tag:blogger.com,1999:blog-35861493602209537222024-03-08T15:29:32.610-06:00Dear Writer - How's Business?A discussion of business issues that writers, particularly fiction writers, face in the course of pursuing their writing passion.Anonymoushttp://www.blogger.com/profile/07987675090169333708noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-3586149360220953722.post-47452159631914860302013-11-03T08:25:00.000-06:002013-11-03T08:25:00.766-06:00Hobby Expenses, Income, and the 3-out-of 5 Year Tax Rule<div class="MsoNormal">
Ima Writer continues to research the impact of earning money
as a writer on her federal tax return.
She searches “Hobby Expenses” at the IRS website (<a href="http://www.irs.gov/">www.irs.gov</a>) and finds the following reference:<o:p></o:p></div>
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<br /></div>
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<span style="background-color: white; background-position: initial initial; background-repeat: initial initial; font-family: Arial, sans-serif; font-size: 9pt; line-height: 115%;">“You
can generally deduct hobby expenses, but only up to the amount of hobby income.
A hobby is not a business because it is not carried on to make a profit. See<span class="apple-converted-space"> </span><em><span style="font-family: "Arial","sans-serif";">Not-for-Profit
Activities</span></em><span class="apple-converted-space"><i> </i></span>in Chapter 1 of Publication 535.”</span><o:p></o:p></div>
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<br /></div>
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Remember to keep in mind that at the writing of this blog we
are using the tax laws for tax year 2012 as a reference since the updated
publications for 2013 have not generally been released. Updated publications are released at the end of the tax year and into January of the following year. Thus, publications for 2013 will start to
become available in December 2013 and into January 2014. One of the helpful
features of IRS Publications is that they have a section in the beginning of
the publication with updates and changes.
Ima Writer will definitely want to review the 2013 version of all
publications related to her situation when they are released.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
So, for tax year 2012, Publication 535, Business Expenses,
there is a section in Chapter 1 on page 5 titled, <i>Not-for-Profit Activities</i>, as indicated in the reference
above. The interesting aspect of
claiming writing or any other type of income as a hobby is that the publication
basically describes a process where someone like Ima Writer has to prove she is
<b><u>NOT</u></b> a business. There are a variety of reasons for this which
we will discuss later.<o:p></o:p></div>
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<br /></div>
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People often confuse the 3-out-of-5 year tax rule for making
a profit as a hobby with the business tax rules and it is important for Ima
Writer to understand the difference before going any further. In the <i>Not-for-Profit Activities</i> section of Publication 535, there is a sub-section titled <i>Presumption of profit</i> which contains the
discussion of the 3-out-of -5 year tax rule which is directed at Not-for-Profit
Activities. Essentially, the IRS
publication states that if as a Not-for-Profit Activity, such as a hobby,
anyone who achieves a profit in 3-out-of -5 years will then be considered a
business and therefore must pay business related taxes. The business related taxes include FICA, which
is basically comprised of such taxes as Medicare and Social Security.</div>
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<o:p></o:p></div>
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<br /></div>
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So, regardless of deciding to become a hobby or a business,
the behavior and nature of the income and expenses of her writing activities will actually determine this for Ima Writer.
