As tax season looms, authors face a unique opportunity to turn their creative passion into financial savvy, yet many leave money on the table by misunderstanding the tax code.

We sat down with seasoned CPA Tom Umstattd, Sr., to unravel the secrets of tax deductions for writers. From home offices to conference travel, how can authors legally minimize their tax burden while avoiding IRS pitfalls?

If you want to keep more of your hard-earned income without landing in hot water with the IRS, keep reading.

James L. Rubart: There are many tax advantages you might not know about, and some you could be misusing.

Thomas Umstattd, Jr.: Stay tuned, or you might go to jail!

I’m thrilled to introduce our guest, a CPA with over 30 years of experience working with authors and celebrities. He usually charges a high hourly rate, but I pulled the “I’m your son” card to get him here. Please welcome my dad, Tom Umstattd Sr. He’s the reason I’m a “Junior.” He’s forgotten more about taxes than I’ll ever know. Welcome to the show, Dad.

Tom Umstattd, CPA: Thank you for having me, Thomas.

Does being an author help save money on taxes?

Tom Umstattd, CPA: When you earn significant income as an author, your taxable income increases, which raises your taxes. To reduce your tax bill, CPAs can introduce you to deductions, which are wonderful tools that reduce your taxable income. If you’re running a business, you can lower your tax liability by taking advantage of deductions allowed by the tax code.

Thomas Umstattd, Jr.: Many authors essentially run a business, which allows them to take tax deductions. Does simply writing in Microsoft Word trigger these deductions, or is there more to it?

Tom Umstattd, CPA: It depends on whether you’re engaged in the activity to make a profit, meaning you’re running a business, not just pursuing a hobby.

Thomas Umstattd, Jr.: So, if it’s a hobby, I don’t qualify for deductions, but if it’s a business, I can take deductions even if I’m losing money?

Can I take tax deductions even if I’m losing money?

Tom Umstattd, CPA: Almost. If it’s a business, you can take deductions even if you lose money. For a hobby, deductions are limited to the amount of income you earn.

How can you determine whether your writing is a business or a hobby?

Thomas Umstattd, Jr.: What are some quick ways to help listeners determine if their writing is a business or a hobby? Is it only a business once they earn a million dollars?

Tom Umstattd, CPA: Hopefully not, as few authors reach that level. The IRS uses a nine-factor test, which we covered in a separate webinar available at authormedia.com. It includes traps to avoid and strategies to adopt.

What are some of those tax traps to avoid?

Tom Umstattd, CPA: One trap is getting overzealous with deductions. If you’re writing a book for 15 or 20 years, incurring losses year after year without any income, it looks suspicious. A few years of losses are understandable, but if it drags on without progress, it may seem like a hobby. A Supreme Court justice once said, “You call it a frog, but it looks, quacks, flies and swims like a duck. It must be a duck.”

Thomas Umstattd, Jr.: So, authors need some income, even if it’s modest, to show it’s a business?

Tom Umstattd, CPA: Yes, though it’s not absolutely necessary.

Can authors take deductions even without income from writing?

James L. Rubart: If someone can show they’re submitting work, taking courses, and actively trying to build a writing career, can they take deductions even without income?

Tom Umstattd, CPA: Perhaps, especially in the first few years.

James L. Rubart: Many writers dedicate a room for writing. Can they deduct that space as part of their writing career?

Tom Umstattd, CPA: That sounds like a home office. The key requirement is exclusive use. You can’t use it for other purposes, like storing toys or housing pets.

James L. Rubart: What about expenses like writing conferences, books, workshops, or laptops? Are those deductible, even if the author isn’t yet profitable?

Tom Umstattd, CPA: Those sound like valid deductions.

Do I need a separate bank account for my writing business?

Thomas Umstattd, Jr.: I’ve heard the easiest way to track deductions is to have a separate bank account for writing-related income and expenses. For example, traditionally published authors might receive a large advance, which goes into this account, and all business transactions flow through it. This simplifies tracking for tax purposes.

Tom Umstattd, CPA: Yes, it’s a good business practice, though not legally required for sole proprietors.

Thomas Umstattd, Jr.: It may not be necessary, but it saves hassle, which authors appreciate when dealing with taxes.

