EXAMPLE: Assume that Charles earned no
money from writing for the year, but still
If being deemed a mere hobbyist is the
incurred $10,000 in annual expenses that
worst thing that can happen to you tax-
could be currently deducted. He would have
wise, being viewed as a businessperson is the
a net loss from writing of $10,000. He can
best. Businesspeople are the pampered pets
deduct his $10,000 writing loss from all his
of the tax code, receiving the best possible
income for the year, which was $50,000 in
tax treatment.
interest and investment income and salary
If writing qualifies as business, and, like
from a part-time teaching job. So, instead
most independent writers, you are a sole
of having to pay income tax on $50,000 in
proprietor, you list all your writing business
income, he only had to pay it on $40,000
expenses and income on IRS Schedule C,
($50,000 – $10,000). This $10,000 deduction
Profit or Loss From Business. You deduct
ends up saving Charles $3,500 in federal and
your writing business expenses from writing
state income tax for the year—$3,500 he
business income. You pay tax only on your
would not have had were he not engaged in
net business income (gross business income
the business of writing.
minus business expenses).
EXAMPLE: Assume that Charles earned
How to Show the IRS
$20,000 from writing for the year, and that
Writing Is a Business
his $10,000 in expenses qualified as current
business deductions. He would deduct
It should be clear by now that writers who
his $10,000 expenses from his $20,000
qualify as businesspeople get the best tax
writing income on his Schedule C, leaving
treatment. Two main factors are considered
$10,000 in net writing business income
by the IRS in determining whether writing
subject to taxation (both income and self-
is a business:
employment taxes).
• Your primary motive for writing must
If, as is the case with many writers,
be to earn a profit.
your writing expenses exceed your writing
• You must engage in writing
income, or you have no writing income at
continuously and regularly over a
all, you will have a net loss from writing for
substantial time period.
the year. You can deduct this business loss
The IRS has established two tests to
from all the income you earn for the year,
measure these factors. One is a simple
whatever the source—for example, from
mechanical test that asks whether you’ve
your salary or investment income—thereby earned a profit in three of the last five years.
reducing your taxable income for the year.
The other is a more complex test based on
whether you behave like a business.
CHAPTER 13 | COPYRIGHT AND TAXATION | 349
Note that the IRS applies these tests only
had no profits from writing for those years.
if your tax returns are audited. In other
He published the book in 2014. Due to his
words, you may mistakenly presume that
royalty income from the book, he earned
writing is a business only to learn, four or
a profit from writing during 2014 through
five years later, that the IRS has a different
2016. As of 2017, he had earned a profit
opinion. In that case, you would be
during three of the last five years. Thus,
disallowed any improper deductions made
in 2017, the IRS must presume writing is
during those years and required to pay any
running a business for Tom.
miscalculated taxes and penalties. The cost
Unfortunately, a great many writers can’t
can be quite expensive, and for that reason, satisfy the profit test. It may take far more we strongly recommend that you bolster
than five years before you see any money at
your position as a business by reviewing
all from writing, let alone turn a profit.
this chapter.
Profit test
IRS Form 5213
You usual y don’t have to worry about the
The IRS has a form called Form 5213,
IRS labeling writing as a hobby if you earn
Election To Postpone Determination as To
a profit from it in any three of the last five
Whether the Presumption Applies That an
years. If your venture passes this test, the IRS
Activity Is Engaged in for Profit. If you file
must presume it is a business. This doesn’t
this form, the IRS must wait an extra year
mean the IRS can’t claim your writing is a
before it can determine whether you’ve
hobby, but it shifts the burden to the IRS
shown a profit under the profit test. This
to prove it is a hobby. In practice, the IRS
may sound like a good deal, but it isn’t.
usual y doesn’t attack ventures that pass the
Don’t file this form. Doing so only alerts
profit test unless it’s clear the numbers have
the IRS that you should be audited on the
been manipulated just to pass it.
hobby loss issue. For this reason, almost no
You have a profit when the taxable
one ever files Form 5213.
income from an activity is more than the
deductions for it. You don’t have to earn a
big profit to satisfy this test, and there is no
set amount or percentage of profit you need Behavior test
to earn.
