writing in her office, which measured
writing, the tax court held that he was
20' x 20' and was located in the same
a hobbyist. Bert failed to keep adequate
building as her apartment, but on
books and records and the court found
a separate floor. She kept a separate
that his articles didn’t appear to be
bank account in which she deposited
written with the purpose of earning
income from her writing activities
money from publication. Rather, his
and from which she paid expenses
diatribes resembled diary entries or
connected with her writing. She was
served as a means for him to let off
a long-time member of the American
steam about the income tax system.
Society of Journalists and Authors,
( Bert v. Commissioner. T.C. Memo,
the Dramatists’ Guild and Authors’
1989-503.)
Leagues, and the American Federation
of Television and Radio Actors. This
Writers who passed the behavior test
all led the court to believe that Eleanor
The following writers passed the behavior
wrote her plays to earn a profit and
test, even though they earned no profit from
was therefore in business. ( Howard v.
their writing during the time in question:
Commissioner, T.C. Memo 1981-250.)
• The struggling playwright. Eleanor
• The freelancer with great expectations.
supported herself as a Hollywood
Seymour, a veteran writer with many
screenwriter and freelance book and
articles and screenplays to his credit,
article writer for 28 years. Following
spent almost a whole year in New York
her marriage, she continued to write
researching D.W. Griffith’s papers at the
magazine articles, but started devoting
Museum of Modern Art. He used this
354 | THE COPYRIGHT HANDBOOK
research to write an article on Griffith
An expense doesn’t have to be indispensable
for Film Culture Magazine and also
to be necessary; it need only help your
signed a contract to write a book on the business in some way, even in a minor way.
pioneer film director. Seymour earned
It’s usually fairly easy to tell if an expense
no money from the article but was to
passes this test.
be paid a royalty for the sales of his
EXAMPLE 1: Bil , a freelance writer, is writing
book. The IRS objected when Seymour
a book about ancient Athens. He hires a
deducted his travel expenses for the
research assistant and pays her $25 an hour.
time he spent in New York, claiming he
This is clearly a deductible business expense.
was not in business during that time.
Hiring research assistants is a common
The tax court disagreed, holding that
and accepted practice among professional
Seymour was in business because he
writers. The assistant’s fee is an ordinary and
had a good-faith expectation of earning
necessary expense for Bil ’s writing business.
a profit from his book once it was
published. ( Stern v. United States, 71-1
EXAMPLE 2: Bil , the freelance writer, visits
U.S. Tax Cas. (CCH) P9375.)
a masseuse every week to work on his
bad back. Bill claims the cost as a business
expense, reasoning that avoiding back pain
Types of Expenses Writers May Deduct
helps him concentrate on his writing. This
Virtually any writing expense you incur is
is clearly not an ordinary or customary
deductible as long as it is:
expense for a freelance writer, and the
• ordinary and necessary
IRS would not likely al ow it as a business
• directly related to your writing
expense.
business, and
• for a reasonable amount.
Expense must be related to your business
An expense that satisfies these require-
An expense must be related to your writing
ments is deductible whether your writing
business to be deductible. That is, you must
activity qualifies as a business or hobby,
use the item you buy for your business
subject to the limitations on deductions for in some way. For example, the cost of a
hobbies noted above.
personal computer is a deductible business
expense if you use the computer to write
Ordinary and necessary
freelance articles.
An expense qualifies as ordinary and
You cannot deduct purely personal
necessary if it is common, accepted, helpful, expenses as business expenses. The cost of a and appropriate for your writing business.
personal computer is not deductible if you
CHAPTER 13 | COPYRIGHT AND TAXATION | 355
use it just to play computer games. If you buy dramatical y. One analysis of almost 1,300
something for both personal and business
tax returns found that you are at high risk
reasons, you may deduct the business portion for an audit if your business deductions
of the expense. For example, if you buy a
exceed 63% of your revenues. You’re
cel ular phone and use it half the time for
relatively safe so long as your deductions are
business calls and half the time for personal less than 52% of your revenue. If you have calls, you can deduct half the cost of the
extremely large deductions, make sure you
phone as a business expense.
can document them in case you’re audited.
