This month 5writers.com is thrilled to welcome first-time blogger Barbara Ebert, a CPA with Martin, Dolan & Holton in Richmond, VA. This tap-dancing, theatre-going, memoir writing accountant is the coolest CPA you’ll ever run across. Plus she knows her stuff. During her many decades as an CPA, she has researched and written returns for plenty of hobby loss/business folks and deals with the shoebox-full-of-crumpled-receipt clients with a great deal of patience and humor.
I am an accountant. No one ever asks me if I always wanted to be an accountant. No one ever speculates how cool it is to be an accountant. There are no TV shows or movies that feature heroic accountants (oh except for the movie Dave when the fake president calls in his accountant to help him rewrite the national budget to free up the funds to save a homeless shelter– I loved that movie). I once unsuccessfully pitched the idea to the state CPA society of making me a grant to write a children’s book series about a beautiful young CPA who solves mysteries and has many adventures (kind of like Vicky Starr Stewardess or Cherry Ames Nurse which you all are probably too young to know about).
Most pertinent to this blog, no one EVER asks me if accounting is my hobby, but I would place bets that all of you earnest writers have been asked how your hobby is coming along. And you probably did not like the question. Especially if it came from your parents. Consider the definitions:
- an activity or interest pursued for pleasure or relaxation and not as a main occupation: Her hobbies include stamp-collecting and woodcarving.
- a child’s hobbyhorse
- a small horse
The IRS also wants to know if writing is your hobby. They care so much about this issue that there is a whole section of the Internal Revenue Code called “hobby loss rules” (IRC Code Section 183—I give you the number to impress you with my CPA credentials). The basics: you have a business that has lots of expenses but not a whole lot of income. The IRS decides you are a hobby and not a business and does not let you deduct any expenses in excess of your earnings (and that’s the simplified version of what happens—you might not even get any benefit from deducting expenses—way too complicated to discuss here, ask your accountant, I know you have one).
Now you need to convince the IRS that the activity is engaged in for PROFIT. You need do more than tell the IRS that “I really really want to make money.” The IRS gives you a safe harbor to start with. If an activity (that’s tax speak for your business) shows a profit for any three or more years in a period of five consecutive tax years, it is presumed to be engaged in for profit. I am sure you are all laughing right now, because tax talk is funny and because you understand that this would not help writers very often (never?).
All is not lost. First, the IRS recognizes that writers may experience many years of small revenues before they write a best seller or a Broadway play. The word presumed is key here, and if audited you will have a chance to be judged on a facts and circumstances basis. The IRS has kindly given you nine factors that they will consider in making their decision. The factors are:
1. Manner in which taxpayer conducts the activity. (Most important!)
Open a business checking account and charge card, document everything possible, keep receipts, keep a car mileage log, keep a calendar of business meetings, etc.— I cannot overemphasize how important documentation is to the IRS. And to your accountant.
Market your writing. Get an agent, get a website, enter competitions, submit work regularly, keep the rejection slips.
Real life tax court case: Taxpayer testified she did some writing and sent manuscripts somewhere, but she didn’t know what the manuscripts were or where they were sent and couldn’t find any rejection slips. She had a writing hobby!
- Expertise of taxpayer or his advisors
Just because you are a talented writer, you may not have the practical experience needed to make a profitable business of selling your works.
Real life tax court cases: Experienced technical writer who wanted to be a fiction writer but did not consult anyone about the economics of conducting a writing activity and failed to get his articles and novels accepted for publication during a 17 year period had a hobby. But experienced technical writer who wanted to be a fiction writer and who had a bachelor’s degree in marketing and advertising had a business.
- Time and effort taxpayer spends on the activity
There is no set rule about how much time is enough to support more than a passing or casual interest in an activity, but Tax Court notes that in a large percentage of decisions that found a profit motive, the taxpayers were spending more than 30 hours a week. You might have trouble convincing the IRS that you have a profit motive if you also have a job where you work 50 hours a week. Do the math.
- Expectation that assets used in activity may appreciate in value
More important if you are renting your yacht, than if you are a short story writer. You will not make money from selling your ten year old laptop.
- Taxpayer’s success in similar or dissimilar activities
You never wrote a play but you operated a moderately successful small advertising agency for a number of years. That will work!
- Taxpayer’s history of income or losses with respect to the activity
- The amount of profits—these two are tricky and good luck.
- Taxpayer’s finances
If you have a huge trust fund, a corporate executive husband, another job that actually pays the rent, you may need to beef up the other factors to convince the IRS that writing is a business.
- Elements of personal pleasure or recreation (also most important!)
Just because you enjoy writing does not mean you lack a profit goal. But not all taxpayers are honest about this (shock!!!). An avid golfer who wants to design golf courses and deducts all his greens fees from his worldwide travel may face a hobby loss challenge. But his clever accountant may be able to demonstrate that he has a clear business plan to justify treating the golf course endeavor as a real live business.
Probably TMI, and forgive me for going on too long. I was honored to be invited to guest blog. Writers, go forth and publish so you can convince the IRS you are in it to make money, but enjoy your hobby business. And get an accountant.