Revenue – Expenses = Net Income.
The government taxes you on your net income, which means as a business your expenses are tax-free. You just have to determine what they are.
The most frequent question I get asked is: “Can I deduct ____?” And the answer is usually: “It depends.” The Tax Code doesn’t publish a giant list of all approved expenses, because there are millions of unique business models in this country and what entails an appropriate expense for one company would be completely frivolous for another. A scuba diving excursion company should be able to deduct all their scuba equipment costs, but Scuba Steve who owns a mystery bookstore should not. Expenses can vary wildly even within narrow industries. An author working on a Gettysburg history will have completely different research costs than the author writing a ripped-from-the-headlines police procedural. Recognizing this, the Code provides a framework for businesses to use in order to determine if their expenses are deductible. I’ll take you through the framework and then we’ll look at some common expenses that most writers could incur.
The Ordinary and Necessary Requirement
Businesses are permitted to deduct all ordinary and necessary business expenses. An expense is ordinary if it is normal, usual, or customary in the type of business conducted. An expense is necessary if a prudent businessperson would incur the same expense and it is expected to help the taxpayer’s business.
The Reasonableness Requirement
An expense must be reasonable in amount in order to be fully deductible.
These components should be considered prior to incurring every new expense, and that’s not as cumbersome as it sounds. Say I need to get a new computer for my business. It’s ordinary for writers to use computers and, yes, a laptop version is probably necessary for me to work efficiently, especially while traveling. But is it reasonable to buy a $20,000 Ego for Bentley Notebook? Maybe a MacBook would meet my needs just fine.
As writers we should appreciate the three-adjective test. Ordinary. Necessary. Reasonable. If your expense can be described with all three adjectives, then you’ve got a fourth as well: deductible.
The cost of boosting a post on social media or placing an ad about your latest book in a magazine or online. Advertising costs are fully deductible.
Most writers use one automobile for both business and personal use, which means you’ll need to track your business vs. personal miles. As a writer you may have to drive to bookstores, events, conferences, and book groups, but don’t forget about your trips to the post office to mail that giveaway, or to the bank to deposit your royalty check. Unrecorded business miles are a huge source of lost deductions, so record, record, record. There are plenty of apps out there to help you track your business miles—MileIQ, TripLog, and Quickbooks Self-Employed, to name a few. Just remember that business miles are direct, incremental costs. If a trip includes both personal and business miles, only the incremental business portion is considered.
Example: I’m having lunch with a friend and afterwards I drive to the post office to mail a review copy of my latest book. It was 10 miles to the restaurant and another 2 past the restaurant to the post office. Roundtrip, I drove 24 miles. Only 4 miles of that trip were business miles.
Note the cost of commuting is not deductible. Most writers work from home, but if your primary place of business is somewhere else, maybe a coworking space like ModernWell, you cannot deduct the miles driven there and back every day. Only trips beyond your primary place of business are deductible.
You can choose between two methods for deducting automobile expense.
Standard Mileage Rate Method
This is the easy route. (Pun intended, not sorry.) Multiply your business miles driven by the standard IRS reimbursement rate and say hello to your deduction.
2018 Rate: $0.545/mile
2019 Rate: $0.58/mile
Actual Expense Method
This method is somewhat more cumbersome. Your deduction equals your actual expenses, so in addition to tracking business miles, you’ll need to record your expenses for gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments), and then prorate the total amount paid for just the business portion. Example: If you paid $10,000 in auto expense on a car used 38% business/62% personal, your deduction is $3,800.
Regardless of the method you choose above, you can additionally deduct the full costs for parking fees and tolls incurred for business.
You can deduct up to $25 per recipient annually. Incidental costs such as engraving, packing, and shipping don’t count against the $25 threshold, as long as those amounts are minor. Branded gifts under $4 (promotional pens, etc.) don’t have to be included in this category. Those items can be separately deducted as a marketing expense. For gifts, keep your receipts and record the recipient and business purpose of the gift.
This category used to be called ‘Business Meals and Entertainment,’ but the TCJA eliminated deductions for entertainment. Business meals, however, are still partially deductible.
Rules for the table: No lavish or extravagant meals. Business must be discussed. Record the who’s and the why’s with your receipts.
50% deduction allowed. (Travel meals also have a 50% cutback)
Commissions and Fees
This includes bank fees and commissions paid to domestic and foreign agents. Fully deductible.
Computers, printers, software, office furniture. Can be deducted fully when the asset is placed into use (as opposed to being depreciated over the life of the asset) as long as gross expenditures do not exceed $500K. We should all be covered here.
Health insurance premiums paid for yourself and family are generally deductible, provided you/spouse/dependents are not eligible to participate in an employer-sponsored plan. If you are eligible to be covered under an employer plan, you can’t deduct the cost of self-employed health insurance during the months you were eligible.
If you hold any liability insurance for your business, this can also be deducted.