It is essential for Ima Writer, and all writers, to keep detailed
records of their writing activity, income and expenses because there is a
minimum of a 3-year window in which the IRS can audit tax returns. If it is determined that Ima Writer considered
her writing a hobby but then the IRS ruled it a business, her tax returns would
have to be amended and her income and expenses reflected on the appropriate
forms. Fortunately, or unfortunately,
for most writers in the early years, their expenses most often exceed any
income, and tax wise this can be an advantage as a business.<o:p></o:p></div>
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<br /></div>
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Also, Ima Writer needs to keep in mind that the leading tax
preparation software programs today are robust enough to help Ima Writer assess
her status as hobby or business as she is inputting her data into the program.<o:p></o:p></div>
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<br /></div>
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Now, back to expenses for a hobby and how they are treated
on the federal tax forms, in particular Schedule A (Form 1040). The total amount of Hobby expenses will be
listed on line 23 of Schedule A (Form 1040) and Ima Writer will “write in”
Hobby Expenses on the line provided.<o:p></o:p></div>
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<br /></div>
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But wait – there’s more!<o:p></o:p></div>
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<br /></div>
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Hobby expenses are limited to the amount earned from the hobby. So, if Ima Writer’s expenses were $1200 she
can only deduct up to the $750 that she actually earned.<o:p></o:p></div>
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<br /></div>
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But wait – there’s still more!<o:p></o:p></div>
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<br /></div>
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Expenses must be deducted in a very specific order AND are
limited to 2% of Ima Writer’s Adjusted Gross Income or AGI. So in Ima Writer’s example who earned $35,000
from her day job and $750 from her hobby, her AGI is $35,750 and 2% of this is
$715. So, her actual amount of deduction
will be $35.00. Keep in mind that in this
example we’re only taking into account Ima Writer’s day job income, her
hobby income and her hobby expenses. Furthermore,
the section of Schedule A (Form 1040) where hobby expenses are listed includes
other types of expenses such as tax preparation
fees and safety deposit box costs and more, and the 2% floor is a collective
one for all expenses in this category.<o:p></o:p></div>
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<br /></div>
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There are many other financial decisions and consequences
that can affect Ima Writer’s AGI but we’ve kept the example simple to
illustrate how the hobby expense limit and the 2%-of-adjusted-gross-income
limit works. Publication 535 walks through
an example of how listing expenses and applying the 2% limit works.<o:p></o:p></div>
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<br /></div>
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But wait – there’s still more!<o:p></o:p></div>
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<br /></div>
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Ima Writer does not have enough other deductions that would
cause her to use Schedule A (Form 1040) so in reality and in her current
situation, she will not be able to truly deduct any of her hobby expenses nor
would any legitimate tax professional advise her to do so. The reason is that her standard deduction
allowed by the federal tax laws – and for 2012 that amount is $7,400 (See IRS
Publication 501: Exemptions, Standard
Deduction, and Filing Information) is more favorable for her current tax profile. Thus $7,400 beats the amount that Ima Writer
would be able to claim on Schedule A (Form 1040) in her current tax profile
scenario but this could change from year to year so her tax situation needs to
be evaluated each year.<o:p></o:p></div>
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<br /></div>
<br />
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So, Dear Writer, go to <a href="http://www.irs.gov/">www.irs.gov</a>
and review Publication 535 and Schedule A (Form 1040) for a better
understanding of hobby expenses because in addition to the IRS being able to
rule a not-for-profit activity as a business, the IRS can likewise rule a
business as a hobby and in my opinion that would have more negative impact tax
wise for any writer. We will look soon
at how Ima Writer transitions from a hobby to a business and what she must do
to maintain her business status.<o:p></o:p></div>
Anonymoushttp://www.blogger.com/profile/07987675090169333708noreply@blogger.com1tag:blogger.com,1999:blog-3586149360220953722.post-46320905899331139142013-10-27T10:00:00.000-05:002013-10-27T10:00:02.711-05:00Writing as a Hobby<div class="MsoNormal">
<span style="font-size: 12.0pt;">At the end of Ima Hobbyist’s
first year providing freelance writing services for her friend’s business, she
receives a Form 1099-Misc in the amount of $750. As indicated in our last blog this document
confused Ima Writer and she called her friend and asked for more information. Her friend refers her to her own account who
tells Ima Writer that as a business owner her friend was obligated to report
all money spent for services and expenses related to her business. Furthermore, because the amount for the year
was more than $600 it required the issuance of the Form 1099-Misc.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-size: 12.0pt;">Per the last blog, Ima Writer
went to the IRS website to download and review the pertinent material that her
friend’s accountant referenced and concluded that she was indeed earning the
money as a hobby and not as a business. Ima Writer has no intention of making a
profit and she doesn’t know if she will even continue to pursue writing for
anyone else, even a friend, but in the meantime she has to make sure that she
properly files her federal and state individual tax returns.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;">Because the 2013 federal and
state tax forms are not yet available, Ima Writer decides to see what impact
the $750 she earned would have on her 2012 tax return in an attempt to better
understand the tax consequences of earning income as a hobby.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-size: 12.0pt;">Ima Writer’s 2012 tax return
was a 1040EZ and she earned $35,000 from her day job as a copy writer for a
local small business. She loves her job
because she loves writing and even though her salary isn’t as large as if she
commuted to the city, she enjoys her options to telework and to potentially
earn money writing on the side. She hasn’t
made up her mind about the writing-on-the-side thing because what she really
wants to do is write fiction. She has
started what she hopes is the Great American Novel (GAN) but right now it’s
just a dream. This recent twist of earning
money as a hobby and having to claim it as income has her realizing that she
must have a better understanding of the business side of writing before she
goes any further.<o:p></o:p></span></div>
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<br /></div>
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<span style="font-size: 12.0pt;">After poking around on the
IRS website, Ima Writer realizes that there are three levels of the Form 1040
for an individual’s federal tax return.
