Whether or not you believe the old chestnut that everyone has a book in them, it is undoubtedly true that those who do have many more options these days for getting that book into the world.
If you want to try your hand at the great American novel, a poetry chapbook, a cookbook or a guide to better management techniques, you may want to venture into the world of self-publishing. It will be a lot of work, but you will have complete control over your final product. And if this is your first venture into self-publishing, you will confront all sorts of complexity, not the least of which are the many tax issues to consider.
When you think about the taxes associated with self-publishing a book, it will help to realize that you are essentially combining two functions. First, you are a self-employed author who has created a piece of intellectual property. Second, you are a self-employed publisher who will distribute the finished book to the world at large. These functions are somewhat sequential, but there is bound to be overlap, especially if you plan to write and publish more books.
You may not have thought of writing your book as starting a business in the way that opening a bakery or launching a tech startup would be. While there are differences, it is still important to recognize that you are a business owner to understand how your taxes will work.
When preparing to deal with the tax consequences of your writing, be deliberate in deciding whether writing is a hobby or a true business activity. Even hobbyist writers need to pay tax on any income their writing produces, but the Internal Revenue Service’s “hobby-loss” rules will apply, meaning hobbyist writers can only deduct expenses against writing-related income.
Assuming you treat your writing as more than a hobby, it will be important to substantiate your business activity in case the IRS asks you to prove this stance. There are a variety of ways to demonstrate your intent, which may include keeping business records related to your writing, maintaining a separate checking account for writing-related transactions, keeping track of your advertising and networking efforts, and attending classes to improve your writing-related skills. Freelance writers should report income and expenses on Form 1040 Schedule C, and their profits are subject to self-employment tax.
While no one wants to volunteer for more taxes, categorizing your writing as a for-profit business activity actually offers a substantial benefit. Authors may not show income for multiple years because of the periodic nature of their activities, but unlike hobbyists, their writing expenses can be deducted against other sources of income.
Most authors will be self-employed in a sole proprietorship — an unincorporated venture that the author owns and runs, with no legal distinction between the individual and the business. Unless otherwise stated, this article will assume the author is a sole proprietor.
Many authors forgo creating separate business entities because the liability protection inherent in other structures is generally not pertinent. For authors, most legal risks will be personal in nature, such as accusations of defamation, intellectual property infringement or plagiarism — issues that incorporation will not protect you against in most cases. An author seeking legal protection will typically do better directing funds toward a personal umbrella insurance policy, as long as the policy covers liability arising from business activity. Those seeking extended coverage unavailable in an umbrella policy may consider adding a business liability or, more specifically, a media perils liability policy.
Assuming that you consider your writing a business activity, you will need to be aware of the uniform capitalization rule, sometimes abbreviated as UNICAP. As it relates to creative industries, the rule requires taxpayers engaged in the production or resale of creative property to capitalize certain costs, rather than to deduct them immediately, with some exceptions. This rule initially applied to authors by disallowing current deductions for expenses incurred while writing a book until the finished product began generating income, placing a large burden on authors to properly accumulate all of their expenses and capitalize them over the expected productive life of their books.
However, Congress soon established that authors were not the intended targets of the legislation and exempted “qualified creative expenses” from the rules when they were incurred by freelance writers. This means that while you are a self-employed author, UNICAP does not apply — at least until publishing begins.
It is also important to note that most partnerships and corporations are still subject to UNICAP rules. If your manuscript was written in collaboration with one or more other writers, the IRS may deem your collaboration a partnership, and thus subject to the rules.
Qualified creative expenses are those incurred by a taxpayer in producing a creative property through his or her own efforts, plus some other ordinary business costs. For a writer, these are the expenditures incurred in producing your manuscript, and they are deductible in the year that you incur them, whether or not your business (in this case, your book) produces any income that year.
Possible deductible expenses include travel costs for research, purchased books or publications, business liability insurance, office supplies, advertising or marketing costs, membership fees for the Authors Guild or a variety of other expenditures. Certain expenses are still subject to other sections of the tax code, such as depreciation requirements for a new desk used in your business or the stricter recordkeeping requirements for listed property assets such as computers or cell phones. Deductible creative expenses do not include printing the book itself, however, as this is considered a reproduction and distribution expense. We will revisit UNICAP rules and distribution expenses in Part Two of this series.
A final tax consideration before you move on to publishing is the reporting requirements for any freelance help you may have used in finalizing your manuscript. For instance, you may have hired a freelance editor to treat your manuscript or a designer to create a cover before approaching a publishing service. If you pay any independent contractor $600 or more for services, or negotiate a rate of $10 or more in royalties, you will need to ask the freelancer to complete a Form W-9, then issue a 1099-MISC reporting the payments shortly after the close of the year.
It is not always obvious whether contract service expenses are immediately deductible or are capitalized labor costs under cost of goods sold. However, if the expense was incurred while you were in the business of writing a manuscript and the contracted work does not overshadow your own creative contribution to the book, there may be an argument for an immediate deduction.
You have written your book. The manuscript is edited, the layout is finalized and you are ready to publish. In Part Two of this series, which will appear in the June 2016 print and online editions of Sentinel, I will discuss the tax concerns an author faces once publishing begins.
