Royalty income should be reported on Schedule C (and not on Schedule E), and is subject to self-employment tax (a form of Social Security taxes).
A writer may be tempted to not report the income on Schedule C in order to avoid the self-employment tax, thereby treating the writing as a hobby. Reporting the income as "Other Income" may be difficult to prove if the writer has consistent royalty income.
Another problem with the hobby approach is that only cost of goods sold is directly deductible against royalty income. All other hobby expenditures are placed on Schedule A (Form 1040), Itemized Deductions, which are only deductible if they exceed 2% of adjusted gross income.
For example, a romance writer Sweet Pea reports $10,000 of royalty income as "Other Income," not obtaining a deduction for $2,000 of expenses because of using the standard deduction or the 2% of miscellaneous itemized deduction hurdle. Sweet Pea, in the 15% tax bracket, would have taxes of $1,500 and no self-employment tax.
If Sweet Pea reports the income on Schedule C (in 2006), her total tax liability would be greater:
|Less 1/2 of SE tax||-612|
|SE tax ($8,000 x .153)||+1,224|
Types of Expenses
Authors and writers incur various expenses in creating
books, articles, or screenplays. Authors and writers seem to fall into four
major categories: (A) Those authors and writers who carry on research to meet
the expectations of their employer; (B) authors (often amateurs) who are engaged
in the trade or business of writing on an active basis; (C) authors or writers
who write for a profit, but their writing may be a sideline activity; and (D)
amateur writers and authors who carry on research and writing with or without a
But before discussing these categories, brief mention should be made of various expenditures that may be incurred by a writer or author. Most expenditures may be conveniently classified into the following broad categories:
Suppose we look closer at categories #1 and #2. If the writer falls into category "A" (a full time writer for an employer), the expenses in categories #1 and #2 are deductible. If the writer is fully reimbursed by his employer, the reimbursement would merely offset the expenses incurred by the employee. If the employee is over-reimbursed by his employer, any excess should be shown as taxable income. If the employee is under-reimbursed, this excess can be deducted by the employee if he has adequate records to prove the expenditures. Travel and transportation expenditures could be taken as deductions from adjusted gross income (that is, not deductible if the employee uses the standard deduction).
If the writer falls into the "B" category, expense items #1 and #2 are probably deductible. Keep in mind that the writing activity of the author does not have to be his principal activity. The writing activity must, however, be recurring in nature and must be carried on with the expectation of profit.
Where research is undertaken with a profit motivation (categories C and D), an author should use a separate trade or business approach and show such expenses on Schedule C. In effect, expenses shown on Schedule C are deductible whether or not the writer itemizes his or her deductions. Such expenditures should be deductible as long as the writing activity is recurring in nature and the writing is pursued with an expectation of a future profit.
Any future income is also shown on Schedule C and is subject to the self-employment income tax. Advances against future royalties paid to an author are normally taxable to an author in the year of receipt. If the publishing company classifies the payment as a loan, such an amount would not be taxed at this point. If you have to pay back any of the advance, you can receive a deduction.
Where the author is an amateur and the profit motive is absent from his literary activity, any expenditures have to be capitalized. They are amortized (written-off) only against any future income, if any. Thus, one must keep track of all expenditures over the years (e.g., keeping receipts in a drawer or file cabinet). When the income finally arrive, the writer will have the appropriate records to prove the deductions. Any excess expenditures would, of course, be non-deductible since the author is really writing as a hobby.
A writer for profit may claim as deductions from adjusted gross income (DFROM) the cost of supplies used in his or her writing research activities, dues to writers’ societies, and subscriptions to writing journals and newspapers. Subscriptions for one year or less are deductible immediately. Subscriptions for more than one year should be capitalized and deducted by amortization over the subscription period.
Amounts paid or accrued for books, furniture, and professional instruments and equipment, the useful life of which is short, may be deducted. If the useful life is not short, the items must be depreciated. It is customary for writers to deduct books as purchased, but the purchase of a large library at once should technically be depreciated over its useful life.
It may be necessary for an author to attend professional conventions and conferences. Unreimbursed expenditures for transportation, including meals and lodging if away from home overnight, incurred in attending most such meetings are deductible from adjusted gross income (DFROM). Only 50% of meals are deductible.
Commuting expenses from a writer’s residence to his work are not deductible. If an author has two or more separate employers, each position is considered part of his overall trade or business. Thus, the transportation costs incurred in going from one employer to another are deductible. If the author goes home between employers, the amount of the deduction is the lesser of the cost of transportation between employers, or the amount actually spent.
A writer might obtain a deduction for a home office. Surf "home office."
Qualified creative expenses are those expenditures paid or incurred by a
writer, photographer, or artist in his trade or business and which would be
deductible for a tax year. The uniform capitalization rules do not apply to these
rules. H Rept no. 100-795 (PL 100-647), p. 531.
Although copyright fees are most often incurred by the publisher rather than an author, where such fees are incurred by an author, they should be capitalized and amortized over the estimated useful life of the book or article. The upper limit as to the write-off period before October 29, 1998 was 28 years, but in most situations a shorter estimated useful life was appropriate.
A free application form can be obtained by writing Register of Copyrights, Library of Congress, Washington, D.C. 20559-6000. Go to http://www.loc.gov/ or http://www.loc.gov/copyright After publication of the work, send the completed application to the copyright office, along with two copies of the work and the appropriate fee. Of course, if a book, article, etc. appears in an uncopyrighted publication, it is then in the public domain. Once in the public domain, the public can use it without infringing upon your rights.
For information about the Sonny Bono Copyright Extension (effective
October 27, 1998), see http://www.loc.gov/copyright/legislation/s505.pdf
Writers and editors often receive unsolicited books. They should be aware of claiming a charitable deduction for unsolicited sample books that are contributed to a qualified charitable organization. Rev. Rul. 70-498 indicates that a book reviewer must include in his or her gross income the fair market value of unsolicited sample books received from publishers that are later donated to a charitable organization and a charitable deduction is taken. The IRS apparently will not tax such unsolicited samples if the taxpayer does not try to get a double tax benefit by claiming a charitable deduction. The Seventh Circuit has upheld the IRS’s right to tax such income. Furthermore, under Section 170 (e)(1) the charitable deduction may be limited to an amount that is less than the fair market value of the books. Thus, the charitable deduction might be less than the amount required to be included in gross income.
For example, a writer receives $400 of books which he contributes to a charitable organization in which the books are unrelated to the purpose or function of the charity (i.e., the charity immediately sells the books). The taxpayer could be forced to include $400 in gross income, but only allowed a $400 charitable deduction. Since a deduction is worth only the individual’s tax bracket (i.e. maximum of 35%), such a scheme is not good tax strategy.
writer may wish to call 1-800-829-FORM and obtain IRS Publication 17, IRS
Publication 334 (Small Business Tax Guide), or IRS Publication 463 (Travel and