Publetariat Contributor Julian Block is an attorney, leading tax professional and former special agent for the IRS. Here, he has generously allowed Publetariat to reprint an entire chapter excerpt from his book, Julian Block’s Easy Tax Guide for Writers, Photographers and Other Freelancers. The book is available in print, Kindle and Nook editions. To learn more about other books by Julian Block, click here.
Your Questions & Julian Block’s Answers
It’s more important than ever for writers, photographers and other freelancers to familiarize themselves with steps that can keep their taxes to the legal minimum—and, of course, keep them out of trouble. To help them take year-round advantage of legitimate breaks while not running afoul of the rules, here’s some advice on common tax problems.
If you need additional information or guidance in specific areas, you should consult a qualified tax professional or contact the Internal Revenue Service. See [the chapter of this book entitled] “Help From the IRS: Free Advice Comes With a Price.”
Question: Last year, a magazine agreed to pay $2,000 for an article, plus reimburse my expenses. Usually, I ask and receive more for this kind of article, but I wanted the exposure this publication could provide. This year, I made sure to deliver the article well in advance of its due date, along with my bill for $2,700, comprised of the $2,000 fee and $700 for travel, telephone and other expenses incurred in the course of research. The assignment turned out to be a fiasco. I’ll collect zilch, because the magazine went kaput; last I heard of its publishers, they’d gone into the witness protection program.
When tax time rolls around, I know where the various out-of-pocket expenses aggregating $700 go on which lines of Form 1040’s Schedule C (Profit or Loss From Business). It seems only fair that I should be entitled to a further reduction in my income taxes with a bad-debt deduction on Schedule C for that unpaid $2,000 fee. As I fall into a 30 percent federal and state bracket, the additional write-off works out to a savings of $600—not monumental moola, but likely enough to cover several sumptuous spreads of my favorite paella at a Zagat-recommended restaurant. Some extra consolation is that a decrease in Schedule C’s net profit will lower what I owe for self-employment taxes. (See below under “Self-Employment Taxes.”) But where do I enter the $2,000 deduction in the expenses part of Schedule C? Or am I supposed to amend the previous year’s return in order to claim it?
Answer: Downsize your dining desires and be content to gorge with the other gringos at La Casa Internacional de Pancakes. You can’t take any deduction for the $2,000. The snag: You’re what’s known as a “cash-basis taxpayer.” That’s the IRS’s designation of individuals (including most of us) who generally don’t have to report payments for articles, books and other income items until the year that they actually receive them and don’t get to deduct their expenses until the year that they pay them. As the tax code doesn’t require you to count the $2,000 as reportable income, it doesn’t allow you to deduct an equivalent amount. Only if you were an “accrual basis taxpayer” and had previously counted the $2,000 as reportable income at the time it became due to you, could you deduct it now, as it hasn’t actually arrived and is a lost cause.
Question: For the past few years, my writing income has been meager. But this year’s income will soar because of a six-figure book advance. According to a fellow writer, income averaging will lower my tax tab by many thousands of dollars. When I file next spring, do I need to complete some form for averaging that has to accompany the 1040 form?
Answer: Your friend’s advice might have been helpful when the Oval Office was occupied by Ronald Reagan. But the rules now on the books provide no break for someone whose income jumps. A top-to-bottom overhaul of the Internal Revenue Code, known officially as the Tax Reform Act of 1986, included a provision that abolished averaging for nearly everybody, though there continues to be a limited exception for farmers. My advice is to focus instead on easy and perfectly legal ways for writers to trim taxes. A standard tactic is to stash some of that advance money into one of those tax-deferred retirement plans for self-employed persons.
Question: I’m an architect and moonlight as a freelance writer. I went to a get-together with some of my fellow writers. There was no speaker; it was more of a social event. While I see it as networking with my professional colleagues, and most of the talk was about work-related issues, writing is only a part-time activity for me. Can I take a business-expense deduction for the cost of getting there? How about my cash contribution to the refreshments for the group?
