Federal Income Taxes: Profit, Loss, and Write-offs
The Finance Department (Part 3)
If your book business earned $1,000 this year (aka profit or income) and you spent $1,000 on your business’s expenses (book creation, marketing, office supplies, etc.) (aka loss or expenses), how much do you owe in federal income taxes?
$0.
Why? Because your business expenses consumed all your business profits. In other words, your net profit (profit minus loss or income minus expenses) for the year was zero. And you only pay taxes on your net profits.
That is why keeping records of all your book business expenses is so important. How much you invest in your business makes a huge difference in how much you owe in taxes! Remember we aren’t talking about discretionary spending. You can only write off items that you had to buy in order for your business to exist.
Making the effort to document and store your receipts may seem like a waste of time, but apathy will cost you. Consider the following example. (Note: For the sake of keeping this simple since there are so many variables, I’m assuming that through other income you are already above your standard or itemized deductions. This example also assumes that you fall in the 10 percent tax bracket. If you fall into a higher tax bracket, then the value of your receipts is even more.)
Your books earn $1,000.
You spent $1,000 on book business items.
So, in your book business bank account, you currently have $0.
Tax Time! The federal government is already aware that you earned $1,000 (thanks to 1099s submitted by publishing platforms).
If you saved your receipts and documented your expenses, you would owe $0 in federal income taxes.
But if you do not provide the government with documentation that you reinvested that money, they assume it’s all profit and expect you to pay taxes on it. Therefore, you owe $100 in federal income taxes.
But you don’t have $100 in your account! Doesn’t matter. You owe $100.
Owing $0 vs $100 is a big difference!
You can throw away a lot of money by not keep records of your business expenses.
This is where the Schedule C, which we covered in last week’s post, comes into play. To review, you receive 1099 MISC forms from your publishing platforms, which tell you how much money you earned (profit/income), and you use your own receipts and records to subtract your legitimate book business expenses (loss/expenses), and that’s the number your book business’s taxes are based on.
What Are Legitimate Expenses?
Examples of Items You Can Write off
- mileage (trips to the post office to send books, to stores for business purchases)
- shipping costs (postage, envelopes, packing material)
- giveaway items (cost of items used for marketing giveaways)
- advertising (online ads, book marketing services)
- cover art purchases
- font purchases
- royalty payments to coauthors or writers you published
- conferences related to your business
- research trips related to your books
- subcontractors (graphic designers, editors, typesetters)
- office supplies and equipment (laptop/computer, flash drives, printer, paper, ink, pens)
- home office (portions of property taxes, utilities, interest on mortgage, insurance)*
Examples of Stuff You Cannot Write off
- Starbucks beverages (even if you write there)
- book purchases unrelated to your research
- tax compliance efforts and products (tax software and accountants)
Remember: You could be audited one day, and you must be able to defend every single item you have chosen to write off. Do not try to stretch it and claim iffy deductions. The IRS isn’t known for its gullibility. They won’t buy it, and you’ll not only pay back taxes but also hefty fines.
The Takeaway
Keeping records of your business expenses could save you a sizable amount of money in federal taxes. If you make recordkeeping part of your work routine, it will save you a lot of hassle at tax time. Create digital copies of all your business receipts and file the originals in a safe place. When tax time rolls around, you’re ready to fill out your Schedule C. Then, store them away again. Keep all your receipts for seven years in case you are audited and need to defend your decisions.
*More on these subjects later.
Disclaimer: Don’t trust me. Go to IRS.gov and confirm the information for yourself. I’m not responsible if you get audited. Also, state income taxes are separate beasts, and you’ll have to tame them for yourselves unless you are fortunate enough to live in a state without them.
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