Welcome to Schedule C

Or, business advice for the indie writer. Note: this is US-specific, as I don’t file taxes anywhere else in the world. Check your local laws for the specifics that apply to you; they may vary wildly.

You’ll hear a lot “save your receipts” before you start filing indie pub income (or trad pub advances) under the self-employment taxes. However, there’s a lot more to your spending and saving than just filing receipts. fortunately, we have a handy guide as to when, where, how, and why, called Schedule C.

IRS form here: https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
Schedule C instructions here: https://www.irs.gov/pub/irs-pdf/i1040sc.pdf

No, it’s not as simple as it looks at first, yes, consult with your accountant. This is only intended to be the rough overview so you understand what your accountant is trying to tell you, instead of learning in billable time. By the way, you are keeping a spreadsheet of all your expenses and the deductible category, yes? Because if you don’t, then you’re paying the accountant at his rates to go through all your paper receipts and compile one. Save your money! Know what you’re spending and where!

Scroll past that rental income, down to the Income (Line 1). Check with your accountant on whether the income received from Amazon counts as royalties, despite all of us always calling it royalties. That said, if you know roughly what you made, this is a good place to start running rough numbers. The most applicable:

8. Advertising – How much did you spend on Bookbub, Ebooksoda, SEO ads, etc. promoting your book(s) over the year? Yes, every time you pay money to a promo site, you need to a.) print out the receipt and note when, who, how much, and why – advertising – on it, and b.) enter that in a spreadsheet. See also the receipts for bookmarks, postcards, business cards, and other swag given away at cons and fairs, banners for signing tables, etc.

9. Auto and travel (see instructions) Mileage to cons where you promoted your books count. Mileage on travel for research may count. Check carefully!

10. Commissions and fees – this is where you put the expenses you paid people. (Graphic Designer, Commissioned Artist, etc.) Note – your IP lawyer and accountant have their own line!

13. Depreciation – if you have a large expense, you don’t necessarily deduct it all in one year.
Equipment, like buying a treadmill desk, or the company buying a vehicle to cart your booth between cons, can have the expense spread out over several years. This means you can use the expense against taxes in future years when you’re making enough money it matters, instead of having it drop you below a threshold you were already below this year. Check with your accountant for when this is a good idea, or must be applied.

17. Legal and Professional Fees – Yes, your accountant’s bill, and the IP Lawyer’s bill, are deductible expenses.

18. Office expenses (see instructions) – Office supplies and postage. If you’re stocking up on cheap notebooks and office supplies during back to school sales, you’ll want to make sure they’re on a separate receipt from your groceries, or separately total out the office expenses on the receipt.

20. Rent or lease – including if you rent an office. For home offices, google “home office deduction”, because that’s its own creature, and complex.

22. Supplies – trickier than it looks; this is “supplies consumed in this tax year”, not “supplies bought this tax year.” Can include books for research & equipment if used within the years – but if the use extends substantially beyond the year (new computer), it goes into a different, depreciation-taking line.

23. Taxes and licenses. Are you in a crazy suburbia where they want to charge you a business tax or fee for a home office? Do you need a business license every year in the state you incorporated? This is where you report those amounts paid.

24. Travel, meals, and entertainment – this is why you want the bill, and you want to write on the back of the receipt who you had the meal with, and why. Because sometimes it’s deductible, sometimes not. Check the instructions.

27. Other expenses – did you spend money in ways not covered above? Check with your accountant if it can go here!

The simple explanation is: The government will do its level best to take all the money you made in a year, and leave you destitute while it spends more profligately than drunken sailors (drunken sailors stop when they’re broke. Our government, not so much!) However, it recognizes that if it takes everything you made, you’re going to immediately go bankrupt because you’ve had to spend money to pay the bills. So it’s trying to take all the money you made except what’s already spent, in a tug-of-war between wanting strip you of every cent and recognizing that bankrupt businesses don’t make more money that they can legally steal to blow on vote-buying, enforcing idiotic regulations, expanding bureaucracies, lavish parties, and kickbacks to fellow travelers.

Therefore, you as a business owner, wanting to actually keep some of that money you’re making, need to carefully track every cent you spend. Then, find the best way to pay for it with pre-tax dollars so your remaining income looks pitifully small and not worth taking. You know, so you can spend it on things like food! Food is good. If you want food, track your expenses, save your receipts, and deduct everything you can. Check with your accountant more often than just filing time, and learn what he can do to help you help yourself!

And now, for some books to amuse, inform, and entertain:
If you want to get some valuable advice on the balance of being an artist/author, a marketer, and a businessperson, MCA Hogarth has collected her Three Jaguars business cartoons into a print book. Not only good advice, it also has moments of hilarity, and a paintbrush-proof mug!

Get it here! http://amzn.to/2d0rkhK

or, if you want to run away and do something bright and cheerful and not at all related to business after this post, here’s one of her colouring books for adults.

Hearts, stars, unicorns, dragons and honey badgers, velociraptors drifting in space… shiny! http://amzn.to/2cjv5w4

11 Comments

Filed under BY THE MAD GENII, FYNBOSSPRESS, WRITING: PUBLISHING

11 responses to “Welcome to Schedule C

  1. Now my brain hurts as much as my wallet.

  2. Draven

    Buying DVDs/Blu-Rays? have you ever written a script you hope to sell? you can deduct them. Games, RPGs… etc…

    • (1) Well worth a read, especially if writing is just your part-time gig:

      When an Artist’s Work is a Business Versus a Hobby: IRS Analysis – from nolo.com, a very solid reference site. The one caveat to the article is that I’d personally be VERY reluctant to rely on this case unless you’re prepared to get into it with the IRS. The Court ruled how they ruled, but, man, this smells like something IRS is NOT going to broadly construe. For one thing, if she’d been (say) a computer programmer and not an art professor I’m thinking this goes the other way. And I’m guessing this cost a small fortune to litigate.

