Can I Have Tax Deductions As a Writer If I Had No Income for My Work?
Writers and other artists have different expense and income flows than most other businesses. Often, the expenses come long before income starts coming in from either freelance writing or royalties and advances on a book. What happens if you have been writing during the year and have incurred expenses but haven't yet sold your work? There are several considerations to think about when preparing your income taxes.
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Is Your Writing a Business or a Hobby?
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When deciding how to handle your writing expenses for tax purpose, you first must determine if you are actually running a business. The IRS looks at criteria such as whether you have a reasonable expectation of profit in the future and how much of your time you spend on your writing activities. If you don't plan on making more money than you spend, your writing is a hobby and you are restricted from claiming losses. If you plan to sell your work in the future and earn net income from it, you may claim your business expenses in the year they occur.
Home Office Expenses
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Home office expenses are a special category of expenses that are handled differently than other business costs. If you do not rent another office and do most of your writing at home, you can claim a portion of your house expenses, such as utilities, mortgage interest, property taxes and repairs and maintenance. With most home office expenses, other than mortgage interest and property taxes, you cannot create or increase a loss. Record the expenses on Schedule C in the year they occur but they will then be carried forward to next year. Once you have taxable income from your writing business, you can deduct the built-up home office expenses from prior years.
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Business Losses
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If the direct expenses from your business, such as pens, paper and research materials are higher than your writing revenues, you will report the business loss on your income taxes. If you have other taxable income, your business loss will be deducted from that, resulting in lower taxes due. If you have no other sources of income, you can carry the loss back to one or both of the prior two years, or forward for 20 years.
How Long Can I Report Losses?
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There are many theories in small business circles about how long you can report losses before the IRS steps in and tells you that you do not have a reasonable expectation of profit. There are no laws in the tax code about it and the IRS can choose to audit your business income at any point in time. Likely after three or more years of straight losses, your risk of audit increases. This does not mean you have done anything wrong and, as long as you can show the IRS the time you put into your business and the efforts you make to sell your work, the losses will likely be granted.
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