Any tax advice for authors and writers should start with the question: are you a hobbyist or a pro? Being a "pro" affects what you can deduct expenses related to your work as an author, so it's important to understand the distinction.
Making money as an author isn't easy, and even bestselling authors advise you not to quit your day job. While many people are passionate about their writing and aspire to make a living at it, not every book author can claim to be a professional — "for profit" — in those most important eyes of the IRS. Here are some guidelines.
Hobbyist vs. Pro Author
The IRS makes a critical distinction between sole-proprietor authors (and all other hobbyists) who ply their craft vocationally rather than depend on their writing work to make a living.
You are presumed to be a professional if your writing makes a profit in at least three of the last five tax years, including the current year. If your book authoring doesn't prove to be a for-profit endeavor, losses from your writing may not be used to offset other income for tax purposes (that is, if you can't prove yourself to be a pro, allowable deductions cannot exceed the gross receipts for the activity.)
Of course, many self-published book authors want to make a profit and become pro (like Donna Fasano), but not everyone will. For that reason, writing is one of the professions that the IRS deemed worth deeper scrutiny because of their potential pursuit and attractiveness as avocations rather than vocations. (Others include horse and dog breeding, yacht chartering, airplane leasing, gambling, photography, fishing, farming, stamp collecting... and bowling).
The Hobby Loss Rule for Authors
Essentially, what's informally known as the "hobby loss rule" separates the hobbyist from the pros. In addition to the 3-out-of-5-years of profit, the following factors (annotated from the IRS) may further help you to determine whether your writing would likely be considered "for profit" or as a hobby in the eyes of the government (1):
- "Does the time and effort put into your writing indicate an intention to make a profit?" A full-time corporate day job requires you commit 35 hours or more to it — something to think about when considering your claim of "professional writer's" hours.
- "Do you depend on income from the activity?" Be realistic here: if your rent is $1,000 a month and for the past two years your total writing income from e-book royalties hovers around $25 for the same time period, you're not going to legitimately claim that you depend on that income.
- "If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?" The former part of the question could be interpreted as: could you have possibly made a profit had it not been for factors in the book marketplace? If you're a writer in "startup," rather than a hobbyist, you have several years to show a profit (see below).
- "Have you changed methods of operation to improve profitability?" In other words, where your writing is concerned, if your profits are less than what you'd like, are you thinking like a businessperson and trying to improve your income by changing the way you operate? Maybe that would mean spending money to create a multi-author blog, or paying someone to create a content marketing plan, or augmenting your income by trying to get sponsors for your blog.
- "Do you have the knowledge needed to carry on the activity as a successful business?" Being a professional book author, like running any business, is complex and challenging. How much do you know about running that business? Are you running it like a business, keeping records, keeping an eye to profitability?
- "Have you made a profit in similar activities in the past?" If you have a successful book under your belt — or even a series of articles in paid publication — that's a predictor that you're a pro.
- "Does your writing make a profit in some years?" The IRS is looking for sustained activity and profit to show you're a professional rather than an amateur dabbler.
Of course, the hobbyists today can be the professionals of tomorrow. If you truly aspire to be a professional book author but don't quite make the cut of the IRS definition, take heart. Keep plugging away at your writing and keep in mind the factors you need to develop to become considered a "pro."
Read more about taxes and the book author, including sales tax facts for self-published authors.
Disclaimer: This article is meant to give general insight into tax information that might apply to writers, and to give readers an entry point so they themselves can research further. While every effort was made to ensure the information in this article was accurate at the time it was written, the Book Publishing site guide is a writer — not a tax expert. Therefore, anyone filing his or her taxes should consult a qualified tax preparer for updated tax laws and further specifics on how these rules might apply to an individual tax situation.
Following are specific IRS resources regarding the subjects mentioned in this article, to facilitate research into individual tax matters.
(1) Internal Revenue Code Section 183 (Activities Not Engaged in for Profit), as described in FS-2008-23
(2) IRS Publication 970 – Tax Benefits for Education
Note: The general information included in this article is not to be used avoid any tax penalties that might be levied by the IRS (see the Treasury Circular 230 regulation for the specific provision).