However, the IRS requires you to keep
records showing when the item was used for
Writer’s Brothel Expenses
business and when for personal reasons. One
Not Deductible
acceptable form of record would be a diary or
log with the dates, times, and reason the item
Vitale, a retired federal government budget
was used. This kind of record keeping can
analyst, decided to write a book about two
be burdensome and may not be worth the
men who travel cross-country to patronize
trouble if the item isn’t very valuable.
a legal brothel in Nevada. To authenticate
To avoid having to keep such records,
the story and develop characters for the
try to use items either only for business or
book, he visited numerous legal brothels
only for personal use. For example, if you
in Nevada by acting as a customer for
can afford it, purchase two computers and
prostitutes. He kept a detailed journal
use one solely for your writing and one for
describing his experiences at the brothels,
playing games and other personal uses.
including the dates (and sometimes the
hours) of his visits, the prostitutes he met,
Deductions must be reasonable
and the amount of cash he paid each one.
He wrote and published the book, called
There is usual y no limit on how much you
Searchlight, Nevada, and later claimed a
can deduct so long as it’s not more than you
deduction of $3,480 on his tax return for
actual y spend and the amount is reasonable.
cash payments to prostitutes. The tax court
Certain areas are hot buttons for the IRS—
found that writing was a business for Vitale,
especial y entertainment, travel, and meal
although he had yet to earn a profit from
expenses. The IRS won’t al ow such expenses
it. However, it denied the deduction for
to the extent it considers them lavish.
prostitutes, declaring that the expenditures
Also, if the amount of your deductions
were “so personal in nature as to preclude
is very large relative to your income,
their deductibility.” ( Vitale v. Commissioner,
your chance of being audited goes up
T.C. Memo 1999-131.)
356 | THE COPYRIGHT HANDBOOK
Common deductions for writing businesses
• retirement plan contributions
Expenses that self-employed writers may
• software you buy for your writing
deduct from their income tax commonly
business
include:
• subscriptions to business-related
• commissions paid to literary agents
publications, and
• legal and accounting fees
• travel, meals, and business-related
• permissions fees
entertainment.
• bank fees for a writing business bank
When to deduct expenses
account
• costs of renting or leasing vehicles,
Some expenses can be deducted all at once;
equipment, and other property used in others have to be deducted over a number of
your business
years. It all depends on how long the item
• depreciation of business assets
you purchase can reasonably be expected to
• education expenses—for example, the
last—what the IRS calls its useful life:
cost of attending writing seminars or
• Current expenses. The cost of anything
classes
you buy for your writing business that
• expenses for the business use of your
has a useful life of less than one year
home (this deduction may not be taken
must be ful y deducted in the year it is
by hobby writers)
purchased. This includes, for example,
• fees you pay to people you hire to help
rent, telephone and utility bil s,
your writing business—for example,
photocopying costs and postage, and
payments to a research assistant or the
other ordinary business operating costs.
cost of hiring a publicist to help you
Such items are cal ed current expenses.
promote a book
• Capital expenses. Certain types of
• health insurance for yourself and your
costs are considered to be part of your
family
investment in your business instead
• insurance for your business—for example,
of operating costs. These are cal ed
liability and business property insurance
capital expenses. In the past, most long-
• office expenses, such as office supplies
term assets had to be depreciated over
• office utilities
several years—anywhere from three to
• postage
39, depending on the asset. However,
• professional association dues
changes in the tax law the last few
• books you need for your writing business
years enable most writers to currently
• repairs and maintenance for business
deduct in a single year most long-term
equipment such as a photocopier or fax
assets they purchase, such as computers,
machine
office furniture, and books. The IRS de
CHAPTER 13 | COPYRIGHT AND TAXATION | 357
minimis safe harbor al ows such items
promised. Thus, for example, if a publisher
to be currently deducted if they cost no promises to pay you a $100,000 advance
more than $5,000, while IRC Section
when you submit a completed manuscript,
179 enables up to $500,000 in personal you’d have to pay tax on the advance only
property to be deducted in a single
when it was paid to you.
year. One exception is real estate. The
Prizes and awards given to writers are also
cost of commercial real estate must be
taxable income, whether cash or noncash.
deducted over 39 years.
