9 tax tips for writers (sorta long)

Subject: 9 tax tips for writers (sorta long)
From: Bob Morrisette <Robert -dot- Morrisette -at- EBAY -dot- SUN -dot- COM>
Date: Wed, 11 Sep 1996 13:18:02 -0700

It's time to think about taxes. Uggggggg!

Since there are so many contractors are on this list,
I am forwarding these tips that I picked up from the
book publishers list. Even regular employees could benefit.
I have permission from Mr. Nelson.

Bob Morrisette
writer -at- sabu -dot- EBay -dot- sun -dot- com

From ??? -at- ??? Sun Jan 00 00:00:00 0000=====

I'd been thinking that at year-end I'd put together a list of tax tips for
writers and post it to this list. The recent tax-related blurbs (and a slight
scheduling hole) made me think the timing was probably okay now, too.

FYI, I'm going to list these tips in order of increasing tax savings...

#1. (LESS THAN $500 IN SAVINGS) Get Quicken or Microsoft Money--it doesn't
matter which--and use it track your business expenses. All of them. Your
business-related expenses are deductible on your business tax return: Computer
gear, business and computer mags, office supplies, online services, trips to
the library or bookstore for research, etc. It makes me eyes tear up when I
realize that some of you haven't been carefully capturing all your business
expenses (which a checkbook program will easily allow you to do). Even the
most low-key writer would probably save several hundred smackeroos a year by
doing this.

#2. (LESS THAN $500 IN SAVINGS) Track your business car miles. Okay, it
doesn't sound like a lot. But all those trips to the library, the computer
store, lunch meetings with professional friends, the bookstore, the office
supplies store, etc. add up. Maybe I run around more than your average bear,
but I do 2,000 to 3,000 business miles at year. At roughly $.30 a mile, that's
another $600 to $900 of deductions. Depending on your tax bracket, that can
save your another few hundred bucks a year.

#3. (PROBABLY AT LEAST $500 IN SAVINGS) Take your home office deduction if you
work at home. You can get specific information on what you need to do to
legitimately do this from the IRS. (Visit the IRS web site at
http://www.irs.ustreas.gov/prod/forms_pubs/pubs.html. Note that you may need to
reorganize your living space to qualify. But any writer here should be able to
whack off at least another few hundred bucks on their taxes by deducting a
share of their housing expenses: A percentage of your rent or of your mortgage
interest, maybe some depreciation if you're a homeowner, utilities, property
insurance, property taxes, etc. It adds up.

#4. ($1000 OR MORE IN SAVINGS) Never travel for pleasure--always travel on
business. Now I'm not suggesting that you can take the family to Disneyland
for a week and write the sucker off. No way. What I am saying is that if you
want to travel and you're self-employed, it makes sense to arrange your
traveling so it legimately counts as business travel. If you want to see
Europe, for example, arrange your trip so you visit the Frankfurt book fair,
meet with your foreign publisher or publishers, connect with some authors,
etc. (For foreign travel, FYI, you've really got to make your travel very
business-like if you're gone more than a week. But you can still have plenty
of time to experience the culture, see the sites, etc., and meet IRS
requirements for deductibility. For foreign travel, a general rule of thumb is
that if 3/4s of your working days are for business, your trip is probably
deductible. Note, however, that travel days count as working days and that
weekend days and national holidays don't. Please ask your tax advisor for more
info on this if you have questions.)

#5. (MAYBE $1000 IN RIGHT CIRCUMSTANCES) Consider incorporating but don't
elect S status. If you're not an "S" corporation, you put together a very
sweet, quasi-ridiculous employee benefit package for your employees. If you're
a one-employee business, this loophole can produce some awesome savings. (I'm
presuming this one employee is you.) You need to ask your tax advisor for
details, there's a pretty good chance that you might be able to create a
really sweet benefits package--life insurance, disability insurance, medical
insurance, etc--and then deduct all of these benefit costs for purposes of
calculating your corporate profits. (Warning: The "S" status versus
non-"S"-status question is pretty tricky, so you don't want to follow either
of these suggestions without consulting with your tax advisor. Also, see tip
#7.)

