Thomas: The new Trump tax plan has some big changes for how much authors pay in taxes. This is arguably the biggest change to the tax code since the 1980s
Jim: In this episode, we're talking about tax issues with Tom Umstead, CPA, who is Thomas’s dad.
Thomas: My dad is the kind of accountant other accountants go to for advice. Right before we started recording, he had other CPAs calling him with questions about how the new tax law works.
He asked me not to call him an expert, so I'll let you make your own determination.
Jim: I've gotten to know Tom over the last three or four years, and he's an outstanding accountant and an outstanding man.
What's the biggest change for authors in the new tax plan?
Thomas: Congress and the president passed a new tax plan that took effect mostly in 2018. What's the effect on authors? What are the biggest changes?
Tom: It's a pro-business plan, so if you make a lot of money, the rates are lower. That's true whether you're an author or not, as long as you're a business and not a hobby.
Thomas: Authors who've made the transition into being a business can take advantage of the pro-business benefits in the new law.
Tom: There's a qualified business income 20% deduction that probably works for publishing companies. It's less clear whether it applies to authors, since the law is still unclear on that point. It replaces the old law.
Thomas: So for traditional authors who get paid royalties by a publisher, it's unclear if they get this deduction. But if you're an indie author, you are a publishing company.
Tom: Yeah, it would probably work.
Thomas: That's a huge reason we've been getting more and more pro-self-publishing on the show. When we started, Jim was a traditionally published author. Now he's a hybrid author, and I'm self-published.
If you weren't convinced by the marketing reasons to go indie, there are some potentially big tax reasons too. Once you become a publishing company, you can take advantage of discounts like the 20% deduction.
Can you be a business if you're not making money yet?
Jim: What counts as a business in terms of profit. Many authors are just getting started, going to conferences, investing in books, and they say, "I'm not making any money. How can I be considered a business?"
Tom: That's a good question. If you act like a business, in ways such as forming an LLC, having a separate bank account, and keeping track of receipts and income, that helps.
You don't need much income. Even a small amount of gross income makes it look more serious. Your net income, which is gross income minus expenses, may actually be a loss, and that can go on for years. It's very common in the writing industry.
There are IRS court cases on this that have gone both ways. If you follow all the rules, the IRS allows losses, in one case for up to 40 years.
Thomas: That measn I don't have to be profitable as an author to be considered as a business as an author.
Tom: That's correct.
How does the IRS determine if I’m a business?
Thomas: What are a few things the IRS looks at to determine if you're a business or a hobby?
Tom: The biggest thing is a profit motive, meaning that at some point you're going to make money. There are nine qualifications for whether something is a business or a hobby, and tax law tries to make that distinction easy to understand.
Tom: Expertise, time spent, and whether the activity is primarily pleasure-oriented. They also look at whether you have skills in the area or hire people who do.
Thomas: So the kinds of advice we give on this show, like hiring an editor, getting trained, becoming good at writing, and doing marketing, can make you look like a business. That can help you be a business in the eyes of the IRS, which triggers these tax deductions.
It's not just good marketing, it's good sense.
How much should authors pay in taxes?
Tom: As little as possible. There's an old saying from the Bible, "Render unto Caesar that which is Caesar's." I like to misquote it as, “Render unto Caesar only that which is Caesar's.”
What can authors do right now to reduce next year's taxes?
Thomas: There are legal ways to reduce taxes, and the time to do it is in the current year for the next year's return. What can authors do right now that will reduce their tax liability down the road?
Tom: The biggest single thing I've seen is automobile expenses. A good way to keep a log is an app like MileIQ. It's free, and if you track your first 10 or 20 drives each month, it gives you a percentage you can apply to the rest of the year. There's also a paid plan for tracking everything.
Auto expenses help a lot because you're already spending that money anyway.
One of the best ways to increase your auto expense deduction is to have a home office. A home office has to be used exclusively for business, whether that's a portion of a room or an entire room. When you leave your home office to meet a business contact, that drive isn't a commute, and commuting is normally a huge expense you can't deduct.