Authors often worry they can’t earn income early on, but there are ways to generate supplementary income. Authors can work for other authors, do editing, work as a virtual assistant, or write short stories. These activities bring in money and demonstrate business intent to the IRS.

What other deductions can authors take?

Tom Umstattd, CPA: Expenses like laptops, workshops, books, word processing software, travel, and car mileage for business purposes are deductible.

James L. Rubart: Mileage deductions, which are around 54 or 55 cents per mile for trips like writing seminars, can add up.

Tom Umstattd, CPA: It’s slightly higher, and the rate changes annually, sometimes twice a year.

How can I reduce the likelihood of an audit?

Thomas Umstattd, Jr.: Many authors fear audits and avoid taking legitimate deductions. What simple steps can they take to reduce the likelihood of an audit?

Tom Umstattd, CPA: Some authors avoid deductions out of fear of the IRS. The IRS isn’t emotional; they’re just processing paperwork. Follow the law, do your due diligence, and claim legitimate business expenses. IRS agents have no sense of humor, as I’ve learned from failed jokes.

Thomas Umstattd, Jr.: Even companies like Amazon operated for years without profits. The IRS looks at more than just profitability. I’ve heard literary agents at conferences give oversimplified advice, like needing $500 in income. Isn’t it more complex?

Tom Umstattd, CPA: Yes, the IRS evaluates based on rational thought. If expenses are ordinary, necessary, and normal for a business, they’re likely deductible. A business plan helps justify your approach.

Thomas Umstattd, Jr.: A business plan could outline losses for the first four years while you’re developing skills and manuscripts, with profits expected in year five. If you get audited, you can show progress, like improved skills or conference attendance, to support your business intent.

Tom Umstattd, CPA: Exactly. A business plan is crucial, not because we plan to fail, but because failing to plan can undermine your case. It clarifies your goals and strengthens your position with the IRS.

Does hiring a CPA reduce my risk of being audited?

Tom Umstattd, CPA: In my experience, CPA-prepared returns, especially complex ones, are audited less often. Mistakes and late filings increase audit risk, but CPAs help avoid those.

Thomas Umstattd, Jr.: Writers’ conferences are often authors’ biggest expense. Can they deduct costs like hotels, flights, and meals in, say, Detroit?

Tom Umstattd, CPA: Assuming you’re running a legitimate writing business and not spending most of your time on personal activities, those expenses are deductible. Meals are 50% deductible, but hotels, flights, and conference fees are 100% deductible if the trip is primarily for business.

Thomas Umstattd, Jr.: What if I have friends at the conference? Does enjoying their company make it non-deductible?

Tom Umstattd, CPA: No, enjoying your work doesn’t disqualify deductions. I’m enjoying this podcast, but it’s still business for us. As long as the primary purpose is work, it’s deductible.

Thomas Umstattd, Jr.: So, is it okay to enjoy your work and still claim deductions, as long as it’s a business and not a hobby?

Tom Umstattd, CPA: Exactly.

Thomas Umstattd, Jr.: Taxes are complex, and we can’t cover everything in 15 minutes. Last year, we created a course called The Tax and Business Guide for Authors. We answer many of your tax questions, and it’s our most popular course.

James L. Rubart: The key takeaway is that many of you may be missing out on legitimate deductions. Do some research, consult a CPA like Tom, and claim what you’re entitled to—it can make a big difference at tax time.

Thomas Umstattd, Jr.: To quote my dad, “Render unto Caesar only that which is Caesar’s.”

Tom Umstattd, CPA: That’s a misquoted scripture, but it is my quote, yes.

Sponsor

The Tax and Business Guide for Authors

In this course, you will learn:

• Whether or not you qualify for tax deductions for your writing-related expenses (not all writers qualify). 
• How to start making a writing income even before your first book comes out. Making extra money helps you qualify for tax deductions!
• Whether or not you need to form an LLC. We will also share a cheap and easy way to form an LLC when the time comes.
• About 19 different tax deductions authors can take advantage of.
• How to reduce your chances of being audited by the IRS.
• How to create a business plan for your independent publishing business.
• How to avoid common mistakes that often get authors in trouble with the IRS.

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• 122 – How the 2018 Tax Changes Affect Authors
• The Author’s Guide to LLCs
• 7 Business Mistakes That Ruin Author Careers