. This also applies to any questions you might have.
What will be covered in the next blog?
My intent in part three of this series is to begin covering the Schedule C and the topics of business forms, accounting methods and material participation.