Answer: It’s immaterial that you’re a part-time freelancer. Your writing endeavors don’t have to be full-time for this kind of event to qualify. You’re entitled to claim the entire cost of round-trip travel between your home and the party’s site. For travel by bus, train or taxi, just keep track of your fares and claim them as business expenses; for auto travel, you can claim actual expenses or a standard mileage allowance.
The standard rate is 50 cents per mile for 2010. For 2009, it was 55 cents per mile. Whether you claim actual expenses or use the mileage allowance, remember to deduct parking fees and bridge, tunnel and turnpike tolls that you pay while you’re on business, too. See below under “Get Car Smart About Business Deductions.”
As for noshing outlays, they fall into the category of meals and entertainment, and are subject to a cap. They’re only 50 percent deductible.
Question: I’m a self-employed writer and have authored fiction and nonfiction books. Presently, I’m represented by two agents—one for nonfiction and another for fiction. Under my agenting contracts, each gets a percentage of my earnings.
When filing time rolls around, both agents send me 1099 forms; copies also go to the IRS. The 1099 forms show what they’ve sent me during the year in terms of advances, royalties received from publishers, and other payments related to my books. But they do different kinds of bookkeeping!
One agent’s 1099 lists the gross (full) amount she received from the publisher as my income; that is, she doesn’t allow for the commission subtracted by her up front before sending a check for the balance to me. The other one handles things differently; his 1099 lists only the net (after commission) payment he actually sent to me.
How should I report these payments on my return? I know that I have to include payments received from agents in the total figure shown on the line for gross receipts on Schedule C of Form 1040, but I’m not sure which figures to report!
Answer: Let consistency be your guide. The amount of income you declare should be consistent with the figures shown on your 1099 forms. Otherwise, the IRS’s ever-vigilant computers might go bananas, with unpleasant consequences to you.
When it comes to monies you received via an agent, what you should declare depends on whether the agent submits a 1099 form for you that shows the gross amount (total paid by the publisher) or the net amount (amount actually paid to you after the agent’s commission is deducted).
Does the 1099 filed by the agent list the gross amount? Then that’s the figure you should include in totaling your income to come up with your gross amount on Schedule C—and remember to include the agent’s commission, which is deductible on the line for commissions and fees.
And if you fail to do that? First, you overstate your net profit. Second, you overpay your self-employment taxes (see below under “Self-Employment Taxes”) and income taxes—federal, and, perhaps, state and city. You shouldn’t count on the IRS to catch your mistake. These kinds of miscues are spotted, if at all, in the course of audits.
TIP: To recover an overpayment, you must file an amended return within three years from the filing deadline (including any extensions) for your return. Do the recalculation on Form 1040X (Amended U.S. Individual Income Tax Return), available at irs.gov. Changing a federal return might also require amending a state return. In that event, file your state’s version of the Form 1040X. See below under “Making Amends Can Bring Rewards: Refund Claims.”
Does the 1099 from your agent instead list the net amount, the sum on the check actually sent to you after the agent’s commission taken off the top? Then you should use that amount in arriving at your gross income figure—and you should not deduct the commission on the line for commissions and fees, since it’s already been subtracted from the income figure.
To make that perfectly clear, here’s an example. Say your agent receives a check from your publisher in the amount of $50,000, deducts the 15-percent commission of $7,500, and sends you a check for $42,500. After that year’s end, you receive a 1099 form that shows $50,000. You should include the full $50,000 in your reported gross income and deduct the $7,500 commission on the line for commissions and fees. If, on the other hand, the 1099 shows only the amount actually sent to you, $42,500, you should include only $42,500 in gross income and deduct nothing. Either way, you pay tax only on the $42,500; either way, the serenity of the IRS’s computers will be preserved.
Question: I write for several magazines. One magazine’s 1099 form reports not only the fees they paid me during the year in question, but also includes sums that compensated me for sizable out-of-pocket expenses for hotels, meals, air fares, car rentals, telephones and the like. Of course this doesn’t agree with my records; I don’t count those payouts as expenses, since I know that I’m going to get them back—and I don’t count expense checks as income, either; it’s just a wash.