If, like many writers, you can’t satisfy the
EXAMPLE: Tom began to work on a new
profit test, you can still show you’re running
book in 2012. He earned no income from
a business by passing the behavior test.
writing during 2012–2013 and therefore
However, you’ll have to work hard to show
350 | THE COPYRIGHT HANDBOOK
that you are trying your darndest to make
—helps show your present writing activities
money from writing.
are a business.
Under the behavior test, the IRS looks
Have you earned at least some profits? Even
at the following “objective” factors to
if you can’t satisfy the profit test, earning at
determine whether you are behaving as if
least occasional profits helps show you’re in
you honestly believe you will earn a profit
business.
from writing.
How big are your profits? Earning only
Do you act like you’re in business? If you
small or occasional yearly profits while
act like you’re running a business, you
you have large losses or a large investment
likely want to earn a profit. Among other
in an activity tends to show a lack of a
things, acting like a business means you
profit motive. On the other hand, earning
keep good books and other rec
ords and
a substantial profit one year after years of
otherwise carry on your writing activities in losses helps show you are in a business.
a businesslike manner.
After all, writers often earn little or nothing
Do you have expertise? It would look pretty for many years in the hope of a big payday odd to the IRS if, for example, a person
down the road when their work is published
claimed to be writing a book on nuclear
or otherwise sold.
physics but had no educational background
Are you rich? The IRS figures you likely
or other expertise in the field. Such a person have a profit motive if you don’t have a
would not seem to be serious about earning
substantial income from sources other than
money. On the other hand, a person who
writing. After all, you’ll need to earn money
had a degree in physics or had writing credits from your writing to survive. On the other in the field would appear to be serious
hand, substantial income from sources other
about earning a profit from writing about
than writing may indicate a lack of a profit
physics. If you lack the necessary expertise,
motive. This factor is never determinative
you should acquire it through study or by
by itself.
consulting with experts in the field.
Are you having too much fun? Finally,
Do you write regularly and continuously?
activities that are inherently fun or recre-
You can work part-time at writing and still
ational are less likely to be engaged in for
be in business. As a general rule, the more
profit than those that are not fun. Writing
time and effort you put into writing, the
is often viewed as a “fun” activity by the
more likely it will appear you want to earn
IRS—particularly where the writer does a
a profit.
substantial amount of pleasurable traveling.
Do you have a good track record? Having a This means, for example, that a writer who track record of success in other businesses in claims a trip to Paris as a writing business the past—whether or not related to writing expense because the novel is set in Paris
CHAPTER 13 | COPYRIGHT AND TAXATION | 351
will have a harder time showing a profit
will usually be found to be hobbyists.
motive than an accountant or a computer
Keep a record of where you submit
programmer who never leaves a cubicle.
your work and save all acceptance and
rejection letters or other letters or email
Passing the IRS behavior test
you receive from publishers or editors.
The first three factors listed above—acting
• Legally protect your writings. Any
like a business, expertise, and time and effort
original writing is automatically
expended—are by far the most important.
protected by copyright the moment it
Studies have shown that no taxpayer who
is written down or otherwise recorded.
has satisfied these factors has ever been found
However, you can obtain additional
not to have a profit motive. If you take the
legal benefits by registering your works
fol owing steps, you’ll have a good chance
with the U.S. Copyright Office. This
of passing the test. First and foremost, in
is inexpensive and easy to do and helps
order to show that you carry on your writing
to show you’re a serious businessperson.
activities in a business-like manner:
(See Chapter 3 for a detailed discussion
• Keep good business records. Keeping
of copyright registration.)
good records of your expenses and
• Keep a separate checking account. Open
income from writing is the single most
up a separate checking account for
important thing you can do to show
your writing business. This will help
you’re in business and want to earn a
you keep your personal and business
profit. Without good records, you’ll
expenses separate—another factor that
never have an accurate idea of how
shows you’re running a business.
you stand financially. Lack of records
• Get business stationery and cards. It
shows you don’t really care if you
may seem like a minor matter, but
make money or not. You don’t need
obtaining business stationery and
an elaborate set of books. A simple
business cards shows you think you
record of your expenses and income
are in business. Hobbyists ordinarily
will suffice. See Working for Yourself, by
don’t have such things. You can
Stephen Fishman (Nolo), for a detailed
inexpensively create your own
discussion of record keeping for self-
stationery and cards yourself using off-
employed people.
the-shelf software products.