#6. (EASILY $1000 IN SAVINGS--POSSIBLY MUCH MORE) You can probably work just
about anyplace so consider moving to a lower-tax state or even country. Or, at
the very least if you're thinking about moving, look at the tax effects of
moving. Sure. This sounds like a minor matter, but it's really not. E.g., a
while back, my family sort of considered moving from Seattle to Montana. Even
though Seattle is the second most expensive place in the country to run a
"service" business (because of some screwy gross receipts taxes), it still
turned out that I'd pay roughly $12,000 more a year in taxes by living where a
river runs through it. I love Montana. But not quite that much.

#7. (AT LEAST $2500 FOR ESTABLISHED WRITERS...AND SOMETIMES $5000 TO $10000 IN
SAVINGS) Consider incorporating and then electing S status. You'll need to ask
your accountant or tax advisor for details, but when you incorporate and elect
S status, your business profits can be split into two buckets: the earned
income bucket and the unearned income bucket. By divvying things up so there's
less money in the earned income bucket and more income in the unearned income
bucket, you can sometimes save quite a lot of self-employment tax. E.g., let's
say, just for the sake of illlustration, that you make $50,000 a year writing.
As a sole proprietorship, you pay right around $7,500 a year in
self-employment taxes. If you incorporate and elect S status and then split
your profits into $25,000 of earned income ( your writing salary) and then
$25,000 of unearned income ( a corporate dividend), you'll save around $3,750
in self-employment taxes. I should warn you, BTW, that this is sort of a dodge
if you're a one-person business and all your income stems from your effort. On
the other hand, if you subcontract work out to ghosts or co-authors, pay
technical editors, sometimes have people revise your books for you, it's a lot
more defensible.

#8. (SOMETIMES SEVERAL THOUSAND DOLLARS) Okay, this is sort of tricky, because
it depends on so many factors. But here's the deal. Because U.S. tax rates are
so darn progressive, you don't want to have years when you basically starve
and then years when you're flying first-class on the Concorde to London. The
reason is that you'll just get beat up on your taxes. For example, let's say
that I make $50,000 a year over four years. In that case, I'll pay over those
four years roughly $15,000 in income taxes. Now let's say you make nothing in
years 1 and 3 and then $100,000 in years 2 and 4. You see we've made the same
amount right? So we probably should pay roughly the same taxes right? No way.
You'll pay roughly $32,000 in taxes. So, by not smoothing your income, you
more than double your tax bill. Even though in many ways, your finances really
suck compared to mine. I mean, because they're so unpredictable. (Editorial
comment: Progressive tax rates may be great politics, but they're also
inherently unfair to the "rich." Maybe that's okay because we don't care about
the "rich." But we ought to all realize that they do discriminate on the basis
of income.) But back to the tip. You can often and usually should smooth your
income by not taking advances, delaying royalty payments, fiddling with return
reserves, etc...

#9. (PRETTY EASILY $250,000 IN SAVINGS OVER WORKING YEARS.) Set up your own
pension plan. I'm tempted to use all caps here, because this is the mother of
all tax benefits. No kidding. This is *really* the way you get rich writing
books (or editing books, acquiring books, slinging burgers, etc.). E.g., let's
say that you're pretty much a compulsive-obsessive person and you follow some
of the previous tips (after consulting with your tax advisor, of course). So
now, you're like maybe $5,000 ahead on your taxes, if you use this money to
annually fund your own pension plan over, say, 25 years, you end up with
around $750,000 (in *uninflated* dollars) if you're smart and just a bit
lucky. If this idea tickles your fancy and you're not making, like, hundreds
of thousands of dollars a year, I suggest you look first at setting up a
SEP/IRA pension plan. SEP/IRAs let you plop at much as 15% (up to a $22,500
maximum) into an IRA and they're really easy to administer. ( Get more info
at http://www.vanguard.com/.) If you are making the big bucks, you need to
talk to a small-business pension consultant because you may be able to sock
away amounts that make $22,500 seem like peanuts.

From: "Steve Nelson" <StphnLNlsn -at- msn -dot- com>
Sometimes a CPA
Sometimes the writer of relevant books I didn't even plug :-)
Recovering pink-cookie-and-starbucks addict

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