Until now she has enjoyed the fact that her return has been fairly
simple to prepare and that she has been able to use the 1040EZ. She now understands that because of the hobby
income she must use Form 1040 which is the more complicated version of the
three choices.<o:p></o:p></span></div>
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<br /></div>
<div class="MsoNormal">
<span style="font-size: 12.0pt;">Ima Writer transfers her 2012
tax information to the Form 1040 and adds the $750 to line 21 of Form 1040
listed as Other Income. She sees from
the instructions that she will have to indicate that this is hobby income. She recalculates her tax and realizes that if
she had earned this amount of money in 2012 her federal tax liability would
have increased by $112.50 due to the fact that her tax rate on this income for
2012 is 15%. She must also pay whatever
her state tax rate is on this income. If
her state tax is 3% then she would owe an additional $22.50 to the state as
income tax on the money earned.<o:p></o:p></span></div>
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<br /></div>
<br />
<div class="MsoNormal">
<span style="font-size: 12.0pt;">At this point, because she
has earned the money as a hobby, she is not able to reduce the amount by any
expenses that she had. That would come
later on the Form 1040 Schedule A which we will discuss more next time.</span><o:p></o:p></div>
Anonymoushttp://www.blogger.com/profile/07987675090169333708noreply@blogger.com0tag:blogger.com,1999:blog-3586149360220953722.post-76548747657366235632013-10-20T19:59:00.000-05:002013-10-20T20:02:24.609-05:00I’ve earned money writing - What do I do now?<div style="margin-bottom: .0001pt; margin: 0in;">
There are
ways in which hobby (or sporadic) income and expenses/deductions are treated
differently than those of a business and there are ways in which they are
treated the same. It's important to know these differences because the US Internal
Revenue Service (IRS) and state revenue agencies do.<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
First,
all income from a hobby (or sporadic activity) or a business is subject to
taxation. BUT, as indicated before just how much and how it is taxed will vary
between the two tax structures.<o:p></o:p></div>
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<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Second,
all expenses/deductions used in a hobby or business MUST be reasonable and
necessary, but how they are treated in the calculation for taxable income --
and even some of the forms used -- is different.<o:p></o:p></div>
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<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Let’s
look at an example:<o:p></o:p></div>
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<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Ima Writer
not only earned money writing a newsletter for her friend's business but she
also received a Form 1099-MISC. In a panic, she called her friend because she
had never seen one of these forms before and wanted to know what it meant.