• Persistently try to sell your work. Writers
• Get online. Today, most writers who are
who are in business ordinarily try
serious about earning money from their
to sell their work—they don’t write
work have a website, blog, or some other
solely for enjoyment. Authors who
type of online presence to market their
fail to make systematic sales efforts
writing and/or themselves. Lack of an
352 | THE COPYRIGHT HANDBOOK
online presence indicates that you’re not
a sideline and never revises it would
real y interested in earning a profit from
not be considered to be in business. In
your writing activity.
contrast, an author who prepares new
• Join professional organizations and
editions of a book from time to time,
associations. Join and participate in
writes other books and materials, and
writer’s organizations and associations—
lectures professionally would likely be
for example, the National Writers
viewed as being in business. (Rev. Rul.
Union or Authors Guild.
55-385.)
• Create a business plan. It is also helpful
Keep a log showing the time you
to draw up a business plan with fore-
spend writing; this doesn’t have to be
casts of revenue and expenses. For
fancy—you can just mark down the
detailed guidance on how to create
time you spend on your calendar. If
a business plan, see How to Write a
you’re audited, this documentation will
Busines Plan, by Mike McKeever (Nolo).
show how hard you’ve been working.
• Have or get expertise. If you lack all the
expertise you need to be a successful
Writers who failed the behavior test
writer, develop it by attending educa-
Following are real-life examples of writers
tional seminars and similar activities or who failed the behavior test. They may
consulting with experts. Keep records
help show you how the IRS and courts
to show your attempts to gain exper-
apply the test:
tise—for example, notes documenting
• The author who never sold a book.
your attendance at a writing seminar.
Bradley, a social services caseworker,
• Work steadily. People who run a busi-
worked part-time at writing for over 17
ness ordinarily work continuously and
years. He set up an office in a room in
regularly. They don’t work one day
his home and wrote fiction. However,
and then do nothing for the next six
he only submitted one manuscript,
months. So, you can’t write one short
a novel called The Glass Mask, to a
article a year and claim that writing is
publisher. It was rejected, and he never
a business.
attempted to get it published elsewhere.
You don’t have to work full-time
The only money he ever made from
on writing to show you have a profit
writing was $700 his mother paid
motive, but you should work steadily
him to write her biography. The IRS
rather than sporadically. This can be
claimed Bradley was a hobby writer,
an important factor in an IRS deter-
and the court agreed. The court said
mination. Long ago, the IRS ruled that
his failure to make systematic efforts
a person who writes only one book as
to sell his work showed he engaged
CHAPTER 13 | COPYRIGHT AND TAXATION | 353
in writing “essentially for personal
more of her writing time to plays,
pleasure,” not to make a profit. ( Sherman
which she sent to agents and producers.
v. Commissioner, T.C. Memo 1989-269.)
She lost money from these activities for
• The engineer’s complaint. Bert, an inter-
eight out of 12 years. The IRS audited
mittently employed electrical engineer,
her and claimed that, although she
wrote various articles in his spare
had once been a professional writer,
time. These were not on the subject of
playwriting was merely a money-
engineering, but on such topics as his
losing hobby she engaged in after her
hatred of the IRS and his problems
marriage. Eleanor appealed to the
with his mother. He wrote 44 such
tax court and won. The court was
articles over a three-year period, and
impressed by the businesslike manner
managed to get five published—
that Eleanor managed her playwriting.
unfortunately, for free. Although Bert
She spent two to four hours a day
claimed to have spent substantial time
The Copyright Handbook Page 61