Thomas: So if I'm part of a critique group and I drive from my home office to my critique group, all those miles are tax deductible.
Tom: I would say so, yes.
Thomas: And if I drive to the bank, that's deductible too?
Tom: Sure sounds like it.
Thomas: What if I drive to Starbucks to write? Is that deductible?
Tom: Probably. A lot of writers have several favorite locations, maybe even another home, like a lake house or ski lodge, where they go for a few days to write intensively, sometimes 12 or 16 hours a day with no phone. There's a pretty good business purpose there.
Keeping good records is very important. A separate bank account helps, and maybe a separate credit card used only for business.
Thomas: I have a separate credit card for my business.It keeps things separate, though I don't get the same rewards points since I have to split them between business and personal. But it makes my bookkeeping at the end of the year a lot easier.
Tom: When you're making drives, think about whether each one is a business drive. Maybe you're driving by office buildings because you're scoping out a location to rent, or doing research for your book, like visiting a ranch you're writing about, or getting some experience on a cruise liner because your book involves one. That sounds like a reasonable business expense.
Thomas: Time out. So if I'm writing a mystery where someone's shot on a cruise ship, and I think I need to go on a cruise to research the book, I can deduct the cruise?
Tom: The IRS specifically doesn't like that, but I've been talked into allowing it as a deduction by some of my writer clients who've done exactly that.
Should authors form an LLC or an S corp?
Thomas: A common question is whether to form an LLC or an S corp. What's the good advice when it comes to forming a business entity?
Check out our episode on The Author's Guide to LLCs.
Tom: Let's talk about an LLC. There's a lot of misunderstanding about what that is. LLC stands for limited liability company, not corporation. People get that wrong all the time.
A limited liability company is a legal entity defined by whatever state you're in. By default, it's just an entity separate from you as an individual. If it has two or more owners, it can choose to be taxed as a partnership. It can also choose to be an S corporation or a C corporation.
Thomas: So LLCs can be corporations as far as the federal government is concerned?
Tom: Correct.
Thomas: So it's not a matter of choosing between a corporation and an LLC. The LLC can be whatever kind of corporation you need it to be to maximize your tax advantages.
Tom: Yes, and that's one reason I prefer LLCs over S corporations. You can file with your state's Secretary of State to become an S corporation, but changing from that to a partnership, or from an S corporation to a C corporation, takes a lot of paperwork.
An LLC can move back and forth between the four major entity types, sole proprietorship, which is taxed as a Schedule C on your 1040 and also known as a disregarded entity, partnership, S corporation, or C corporation. There are other options too, but I don't think they're a good idea.
Jim: Let's talk about the limited liability part of the LLC for people who aren't familiar with it. That's one of the reasons I've been a limited liability company for a long time. Can you touch on that?
Tom: That's really a legal question an attorney should answer, but from what attorneys have told me, you do get some limitation on liability. A lot of times it covers things you wouldn't think of, like if an employee is driving for the LLC and gets in an accident. It's harder for the injured party to sue the owner of the LLC directly.
They can sue the LLC, the driver, and the insurance companies, but it's harder to pierce that corporate veil, even though it's not technically a corporation.
Thomas: To give an example for authors, if you don't have an LLC and you've written a book, and another author sues you for copyright infringement, they can go after everything you own. In some states that even includes your house.
You're putting all of your assets at risk, and that's very scary. It works the other way too. If you get in a car accident or something else happens and you own the copyright in your own name, they can seize that copyright.
I believe that once you're receiving revenue on Amazon, whether you're an indie author or a traditionally published author receiving royalties, it's important to have an LLC that owns the copyright to your book.
What expenses can authors deduct?
Thomas: What are some expenses that authors can deduct?
Tom: Business expenses like supplies, seminars, education, web hosting, and other things you buy online that help you improve as an author.
Thomas: Like a five-year course on how to become a bestselling author? Purely coincidentally.