Also, she hadn't realized that she had made as much money as the document
indicated because she really didn’t keep track of the income she received.<o:p></o:p></div>
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<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Her friend
calmed her down and advised her to talk with a tax professional. Ima Writer
said that she didn't know how to even begin to choose one of those since her
return had always been so easy to do in the past. Her friend gave her the name
of her own accountant and advised Ima Writer to contact her.<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
The
accountant explained that a 1099-MISC form was issued for a variety of reasons
to include reporting to the IRS money tendered to independent contractors such
as herself, and that these documents were required when the total amount of
money tendered/received at one time, or over a given tax year, was $600 or
more.<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Perplexed,
Ima Writer queried as to what an independent contractor was and the accountant
explained that this is someone who provides a service to someone else or to a
business, and who is not an employee of that person or business. (More
discussion on the difference between an employee and an independent contractor
will be presented in a future Blog.)<o:p></o:p></div>
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<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
It was
clear that Ima Writer had much to learn about the impact of receiving money for
helping her friend and the resulting effect on her federal and state income tax
returns. Even though she felt she had
earned very little money over the year, she knew she needed to take this
situation very seriously. Armed with the advice of the accountant, Ima Writer
set out to have a better understanding of just what she had gotten herself
into. So, she accessed the IRS website (<a href="http://www.irs.gov/">www.IRS.gov</a>) and downloaded the following publications, forms and
instructions for tax year 2013 per the accountant's advice:<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Publication
17 - Your Federal Income Tax<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Form 1040<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Form 1040
Instructions<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Schedule
A (Form 1040)<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Schedule
A Instructions (Form 1040)<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Form
1099-MISC<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Form
1099-MISC Instructions</div>
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<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
After
reading the materials listed above, it was clear to Ima Writer that she would
have to include the amount of income indicated on line 3 of Form 1099-Misc on
her federal tax return. For tax year 2012
if Ima Writer were considered a hobbyist and not a business then the income
reflected on line 3 of Form 1099-Misc would be included on line 21 of Form 1040 as
Other Income. Ima Writer will have to
confirm that the 2013 version of Form 1040 has Other Income on line 21 as well since tax forms are subject to change each year based on laws passed by
Congress.<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
It is important
to note at this time that due to receiving Form 1099-Misc, Ima Writer must now
use the federal Form 1040 and is no longer eligible for Form 1040A or Form 1040EZ
as she has been in the past. The good news is that with the tax preparation software
today it is fairly easy and straight forward to have the income correctly
listed on one’s federal and state income tax returns.<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Ima
Writer believes that she is indeed a hobbyist because she never intended to
make a profit and she is not actively seeking to earn money from her writing
endeavors. Her friend came to her and
basically asked Ima Writer to help out with her business but insisted on paying
her for the work that she provided. In
the end, Ima Writer’s friend was so pleased with her work that she asked her to
produce not only the newsletter but a few brochures as well. Still, Ima Writer only accepted the work when
she had time and didn’t treat it as a business.<o:p></o:p></div>
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<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Ultimately,
Ima Writer earned $750 from her writing which is reflected on line 3 of Form 1099-Misc
that her friend’s accountant provided.
The $750 is the amount of other income that is then included on line 21
of the federal Form 1040. To appreciate
the impact that this amount of money could have on someone’s federal income tax
return you need to understand that this amount affects what is known as the Adjusted
Gross Income (AGI) of an individual’s federal tax return and the AGI affects
thresholds for tax credits, brackets and so much more. Additionally, income received on Form
1099-Misc typically does not have any corresponding withholdings sent to the IRS
or state revenue department to offset any income tax owed.<o:p></o:p></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
We will
continue this discussion next week by looking at Ima Writer’s 2012 tax profile
and demonstrate how earning $750 as an independent contract impacts that
return. At this time we have to use the
2012 forms and rules because the rules for 2013 have not yet been fully
released.<o:p></o:p></div>
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<br /></div>
<div style="margin-bottom: .0001pt; margin: 0in;">
</div>
<div style="margin-bottom: .0001pt; margin: 0in;">
Dear
Writer – if you haven’t done so already, you too should download the
publications, forms and schedules mentioned above, and keep that calculator handy
because we're going to keep looking at the numbers just so you can see where
the money flows on Ima Hobbyist's federal tax return. We'll also see just how
much of her hobby income is taxed and how it affects the rest of her federal
tax return calculations.<o:p></o:p></div>
Anonymoushttp://www.blogger.com/profile/07987675090169333708noreply@blogger.com1tag:blogger.com,1999:blog-3586149360220953722.post-32942617565432420342013-10-13T18:46:00.000-05:002013-10-13T18:46:22.410-05:00What do you mean that's taxable!<div class="MsoNormal">
Before we delve into the tax consequences of earning income
from your writing as a hobby, let’s first discuss what the IRS (and statutorily
backed by Congress) identifies as income.<o:p></o:p></div>
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<div class="MsoNormal">
Per IRS Publication 525, <i>Taxable
and Nontaxable Income</i>, income is defined as that which is received, “…in
the form of money, property, or services.”
