Is your writing for profit or pleasure?
IRS rules are strict on deductions
Published: August 26, 2004
|Those obliging folks at the U.S. Internal Revenue Service allow write-offs to ease the pain for losses you suffer in ventures entered into make "profits." But long-standing rules disallow deductions for losses incurred in pursuing "hobbies." |
Because of that distinction, the feds program their computers to bounce returns that show full-time salaries and other sources of income offset by losses from sideline undertakings that turn out to be hobbies--writing, photography and painting, to cite just three of the activities likely to draw the attention of tax collectors.
How do IRS examiners determine whether your intention is to turn a business profit from, say, your writing--or just to have fun? They get their cues from Internal Revenue Code Section 183, which provides guidelines on how to distinguish between a hobby and a business. To take advantage of Section 183, you have to establish a profit motive.
To cut down on disputes, the law presumes that you are engaging in a business rather than a hobby--with the IRS as partner that is entitled to a portion of your profits--as long as you have a net profit in any three of the last five consecutive years. Net profit is IRS-speak for an excess of receipts over expenses. (By the way, Congress, in its wisdom, decided that writers and the like are not as deserving as individuals involved in the breeding, training, showing or racing of horses. It conferred an easier standard on the latter: two out of seven years).
So--usually--not to worry when you have at least three profitable years during the last four. Satisfy that stipulation and you are entitled to fully deduct your expenses this year, even if this is a loss year.
A question of 'profit'
What if you have red ink in more than two out of five years? A much misunderstood point is that flunking the three-out-of-five test is not fatal. You still can establish that you conduct a "for-profit" business, provided you pass an IRS "facts and circumstances" test.
These are some of the circumstances that the IRS takes into account in determining your intention to make a profit:
-The way you conduct your writing activities--for instance, membership in writers organizations.
-How much time and effort you expend in the conduct of your writing career. The burden of proof to establish that is on you, not the IRS. To back up your deductions, in the event of an audit, save such records as queries to publishers and programs from writers conferences. Note, too, that full-time employment in some other field (as is the case with most freelancers) does not trigger an IRS refusal to classify you as a professional writer.
-The amount of occasional profits, if any, that are earned.
-The elements of personal pleasure or recreation.
-Your history of income or losses from writing. In particular, is there a string of losses?
Your activity has to be real work; you can not use a hobby that has no income and lots of expenses to offset other income. If you want to write the Great American Novel and have been at it 30 years, without any income, there can be no deductions.
Copyright © 2003 Julian Block. All rights reserved.
--Posted Aug. 26, 2004
Julian Block is a syndicated columnist, attorney and former IRS investigator. This article is excerpted from Tax Tips for Freelance Writers, Photographers And Artists, which covers key changes introduced by the 2003 tax act and shows how to save money on your taxes. Send $9.95 for an e-mailed copy or $14.95 for a postage-paid copy to: J. Block, 3 Washington Square #1-G, Larchmont, NY 10538. Contact Block at firstname.lastname@example.org.