You can take a deduction for your home office if it is used exclusively for your business. Offices in the laundry room or on one end of the dining room table don’t qualify, unfortunately. The space must be clearly defined and devoted solely to your writing business. Like the auto expense deduction, there are two options for calculating your home office deduction.
$5.00 multiplied by the square footage of the office, up to 300 feet.
The maximum deduction is $1,500.
Your deduction equals the business portion of your actual expenses, including mortgage interest, property taxes, rent, insurance, utilities, depreciation, and repairs and maintenance prorated for the percentage of the home used for business. So if you have a 150 square foot office and a 1500 square foot home, you can deduct 10% of these costs for your home office.
As a taxpayer I appreciate simplicity, but this is one area where I generally use the regular method to maximize my deduction. Calculate it both ways to decide what’s best for you.
You may have heard rumors that the TCJA eliminated the home office deduction, but that change applied only to employees who maintained a home office. As a self-employed writer, the home office is still a valid business deduction.
Marketing / Networking
Conference registration fees, professional association membership dues, website fees, etc. These are all the cost of doing business in order to expand your audience and potential channels for publication and are fully deductible.
If you pay to rent studio space or a coworking space, those costs are fully deductible.
Pro Tip: If you’re looking to reduce your taxable income in the current year, you can prepay up to 12 months of next year’s rent and deduct it this year.
Here’s where things get *very* specific to each writer. No two writers will incur the same research expenses, even if they’re working on similar projects, and I won’t attempt to compile a list of ‘valid research expenses’ here.
The key is to review your business plan for the work you’re producing and apply the expense criteria to the costs you intend to incur. Are they ordinary? Are they necessary? Are they reasonable in amount? I like to take it one step further and ask myself: Would I be comfortable defending this deduction in Tax Court? Remember the Susan Crile case we reviewed in the Income section and the types of deductions that came under question by the judge. The next case study, coming up in Expenses Part II, specifically focuses on research deductions.
Contributions to SEP, SIMPLE, and qualified plans are generally fully deductible.
Printer ink, paper, file folders, stamps, envelopes, business cards, etc. Everything you need to operate your office is fully deductible as long as it’s (all together now!) ordinary, necessary, and reasonable in amount.
Airfare, lodging, and transportation expenses incurred for business trips are deductible. I get a lot of questions about travel when the trip combines business and personal elements. The short answer is that the expenses need to be divided and only the business portion can be deducted, but the nature of the trip should be considered. Here are a few examples.
Maria flies to Chicago on Thursday for a two-day writers’ conference to be held Friday and Saturday. She stays until Monday so she can spend Sunday visiting some family in the area.
This is primarily a business trip. Maria can deduct her airfare as well as transportation, lodging, and meals for Thursday, Friday, Saturday, and Monday. The expenses for Sunday are personal and nondeductible.
Lou and his wife take a weeklong vacation to New York City. While in town, Lou has lunch with his agent and he and his wife also go to a museum that houses a collection Lou is studying for a book idea.
This is primarily a personal trip, so none of the airfare or lodging is deductible. Only the direct, incremental costs Lou incurred for business can be deducted, such as his admission to the museum, any additional transportation costs, and the meal expense (but really, if his agent made him pay for lunch he’s got bigger problems than taxes.)
Wages and Contract Labor
Did you pay someone to organize the unholy mess you call a filing system? Did you hire a summer intern to research the setting for your period drama? These payments are fully deductible. Obviously employees will need to be issued a W-2, and if you paid a contractor over $600 during the calendar year, you are required to send them a 1099.
If you started panicking when I mentioned records and recording, you’re not alone. This can be a huge source of stress for many writers, especially if you don’t have a good system. Click over to Record Keeping Like a Boss for guidance, tools, and tips aplenty.
Many costs you might want to attribute to your writing business are not deductible business expenses according to the IRS. To name a few…
- Childcare costs. There’s a credit available for this on your individual tax return, but it can’t be considered a business expense.
- Entertainment. Taking Stephen King to a baseball game is still an incredible business opportunity. Just don’t try to deduct it in the TCJA world.
- Grooming and attire. Wait, I’ve got to go on book tour and I need a new wardrobe! I need a haircut and some moisturizer! Sorry, street clothes and grooming costs are not business expenses. Everyone needs clothes. Everyone should groom themselves. Besides, writers are expected to be disheveled.
- Inherently personal expenses. These are costs so personal in nature they can’t be considered professional expenses, no matter how relevant they are to your work. (Hint: Check out the next Tax Court case.)
If you’re still unsure about what to deduct, read on to Expenses, Part II, where we take another tour through the Tax Court. Thanks for coming along on #TaxAdviceforWriters!
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting services. Presentation of the material does not create a tax-professional-client relationship. The material is provided on an “as is” basis and is accurate and true to the best of my knowledge, but no representation or warranties of any kind are given about the material, and there may be errors, inaccuracies or omissions.