Scholarship and fellowship grants are
excluded from taxable income only to the
extent they are used for tuition and course-
Writers Need Not Capitalize
related fees, books, supplies, and equipment
Short-Term Expenses
at a qualified educational institution.
In the past, writers used to have it tough tax-
wise because they were required to capitalize
Income Reporting
all costs they incurred while creating their
works. This meant they had to deduct them
How do the folks at the IRS find out how
over several years as sales occurred. However,
much you’ve earned from writing? Easy
the tax law was changed in 1988 to provide
… publishers tell them. Any magazine,
a special exception to these capitalization
website, publisher, or other enterprise or
rules for writers or other creative individuals.
person that pays you $600 or more by check
(IRC § 263A(h).) Writers may now deduct
or cash during the year as a nonemployee
costs, other than some capital expenses as
writer must complete a Form 1099-MISC
described above, in the year incurred.
reporting the payments. The payer must file
a copy of the 1099 with:
• the IRS
• your state tax office if your state has
Taxation of Copyright Income
income tax, and
• you.
Virtually any income you earn from
To make sure you’re not underreporting
writing—that is, creating copyrighted
your income, IRS computers check the
written works—is subject to federal income amounts listed on your 1099s against the
taxation. This is so, whether such income
amount of income you report on your tax
takes the form of a set fee for an article or a return. If the amounts don’t match, you have royalty based on sales. Virtually all freelance a good chance of being flagged for an audit.
writers are cash-basis taxpayers. This means
Publishers and others need not file a 1099
they must pay tax on their earnings only
form if you’ve incorporated your business
when they are actually received, not when
358 | THE COPYRIGHT HANDBOOK
and the publisher pays your corporation,
payer immediately and request a corrected
not you personally.
1099. You don’t want the IRS to think
In addition, payers need not file a
you�
�ve been paid more than you really were.
1099-MISC if you are paid electronically— You don’t have to file your 1099s with your
for example, through online payment
tax returns. Just keep them in your records.
services like PayPal. However, third-party
payment services like PayPal must report
Capital Gains vs. Ordinary Income
the payments they make to you on IRS
Form 1099-K if you are paid more than
As you are probably aware, the IRS taxes
$20,000 per year and have 200 or more
your income as either capital gains or
transactions.
ordinary income. The top capital gains
tax rate (as of 2017) is 20%, compared
with 39.6% for ordinary income. (Note:
Self-Employment Taxes
Capital assets held for less than one year
are taxed at ordinary income rates.) This
In addition to income taxes, you’ll also
means that writers with higher incomes
have to pay Social Security and Medicare
could pay substantially lower taxes if they
taxes on the profit you earn from your
were allowed to treat the money they receive
writing business. These taxes are called
from the sale of a copyright as a long-term
self-employment taxes, or SE taxes. You
must pay SE taxes if your net yearly
capital gain rather than as ordinary income.
earnings from your writing business
Capital gains treatment is available only
are $400 or more. When you file your
when you sell a capital asset—this commonly
annual tax return, you must include IRS
includes such things as real estate and stocks
Form SE, showing how much SE tax you
and bonds. Logical y, there would seem to
were required to pay. However, SE taxes
be no reason why a copyright shouldn’t also
need only be paid by writers who are
be treated as a capital asset. Unfortunately,
in business—not by hobby writers. For
Congress disagrees. A special provision of the
more information on SE taxes, see IRS
tax law bars writers from obtaining capital
Publication 533, Self-Employment Tax.
gains treatment on money they earn from
the sale of copyrighted works they create
themselves. A person who is given ownership
You should receive all your 1099s for the of a copyrighted work by an author is
previous year by January 31 of the current
also denied capital gains treatment. (IRC
year. Check the amount of compensation
§ 1221(a)(3).) However, a person who inherits
listed as paid to you in each 1099 against
The Copyright Handbook Page 62