Suppose I receive a 1099 form that shows $9,687.53, which actually includes payments of $6,500 for articles and $3,187.53 worth of reimbursement for travel and so forth. It doesn’t make sense that I’d have to include the latter amount in totaling my income for line 1 of Schedule C, since it wasn’t income.
Answer: Contrary to what many freelancers and other self-employed people mistakenly believe, it’s not “just a wash.” This is much like the previous question about payments from agents; again, you should make sure your return reflects the consistency that will keep the IRS computers in a calm, unagitated state.
You should include in total gross receipts the full amount shown by the magazine, $9,587.53. Then, as with the agent’s commission, include the $3,187.53, though reimbursed, with your other deductible expenses, since you shouldn’t be paying taxes on it. That way, you avoid an overstatement of net profit on Schedule C and overpayments of self-employment taxes and income taxes.
Question: I came in from Chicago to New York City to attend a writers’ conference. I’m pretty sure that I’m entitled to claim some deductions, but what sorts of expenses can I deduct, and can I deduct them totally?
Answer: You get to deduct 100 percent of what you spend for the attendance fee, tapes of sessions, books on writing and the like, plus travel between your home and New York, and expenditures for hotels. There’s a limitation, though, for meals not covered by the attendance fee, including both what you eat en route and food consumed while you’re in New York: Deduct only 50 percent of those expenditures.
Question: I was accompanied on the trip by my spouse, who isn’t a writer and didn’t attend the conference. Is there any chance that any of my spouse’s expenses qualify as deductible?
Answer: There’s no deduction whatever for the portion of the outlays attributable to your spouse’s travel, meals and lodging—with a limited exception, one that will allow relatively few freelancers to salvage deductions for a mate’s travel expenses. To qualify for the exception, these three requirements must be met: (1) the spouse (or dependent, or any other individual) accompanying you on business travel is a bona fide employee of the outfit that pays for the trip (in this case, your freelance business); (2) the spouse undertakes the travel for a bona fide business reason; and (3) the spouse is otherwise entitled to deduct the expenses. See below under “Business Travel with Your Spouse.”
TIP: Take heart. Some often-overlooked tax relief remains available for lodging costs even when your spouse, significant squeeze or someone else tags along only for fun. You’re entitled to a deduction for lodging based on the single-rate cost of similar accommodations for you—not half the double rate you actually paid for the two of you.
EXAMPLE: Judy, a photographer, goes by car to New York for a business conference. She’s accompanied by her husband, Frank, who’s retired. They stay at a Manhattan hotel where rooms go for $200 for a double and $180 for a single room. Besides a deduction for the total cost of driving to and from New York (Judy obviously incurs the same driving expenses whether Frank accompanies her or not), she should claim a per-day deduction for their hotel room of the entire single rate of $180, rather than half the double rate, or $100. To help safeguard her deduction in case the IRS questions it, she should remember to have the hotel bill note the single rate, or be sure to get hold of a rate sheet.
Some of Frank’s meals might qualify as deductible business meals. An example: At the conference, Judy dines with a book publisher and the publisher’s spouse. Because of the presence of the publisher’s spouse, Frank attends on a business basis.
Question: I’ll be paid for a talk that I’ll give at a writers’ conference. Is a charitable-contribution deduction available to a speaker who declines an honorarium and asks that the money be donated to a charity he or she picks?
Answer: Yes. But the speaker still has to declare the honorarium as income. Note that you derive no benefit from a donation deduction if you pass up itemizing on Schedule A of Form 1040 for contributions, home-mortgage interest, state and local real estate and income taxes and the like because it’s more advantageous to use the standard deduction. The standard deduction is a flat amount based mostly on filing status and age that’s adjusted annually to reflect inflation. If you anticipate that you’re going to claim the standard deduction, decline the honorarium before you become entitled to it and required to declare it. Assign the payment to your favorite philanthropy.
