Hobby Loss interpretation for writers
A lot of writers wonder if their writing business will be considered a hobby by the IRS. The IRS has specific guidelines for determining whether or not a business is for profit, but some of the rules can appear confusing, especially as they relate to writers. While the following list can’t replace sitting down with a tax advisor to look at your specific tax situation, it may provide guidance for you to begin the conversation.
The full IRS guidelines can be found here: http://www.irs.gov/irs/article/0,,id=186056,00.html
Here are the guidelines with some interpretation for writers
Does the taxpayer operate in a business-like manner?
Are you doing things in your writing business that people would do in any other business? Here are a few examples. Are you a member of a professional organization, such as ACFW? Do you spend time networking? Do you spend time studying the industry and keeping up on changes within the industry? Do you keep records of your writing business? If someone wanted to look in on your writing as a business model, would they think you had a real business?
If you’re a writer who writes when you feel like it, you may not be able to prove this one to the IRS. But if you’re seriously working on the craft and working on activities to improve your craft, then the intent is there. It may be helpful to log this information in a spreadsheet outlining what you did and when.
Does the taxpayer depend on the income from the activity?
Many writers do not make enough money to depend on the income, particularly in the early years. However, this isn’t a dealbreaker for the IRS, so even if you are only making a small amount of money, or maybe none at all, that’s okay. But are you showing the attempts to create income from your writing? Are you submitting? Are you tracking those submissions?
If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
Insert a big fat yes here. Unfortunately, writers do not have control over whether or not the publisher will buy the book, or if it will hit the bestseller list. What you do have control over is the number of submissions you make and the attempts you make at developing income from your work.
Has the taxpayer changed methods of operation to improve profitability?
What are you doing to improve as a writer? Are you taking classes, getting advice, doing whatever it takes to move to the next level?
Does the taxpayer and his/her advisers have the knowledge needed to carry on the activity as a successful business?
This doesn’t mean having a specialized degree. But it does beg the question of whether or not you are doing what you can to learn the business and learn the craft. Being a part of a writer’s group like ACFW or RWA is a great way to demonstrate your commitment to getting solid advice to grow.
Has the taxpayer made a profit in a similar activity in the past?
If you have any previous job experience that you used your writing skills, you’ve met this test. However, just because you were not in a writing profession previously does not mean you will be disqualified. The IRS looks at the entire list as a whole in making determinations.
Does the activity make a profit in some years?
Some writers go through dry spells and don’t make any money for a long time between contracts. Don’t let a dry spell keep you from claiming deductions.
Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
Technically, since the writer is the asset, there probably won’t be any appreciation there. However, because the writer may receive future royalties on the books, there may be a chance at future income.
