Taxes, record-keeping, and keeping track of deductions don’t always come naturally to writers. This post, written by tax professional Andrew Stern, author of Z Art of Taxes, helps demystify the process.
Take it away, Andrew…
What writers should know about taxes
KISS! No, not the rock group. You know what I mean. Simplicity.
I’ll start with a general tax/financial overview and then address a few specific issues for writers.
Your financial life can overwhelm if not handled strategically and in a timely fashion. Create a system where you can track your entire financial life without it taking much of your time. No special skill set is required.
It’s easier than you think. All tax & financial responsibilities start with excellent recordkeeping. You must be able to see and analyze your financial life to accomplish your financial goals and meet your tax & financial responsibilities.
Tax planning and preparation is a math puzzle with variables from year to year. The math, for the most part, is straightforward.
Your goal is to connect your opportunities into one cohesive overall tax strategy: business deductions, business use of home and auto, retirement plan funding, estimates, health insurance, medical expenses, Health Savings Accounts. They all fit together into your tax planning.
What writers can deduct
Your business deduction opportunities are the same as any other self-employed taxpayer. Tax code states that an expense can be deducted for business if it meets the test of being “ordinary and necessary” to your profession.
Your task is to carefully analyze where you spend your money to see what fits into that definition. There are certain expenses that are black and white; you drive a car, use a phone, have an office. What you are looking for, in addition to the obvious, are the indirect, peripheral, personal expenses that might be linked to the tax code definition of what constitutes a business expense.
Manipulate and exploit your financial life. Identify what you like to spend money on and see if it can be linked to your business. If you like to drink wine and spend money on wine, write articles about wine and submit them to publications for publishing. If you like to travel, write travel articles and submit them for publishing. Look at what your interests are, where you spend your money on those activities, and use them as subject matter for your writing opportunities.
Book “production costs”
If you spend money to create a product, such as a book, film, or a set of recordings (what we call an album), a product that once it is finished will get duplicated and sold, the expenses associated with the creation of the product have specific rules. All expenses incurred are rolled into one “production cost” category, they are capitalized (sorry, tax speak), and amortized (sorry, tax speak again, this means deducted) over a three (3) year life, using the safe harbor. You can deduct 50% of the production costs in the 1st year, 25% in years 2 & 3.
For example, if I record an album I would pay for musicians, engineering, recording studio time, art work, mixing, and mastering. Those are all production costs. They create the product which I can then duplicate and sell.
Keys to tax preparation and tax planning
- Track your entire financial life using personal finance software.
- Stay current on all tax deadlines, filings, and scheduled tax payments.
- Start early in the year for tax preparation. This allows you to go through this process with enough time to ensure that you have not overlooked anything or missed opportunities.
- The information required for your tax return preparation is obtained thru careful analysis of your yearly software reporting.
- Turn what you spend money on into deductions.
- Engage in tax planning every year.
- Perform tax planning every year in November or December.
- Find a good tax practitioner who is…
- Smart, someone with a bigger perspective of the world
- Responsive, always returns e-mails and phone calls within a day or two
- Can explain issues in plain English
- Street-wise & financially savvy
Using a personal finance software program is the BEST way to track your financial life:
- No more creating spreadsheets where you must log in every single piece of data.
- No more dumping receipts on your desk and sorting thru them.
- No more last minute crush to the deadline.
Using the personal financial software works like this
- Every line item on every credit card and checking account statement is downloaded directly into the software.
- All you must do is to categorize what the inflow and outflows are.
- No special bookkeeping skill set required.
- Doesn’t take very much time, 5 to 10 hours a year.
Clear as muddy waters?
Andrew Stern is a tax practitioner, Enrolled Agent, musician. I’ve had my own tax accounting practice for 30 plus years, working for a wide variety of clientele, including many taxpayers in the arts: writers, musicians, fine artists, etc. Been playing guitar since I was a teenager, have my own ProTools recording studio in my residence, write, record and release music with my spouse, Laura LaRue. The past 5 years we have released dance singles, charting Billboard top 20 dance charts, licensed and used for placement, most recently Shameless season 7 on Showtime. Also have catalog for pop, rock, ballads, and Latin dance available thru download. Music and videos can be reached at z-axman.com. Latest project is our Nashville style country album, just being released. You can check it out at 3pairsofboots.com, available thru download.
Please note: This blog post is not a substitute for legal or tax advice. If you have specific tax issues or questions, discuss them with your legal or tax advisor.
Art: Vanitas Still Life by Jacob de Gheijn II