CAUTION: The IRS says that a writer who donates unsolicited property that’s received “for free,” such as books received from a publisher for review, must declare the value of the books as income if he or she donates them to charity.
Question: A university asked to reprint one of my magazine articles in its alumni publication. I gave permission without asking for any payment. Since this is an educational institution, can I take a charitable contribution deduction equal to the fee I would have asked of a commercial publisher? Do I need a letter from the school? If so, what should it say?
Answer: Sorry, a letter won’t help. You’re not allowed any deduction.
Question: I’ve written several best-selling books on World War II. I plan to donate papers, including original manuscripts and historic correspondence with famous persons, to a university. Should I consult a tax expert on how to calculate the value of my charitable contribution?
Answer: Don’t bother, unless you write your manuscripts on legal tender. For your kind of property, a special restriction applies. In tax jargon, it’s “ordinary-income property,” meaning property that, if sold by you, would result in ordinary income or short-term capital gain, rather than long-term capital gain. The measure of your allowable deduction is your cost for the property. Because your cost basis for the property is zero, you can claim no deduction.
Question: When I’m not writing, I squeeze in time for my hobby of painting. I donated one of my paintings to a church bazaar, where it sold for $100. Can I deduct that as a contribution?
Answer: No. Your deduction is limited to your unreimbursed out-of-pocket expenses for materials—the canvas, paints and brushes. The entire $100 is deductible only if you sell the painting yourself and donate the proceeds to the church. But this maneuver doesn’t help, because the bigger deduction is completely offset by an increase in your reportable income of $100.
Question: Who’s right? I have office furniture and machines that I no longer use in my business as a freelance writer. Over the years, I claimed depreciation deductions on Schedule C that have reduced my tax basis in the equipment to zero. My tax adviser says that I can donate these items to a charitable organization and take a contribution deduction for their current market value. However, my mother-in-law insists that I’m not entitled to any deduction because I fully depreciated them.
Answer: She’s right on the money. Unfortunately, you’re not allowed any deduction. As the equipment’s basis is zero, there’s nothing of value for you to write off as a deduction. For more on depreciation, see below under “Big Break on Depreciation for ‘Small’ Freelancers.”
Question: Can I deduct money spent for magazines purchased at a newsstand for pre-query research? These aren’t magazines I’m now writing for but magazines I hope to write for. And if I can, where on Form 1040 do I list those deductions?
Answer: The law allows you to deduct business-related publications, and these magazines are in that category. Like your other writing expenses, you claim them on Schedule C or on Schedule CZ, the shorter, one-page form that can be used by a business owner when expenses are below $5,000, a loss isn’t shown and certain other requirements are met.
Question: I’ve been told to report my book and photo royalties not as income on Schedule C, but as royalties on Schedule E. The word is that by doing so, I can skip paying the 15.3 self-employment tax, which consists of 2.9 percent Medicare and 12.4 percent Social Security. True?
Answer: IRS revenue agents and office auditors look unkindly on writers, photographers, artists and other self-employeds who try to escape self-employment taxes. Perhaps we have a case of semantics here. Yes, the word “royalties” is used on Schedule E, and yes, the IRS defines royalties as “payments for intangible properties”—for example, books and artistic works, which would include photos.
But the IRS is adamant that you report royalties for your creative efforts on Schedule C, making that income subject to self-employment tax. Schedule E is for reporting royalties received by other people—for example, those who purchase or inherit copyrights on books, photos and other material that they didn’t create. Limit your use of Schedule E for reporting royalties to listing those received from coal, oil or gas sites. See below under “Self-Employment Taxes.”
CAUTION: You’re playing the “audit lottery” if you report book and photo sales on Schedule E. True, your ploy might never be discovered, but should you be, expect to be hit with a hefty bill for back taxes, interest, and penalties.
Question: How can I keep track of all the federal deadlines for filing returns and sending in quarterly estimated tax payments?
Answer: One way is to ask IRS for its free Publication 509, “Tax Calendar.” See also [the chapter of this book entitled] “Help From IRS: Free Advice Comes With a Price.”