Furthermore that income is generally taxed if it is “constructively”
available to the taxpayer whether it is in the taxpayer’s possession or not. Moreover, this applies to all income received
worldwide and not just in the US or its territories. Additionally, all income is subject to
taxation unless specifically excluded by law or IRS ruling as identified in IRS
Publication 525.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
So, let’s look at some examples of different types of income
that you have the potential of receiving as a writer.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
In the previous blog one of the scenarios illustrated a
situation where Ima Writer helps her dear friend, Ima Small Business Owner, produce
her first newsletter. Her friend doesn’t
have much money so she offers Ima Writer some of her product instead. This is technically considered a bartering
transaction and, at a minimum, is subject to income tax. Ima Writer constructively received product in
exchange for a service of producing a newsletter and must include the value of
that product on her individual or business tax return. Her friend must also reflect the transaction
on her individual or business tax return and we’ll come back to that in a later
blog as we progress in Ima Writer’s journey.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
If Ima Writer’s friend had paid her a small amount of money
instead, say less than the going rate for a freelancer’s fees to produce a
newsletter, then that money would still be considered income but because it was
less than the going rate it would tend to classify Ima Writer as a hobbyist
because she didn’t intend to make a profit and the low payment supports this –
for the most part. Still, she must pay
income taxes on the money received and we’ll discuss this further when we walk
through how this shows up on IMA Writer’s federal income tax return as a hobby.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Let’s say that instead of product Ima Writer’s friend
offered to advertise her writing services to other businesses via her store and
the newsletter. This is now an exchange
of services and again subject to the federal tax rules. The trick here is figuring out the Fair
Market Value (FMV) of the services and how to report the income on a federal
tax return.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
In another example, Ima Writer decides to send off a
manuscript to a publisher and receives an offer of publication and
accepts. She receives an advance and eventually
royalties on the publication of her first novel. This is considered constructive income. It’s important to note that the term royalty
means something different in the IRS code than it does in the publishing
business but there is at least one example when these actually mean the same
thing in both arenas and that will be discussed in the future.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
Stepping away from the world of writing for a moment, and in
an attempt to further illustrate the concept of income as something other than
actual money, let’s examine a more familiar situation where two people exchange
services. Two parents decide to exchange
watching each other’s children while they run errands, go on social outings,
attend classes, etc. You get the idea. It’s not difficult to figure out what the
going rate for a “babysitter” is. Just
look it up on the internet for your area or try to find someone who will
provide child care in your home or theirs. While no money actually changes
hands this is a bartering transaction and the exchange of services is a taxable
transaction. Whether or not it has an
impact on either person’s tax return depends on the rest of their tax and
financial profile, which is something a tax professional can determine.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Regardless of how the income is categorized and how it is
reflected on Ima Writer’s tax return, Ima Writer needs to keep detailed records
on all income and expense transactions.
