THE WRITER AND THE TAXMAN

         I bet you are expecting lots of tips about neat write-offs that you can get because you are a writer. Don't hold your breath, please. My first job is to get you in the door with IRS and have your avocation taken seriously. If I fail, your endeavors will be treated as a "Hobby" loss under dreaded Internal Revenue Code Section 183, and your expenses will be limited to the income you earn, if any.

         Over twenty years ago Maurice Dreicer traveled the world collecting information for a book he was going to write. This activity continued for many years. He wrote off these travel expenses. He produced no income from his writing. The Tax Court ruled he was not entitled to his deductions because he did not demonstrate an "actual and honest profit objective." Apparently Mr. Dreicer was wealthy and did not have to work. He used his expenses to reduce his income from investments. Let Mr. Dreicer be a lesson to us. In my trade we have a saying about such write-offs: when pigs get to be hogs, they are slaughtered.

         I will assume Mr. Dreicer is not in my reading audience. I will also note that the Service is scarcely going to bother a writer who has taken in $200 of fees and spent $950 on expenses. The tax collected from such an audit would not be worth the time expended. Yet as more of your time is devoted to your writing and as the money you spend on it increases exponentially, there might come a day when the $950 becomes $2,950 or more. After all there are computers to buy, professional libraries to build and workshops to attend, many in lovely climes.

         "Gosh, I'm in the hole over three thousand dollars on my writing. Do you think I should just call it my hobby and forget about it, or since I made one $300 fee, limit my expenses to $300?" Here I reply,"That's up to you, but let me ask you a question. What would you think if six years from now, you collected a $20,000 advance on a book? What about all those years of struggle and all the expenses you had? They're gone. You won't get any credit for them, yet you will pay tax on your profit from the advance."

         If you answer me that you will never make real money, I will tell you to forget about writing off your expenses. You must have the expectation and objective of making a profit from any activity. You might then ask, "How can I do that?" I will usually tell you my little joke that the people who draft regulations for the Internal Revenue Service must be Buddhists because they are always referring to lists, and here in Regulation 1.183-2(b) we are given a list of facts and circumstances to consider:
                   1. Manner in which taxpayer carries on activity.
                   2. Expertise of the taxpayer or advisors.
                   3. Time/effort spent personally on the activity.
                   4. Expectation that the assets will increase in value.
                   5. Success of taxpayer in other similar or dissimilar activities.
                   6. History of income or loss with respect to the activity.
                   7. Amount of occasional profits, if any.
                   8. Financial status of the taxpayer.
                   9. Elements of personal pleasure or recreation.

         The factors are not considered in this order, or in any particular order, but rather depend on the facts and circumstances of each case. A number of 'professional fishermen' have had their interest declared a hobby because the element of pleasure derived was considered greater than the moneys they could possibly make. The writer who states that he or she writes for therapy, or to pass time and share gifts with others is not going to make a great impression on the Internal Revenue Auditor either. You are permitted to get enjoyment from your work, but it should not be the tail that wags the dog.

         All of us spend significant time on our writing. I doubt that would be a factor in any of our cases, nor is there a reason to discuss number four. I would also argue that numbers six and seven in regard to writing mean little. There are too many stories of sudden discoveries in literature. On the other hand, the financial status of the taxpayer along with lack of profits could definitely make the Service suspicious, Mr. Dreicer being the perfect example. I would point out that Stella Waitzkin, a very wealthy woman who devoted her time to art won her case in court.

         Ms. Waitzkin impressed the judges with the fact that the art world knew her and respected her. Her case illustrates the potential need for expertise. It certainly will be easier convincing the Tax Examiner that you are a serious writer if you work as an editor, reporter or in similar capacity, or have done so in the past. This analogy might be extended to professors or teachers, but once again, all factors are considered. Often when I do a journalist's taxes, a standard story comes up.

         "I took a trip to Tahiti; it cost me $2,800. I wrote a travel story about it. Can I deduct the trip?"
         "How much did you make from the story?"
         "My paper bought it for $300."
         "In my estimation, you should deduct $300."

         My opinion illustrates the workings of personal pleasure versus expertise. I might give a different answer had the person held on to the rights to the story and was attempting to have it published elsewhere, or like one client, made many trips of varying costs and sold many stories.

         There is also something to be said about the manner in which you conduct yourself as a writer. Do you have an agent? Have you tried to find an agent? If not, do you send out queries? Do you attempt to improve yourself? Do you save flattering letters? You should! You want to show that people take you seriously as a writer! Normally when we discuss manner of conducting business, we talk about record keeping, separate bank accounts and the like, but it is my opinion your presentation of yourself is the most important point in being a profit-making writer.

         "EV" was a former editor at a medical magazine. She retired and began to write what I could only say was some of the worst dreck I could imagine. In seven years of knowing her, she had one short piece published. Yet she was invited to and attended famous writers' retreats, and often would entertain other writers at her house. Her correspondence with her agent was voluminous. She would travel to New York to see her also. Her business records were abysmal. She was the literal shoebox lady. The Service audited and questioned her activity. I presented her correspondence, her manuscript and the many letters of thanks.

         The gods blessed her and accepted her attempt to make a profit. Her expertise and business manner trumped her poor record keeping, obvious personal pleasure, and the fact she had never turned a profit. By the way, the fact that she worked for a publisher showed that she could succeed in the activity, which is factor number five.

         So what am I saying here? Simple. If you want to be a writer in the eyes of Internal Revenue, act like that pot of gold is just around the next corner. Don't disparage yourself. But do remember those little piggies who became hogs! Wait until you sell your m/s to plan that trip to paradise.

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The author is an Enrolled Agent, a designation given to tax professionals who qualify by passing a test given by Internal Revenue Service. He is a member of the National Association of Enrolled Agents.