Tom: That would work, if you're already an author and you're improving your skills.
I've already mentioned car expenses and home offices. A lot of people worry that home offices are a red flag for an audit, though I've never heard a CPA say that, only non-CPAs claiming that CPAs said it. I've never seen it happen in practice.
Thomas: I saw a statistic that 55% of companies in the United States are based out of homes.
Not in terms of money, since a lot of those companies are small, but every home I've lived in since before I graduated from college has been the home of one of my companies, because I've been starting companies since college. A lot of people run businesses out of their homes. If the IRS were going after everyone with a home office, they'd be going after a huge percentage of the population.
Jim: Another thing about home offices is that I write off a small percentage of my utilities too, not just the office itself, things like a portion of my electric and heating bills. I actually finished out a storage shed and I call it my shed quarters. It's physically separate from my home, but there are other advantages to a home office in terms of ongoing expenses you can write off.
Tom: So even if you just have one desk in a house, that would limit your utilities, home insurance, taxes, or rent, but it wouldn't limit your driving amount or your mileage. The mileage deduction is usually much bigger than the home office deduction itself. Having a home office just helps you rack up more business miles.
When does an author need a CPA?
Tom: When they get big enough, when they're actually making or spending a lot of money, and they're wondering about the kinds of questions we've been talking about.
Any good CPA doesn't want to take on a client unless they can save them three to five times their bill, sometimes 10 or 20 times in taxes. Other times it's not a huge amount, but there's still value in not going through all the paperwork yourself.
You need a CPA when the numbers get big enough that you get a feeling you might be losing out on something. A good CPA will usually talk to you for 15 or 30 minutes for free.
Thomas: It's typically a case of spending $1,000 to save $3,000 or $4,000, and I'll take that deal.
If it were to spend $1,000 in marketing to sell $4,000 worth of books, I'd buy all the ads I could.
This episode of the Novel Marketing Podcast is brought to you by the Tax and Business Tips Course for Authors. It's a course where I sit down with my dad and go into a lot more detail about what we've covered here.
If you're doing your own taxes and you're not ready for a CPA, this course can be a great investment in saving money and understanding how to take advantage of these deductions. We've only skimmed the surface here, and there's a lot more to cover.
The course also includes a business plan template designed specifically for independently published authors, along with training I recently delivered to a group of bestselling authors on how to create a business plan. If putting together a business plan sounds like a lot of work, this makes it simple. I walk you through it step by step, and it doesn't need to be 100 pages, just one or two.
We also cover 19 different tax deductions authors can take advantage of, and five ways to reduce your chances of being audited. That alone may be worth the price of admission.
It's more than tax advice; it's business advice too. If you're ready to make the transition from hobbyist to business, I encourage you to take this course. It's $99 for the entire course, several hours of training, and it comes with a 30-day refund. If you don't feel it was worth it, we'll refund your money and you keep the knowledge.
Links:
Sponsor:
2018 Tax & Business Tips for Authors Course
We are re-recording an all new course updated for the Trump Tax Plan.
In the course you will learn:
- Whether or not you qualify for tax deductions for your writing-related expenses (not all writers qualify). You will also find out about the 9 factors the IRS uses to determine if someone is a professional author or not.
- About a simple tool that will help you make more money as an author while helping make you become more audit-proof.
- How to start making a writing income even before your first book comes out.
- Whether or not you need to form a business entity, and which entity is best for authors (S Corp or LLC). We will also share a cheap and easy way to form a business entity.
- 19 different tax deductions authors can take advantage of.
- 5 ways to reduce your chances of being audited by the IRS.
- How to avoid common mistakes that often get authors in trouble with the IRS.
- Not just tax advice, also a lot of general business advice including a special Indie Business Plan Template a Training.
Spending an afternoon talking with a CPA would cost you hundreds of dollars. The course is only $99 for focused advice specifically for authors. It comes with a 30 day refund, if you are not totally satisfied.