      Back when I used to do tax returns, we used to apply a “three year rule” to almost any activity a client claimed they were engaged in for profit. IOW, deduct losses for three years, then treat the activity as a hobby if it continues to show losses after that. Wasn’t written in stone, I had a guy who raced mini race cars we called a hobby from day one, and a dry cleaner we took losses on for years b/c (a) a dry cleaner isn’t my idea of a hobby and (b) the place actually generated a positive cash flow once you back out depreciation.

      (2) BTW, it isn’t just “Welcome to Schedule C,” if you actually make money. If you show a profit it is also “Welcome to Schedule SE,” since you gotta pay 15.3% for social security/medicare as both employee and employer and also “Wecome to Form 1040-ES,” since you’ll probably have to pay quarterly estimated taxes in lieu of paycheck withholding.

      (3) One final thing to ask/investigate: Do you need to issue 1099 forms? As in, if you outsource editing, covers, possibly promotion and pay out more than $600/year to any noncorporate entity (individual, partnership, LLC, etc.), you may have to issue these lovely things, for nonemployee compensation. Last I heard this was nothing IRS was pursuing aggressively, and who does and does not need to get one can be kind of murky…but if you start showing serious dollars in lines 10 and 17 and your return gets flagged, I’d suggest it is a question any semi-competent GS-9 auditor would ask.

      • Draven

        Things like paying quarterly etc were discussed in another recent post.

        I’m basing my information on a friend (who departed years ago, we miss ya Dave) who was writing things off in this fashion, was audited and passed the audit. Of course, he was a working VFX/animation professional….

  3. Mike W.

    FYSA – since about 2011, home office deductions have been weighted more heavily as the basis for triggering an IRS audit. If you do it, I most strongly recommend that you have an accountant carefully calculate relative square footage, depreciation etc.

  4. Thank you for this! My accountant has a detailed form that I fill out every year before he actually figures my taxes. And that form has all the categories you mention above. (Of course!) I always found it very confusing, however, and struggled mightily. I managed to fill it out. I even think I managed to fill it our correctly! ๐Ÿ˜‰ But your explanations will make it much easier in 2017!

  5. sabrinachase

    Yep, I have been doing 1099 forms for my editor for years. My artist, smart man, is in Australia so I get to skip him ๐Ÿ˜€

    Another thing to look into on the tax front is the individual 401(k). You may have to pay self-employment tax, but you also get to contribute to a retirement fund as well. This can also mitigate the total federal tax burden.

    I never bother with the home office stuff. Too many people have said it is an audit trigger, and I don’t have the space to do a hermetically sealed “business only” room. Now Greg Bear (who lives nearby) cleverly bought the house next to his when it went on the market, and *that* is his home office. Pretty clear demarcation of use there…

    • And some municipalities take a dim view to home offices for e-commerce (if you do work and you have a website where people can buy e-books or paper books straight from you). It could be a zoning violation, and they will probably want to know if you are collecting municipal sales tax, et al. I’ve only heard of a few cases where this kicked in, and those were back in 2012-13 so take it for what it’s worth.

  6. Speaking as someone who has 15+ years of schedule C returns and recently went through a schedule C audit… Don’t be _too_ afraid of a future one. Yeah, it’s a little panicky to get the dreaded letter in the mail, but it’s normally not that big of a deal, assuming you have some cash reserve just in case.

    Also, If you have proof you paid for something and at least a semi-plausible way of relating it to your business, deduct it. If you aren’t audited (which is what happens 90+% of the time), then you didn’t overpay taxes. If you _are_ audited and the IRS decides they don’t agree with you on how it relates to your business, then you pay the same tax you would’ve owed before plus a lower interest rate than you’re likely paying on any other debt you currently have. It may become an issue if you don’t have any justification at all and they tack on a 10% penalty, but that’s highly unlikely if you aren’t being crazy about it.

    Plus, don’t assume for the IRS that your business is a hobby, if it’s at all questionable. If you _ever_ made a profit doing it, if you advertise it as a business, or if it’s traditionally something someone would do as a business, there is a lot more flexibility than you may think based on the IRS guidelines. In addition, most types of audits the IRS does of schedule C only look at one year and don’t even consider stuff like the hobby question. Check with your accountant.

    One more thing to consider is that in some years (when you don’t have a bunch of non-schedule C income that year), it may be better to not take all the deductions you might otherwise (or defer spending to a different year, speed up or defer some income, etc…) in order to show more of a business profit and hit that sweet spot of EITC and family deductions based on your household size, etc…

    Lastly, at some point you’ll likely use your schedule C to show income to someone like a mortgage broker who wants to lend you money, so consider the timing of your profits and expenses with that in mind as well. i.e. make your profits the year before you want to buy a new house or they may not believe you can afford it.

    Disclaimer: Not a tax accountant or tax lawyer, consult your own for your specific situation, don’t just rely on things you read on the internet, etc… YMMV

  7. All good points, and thanks to the commenters for additional pointers. And yes, home offices WILL get you audited. IIRC, in VA if you ‘work from home’ and sell a product, Fairfax and Arlington counties want you to pay sales taxes collected to the state…