Yes, you guessed it, we will be covering record keeping in detail
throughout this blog.<o:p></o:p></div>
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<br /></div>
<div class="MsoNormal">
So, I hope you’re not getting motion sickness on this windy
and bending road of the business side of writing. Hang in there it will make sense eventually
and remember that it’s important to consult a tax professional if you have any
questions regarding your specific tax situation and how your writing endeavors
do or do not have an impact.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Next time we will run some numbers on the impact of hobby
income and expenses on Ima Writer’s federal tax return. In the meantime, here’s a research assignment:</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoListParagraphCxSpFirst" style="margin-left: .75in; mso-add-space: auto; mso-list: l0 level1 lfo1; text-indent: -.25in;">
<!--[if !supportLists]-->-<span style="font-size: 7pt;">
</span><!--[endif]-->Access the IRS website at <a href="http://www.irs.gov/">www.irs.gov</a><o:p></o:p></div>
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<!--[if !supportLists]-->-<span style="font-size: 7pt;">
</span><!--[endif]-->Review and/or download IRS Form 1040 Schedule A
and the Form 1040 Schedule A instructions<o:p></o:p></div>
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<!--[if !supportLists]-->-<span style="font-size: 7pt;">
</span><!--[endif]-->Review and/or download IRS Publications 529 and
535</div>
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<span style="text-indent: -0.25in;">-</span><span style="font-size: 7pt; text-indent: -0.25in;">
</span><span style="text-indent: -0.25in;">Pay particular attention to hobby income and
expenses and the 2%-of-adjusted-gross-income limit.</span></div>
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<o:p></o:p></div>
Anonymoushttp://www.blogger.com/profile/07987675090169333708noreply@blogger.com0Chicago, IL, USA41.8781136 -87.62979819999998241.4995241 -88.275245199999986 42.256703099999996 -86.984351199999978tag:blogger.com,1999:blog-3586149360220953722.post-39826688080138056412013-10-06T22:11:00.003-05:002013-10-06T22:11:53.673-05:00<div class="MsoNormal">
Are YOU Writing as a Hobby or a Business? </div>
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(This was previously posted at my old site. I have updated some of the information.)<o:p></o:p></div>
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<span style="font-size: 13.5pt;">The first question anyone who earns money as a non-employee, not
just writers, must ask is - what's the difference between being considered a
hobby versus a business? That is indeed
what this first blog is about. <o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">But you also might ask - why even bother caring about the
difference between the two? Well, the answer to the second question is that the
IRS cares about the difference because Congress directed them to care about it.<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">The fact that you write or that you call
yourself a writer (or author) is irrelevant as far as the IRS is concerned.
What does matter is whether or not you earn taxable income from your writing or
deduct expenses related to your writing from your taxable income. Either of
these will impact on how much you do or do not pay towards your federal, state,
and sometimes local income tax obligations.<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">The first place to start to determine if
you, Dear Writer, are a hobby or a business is to examine how you are behaving
as a writer. Notice the word behavior, a word that implies that you have at
least some control over your writing journey, and indeed you do.<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">So, let's look at how a hobbyist writer
behaves.<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">Scenario 1:<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">Ima Hobbyist loves to write but isn't
interested in making money from her writing. She mostly writes for herself. She
has dabbled in writing the Great American Novel (GAN) but that's just a dream
right now. Maybe when her kids are grown she'll take it more seriously, but
right now it's just for fun.<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">In this situation, Ima Hobbyist has no tax
obligations because she has not received income nor has she deducted any
writing expenses on her tax returns from her taxable income.<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">Scenario 2:<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">Ima Hobbyist's friends found out that she
loves to write and one of those friends has a small business and needs the
occasional brochure or newsletter written for her business. Ima Hobbyist agrees
to her friend's proposal that she become her scribe. Ima Hobbyist knows that
her friend is just breaking even on her business so charges her very little for
her services.<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">In the above situation, Ima Hobbyist is
still writing as a hobby because she's not charging the fair market value for
her services and only occasionally provides written product for her friend. In
the lingo of the tax code, Ima Hobbyist is not demonstrating an intent to make
a profit - a critical element of behaving as a business, regardless the trade.
However, she now has to claim the income on her tax return. She can also deduct
her expenses but only as a hobby which has stricter limitations than a
business. (Stay tuned for this discussion in a future Blog.)<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">Scenario 3:<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">Ima Hobbyist continues to write for her
friend's business but this time she exchanges her writing services for some of
her friend's products.<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">In this situation, Ima Hobbyist is still
writing as a hobby but is earning money from bartering and must report the fair
market value on her tax return. A future Blog on the different types of income
writers can earn, including bartering income is coming.<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">So, Dear Writer, consider the scenarios
above and see if any of them apply to you.<o:p></o:p></span></div>
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<span style="font-size: 13.5pt;">Soon we will discuss how income earned as
a hobbyist affects your federal tax return.</span></div>
Anonymoushttp://www.blogger.com/profile/07987675090169333708noreply@blogger.com0