Nuts & Bolts
Business of Freelancing

Bottom Line: Turn your Writing into a Business

By Kelly James-Enger, Special to WIW

How well are you tracking your expenses? Do you know what you can and can’t deduct?

According to the government, you have to report—and pay taxes on—all income you receive. Operate as a business, rather than a hobby, and you’re entitled to deduct legitimate business expenses that reduce the amount you pay in taxes at the end of the year.

In 1996, the first year I sold a couple of articles, I was still working full time as a lawyer, and didn’t worry about keeping track of the money I was spending on postage, magazines and office supplies. When I started freelancing full time the next year, I started tracking all my income and expenses. You should be doing the same thing.

In Pursuit of Profit

If you’re writing with the intention of being paid for your work, you have a profit motive in mind. You don’t have to be freelancing full time nor writing solely for the bucks to have a profit motive—the fact that you receive some kind of psychic reward from your work doesn’t count against you. Going for the green is a factor the government considers when deciding whether you’re a legitimate business. 

“The government looks much more favorably on enterprises that are conducted with the intention of making a profit, like a business, than enterprises that are conducted for one’s personal pleasure, which is to say a hobby,” explained enrolled agent Joe Anthony, a tax professional specializing in planning and returns for self-employed people and small businesses in Portland, Ore. “If you’re a business, which is to say an enterprise with the intention of trying to make a profit, you can deduct all the expenses related to that business whether or not the result is that you show a loss. If you’re a hobby, the government says you can only deduct expenses up to the income you receive.” Here’s the rub: if you’re operating as a hobby, you’re probably not making any income from it, so as a practical matter you can’t take any deductions. 

Keep in mind that profit motive is more important than actually making a profit—ending up in the red doesn’t mean your deductions will be disallowed. You may have heard of the “3 in 5 rule,” which is often misinterpreted to mean that a venture must make a profit 3 out of 5 years to be considered a business. That’s not quite what it means. “The 3 in 5 rule actually says that if you make a profit in at least 3 out of 5 years, the presumption is that you are conducting a business, which means in an audit the burden of proof is on the government [to show that you aren’t],” said Anthony. “If you do not make a profit, in an audit, the burden of proof that you are in a business and conducting yourself as a business is on you.” In other words, the presumption will be that you’re only a hobbyist and will have to overcome that at an audit.

Pens, Papers, Printers and Cartridges, too!

 So, what’s deductible? According to the IRS, all ordinary, necessary and reasonable expenses related to trying to make a profit in your business. (Check out www.irs.gov for more info.) For writers, that usually includes office supplies, postage, writing-related books, fees for writing associations and conferences, a computer and peripherals, long-distance phone charges, a second business-only phone line (the first line is not deductible) and writing-related travel and entertainment expenses. If you drive to interview someone or conduct research, you can also take a standard mileage deduction (in 2005, it’s 40.5 cents/mile) or use a more complicated formula to take a percentage of your total car expenses at the end of the year.

You may also be entitled to a home office deduction if you use a section of your house or apartment solely and exclusively as your place of business. “Ideally, it’s a separate room but it can be part of a room if you have an area that you designate where you perform your work and only your work,” said Anthony. Having a home office still allows you to work in other locations—say at Starbucks—but you must only use your home office for your writing work. Then you can take a percentage of your rent or mortgage interest and utilities as an expense at the end of the year as well. 

The Importance of Being Anal

Even if you haven’t been published or paid for your work yet, it’s a good idea to keep track of your writing-related expenses and maintain receipts for them as well. Once you receive a check, they may come in handy by helping reduce your tax liability. Keeping track of them helps support your argument that you're in fact a business, not a hobby, should you be audited. And if any questions arise about deductions, you’ll have proof of what you spent, when and why.

Talk to a tax professional to learn how to set up a record-keeping system. It doesn’t need to be fancy. I keep my expenses in a notebook and store the receipts in a folder in my office. I don’t necessarily need a receipt for $5 worth of copies, but if I'm audited, I should have no problem backing up my deductions. “In an audit, the things that are most important are the documentation,” said Anthony. “For example, the law says that for meals and entertainment of less than $75, you don’t need a receipt. However, it then goes on to say that you need to be able to provide all the information to substantiate the deduction such as where you were, who you were with, when you did it, what you discussed, what was the business purpose and how much you spent. I advise people to keep the receipts. If you don’t have the receipt, document it in your calendar, your day planner or Palm Pilot.”

The bottom line is that you want to declare all the money you’re required to declare and take every deduction you’re legally entitled to said Anthony. “Writers don’t realize that if you’re starting out in a business and you don’t yet have revenues, you should still keep track of expenses,” said Anthony. “Those expenses can be taken as startup expenses when you are making money.”

Freelancer, consultant and speaker Kelly James-Enger is the author of six books including Six-Figure Freelancing: The Writer’s Guide to Making More Money (Random House, 2005.) Visit www.becomebodywise.com for more information about her.