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Accounting and Tax Advice for Writers by Mari Ramirez

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Source: http://mgherron.com/accounting-tax-advice-writers-mari-ramirez/

- Self-Publishing – how to handle income and expenses

- Advances and quarterly estimates and how to budget for quarterly estimates

- The way to take advantage of travel expenses and the rules behind travel

- Best way to track writing expenses and what it entails

- Other tax deductions that are usually forgotten

- Difference betweeen LLC, S corporation, corporation, sole proprietorship, and the advantages and disadvantages of each.

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Accounting and Tax Advice for Writers by Mari Ramirez

  1. 1. Accounting & Tax Advice for Writers Mari Ramirez CPA
  2. 2. Differences between LLC, s corps, corporations and sole prop • LLC – just for state purposes; legal protection • After filing LLC docs with Texas, I always encourage people to file for an EIN on irs.gov (apply for EIN). ALWAYS save the pdf that it creates at end of questioning. – If you are single member LLC, you are automatically a sole proprietor, so nothing changes on your tax return except adding the name of your business. – If you are a multi-member LLC, you are automatically a partnership and may require a partnership return to be filed with the IRS. • If you have a LLC, you must file a franchise tax annually with the state of Texas if it is filed in Texas.
  3. 3. Differences between LLC, s corps, corporations and sole prop • S- Corporations: – You would do an election with IRS using Form 2553 and/or you may also have to file form 8832 with it (not complicated forms – no fee) • The benefits of S Corporation: – Can be single Member S corporation. – Less likely it would be audited by IRS comparatively to a sole prop. – Net income of S corps do not have self employment tax associated with it. – Passes to your individual tax return as a K-1 (so it is shown on your tax return and net income is taxed at a federal level. • Disadvantages of S Corporation: – You have to be an employee of your own company; set salary at “reasonable salary”. Some of us like to think that’s about 20% of net income but also depends on industry. – File its own tax return (Form 1120S) but it passes on to you as a K-1 (similar to a partnership).
  4. 4. Differences between LLC, s corps, corporations and sole prop • C- Corporation • The benefits of C-Corporation: – Separate from its owner – Shareholders do NOT manage the corporation • Disadvantages of C Corporation: – It is taxed on its own. Can be between 15% - 35% – Return is filed on its own as Form 1120. – Double taxed if you take dividends • Most CPAs would NOT recommend a c- corp unless you have foreign investors or other big investors.
  5. 5. Self-Publishing expense and other forgotten deductions • Subscriptions: this could be as simple as writer’s magazines to newsletters to research. They are usually small in amount but could add up later. • Agent Fees • Websites • Cell phone – percentage • Outsourcing - 1099 • Insurance
  6. 6. Self-Publishing expense and other forgotten deductions • Research expenses – CD’s, videos, DVDs (electronic or otherwise), tickets to plays & movies for script research. Writers have to keep up with trends in their profession. There should always be some personal – don’t make EVERYTHING in your life research, even though, most likely, it always is.  • Meals and entertainment • Sales tax deduction • Charitable deductions – non cash deduction – Goodwill (donationcalculator.com)
  7. 7. Self-Publishing expense and other forgotten deductions • Self employed health insurance (which includes your children too!) This one is NOT an itemized deduction so you don’t have to itemize to take deduction. • Refinancing points – if you refinance your house • Section 179 and bonus depreciation • Automobile Expense – use your calendar to justify! Don’t forget trips to shopping supplies, driving to libraries, etc.
  8. 8. Home Office Expense • You have 2 options for Home Office Expenses – Simplified: – Multiply the allowable office area by $5. – If there is a loss that year, you cannot take deduction – Max is $1500 – Actual Expenses: – Home office indirect costs – mortgage interest, property taxes, utilities, etc. – Multiply by Percentage of office area vs total home area • Always Calculate Both and Use Higher Deduction!
  9. 9. Travel expense • Of course, if you spend all your time for business, it’s all 100% deductible (except meals & entertainment, which is 50%) • If you spend more than half of your time on business activities WITHIN the US, then 100% of the transportation expenses are deductible (so airfare, baggage fees, etc). Business days must outnumber personal days. On the business days, you can deduct lodging, meals etc. • Travel outside of the US is actually a bit more flexibile. If you travel outside of the US for no more than 7 days, you can deduct 100% of your airfare or other transportation expenses such as train et, as long as you spend part of the time on business. 7 days means consecutive. As for the lodging, meals and other expenses, only on the days you are working.
  10. 10. Travel expense • For more than 7 days outside of the US, the magic number is 75%. If you spend more than 75% of your time on business at your foreign destination, you can deduct 100% of your airfare or other transportation expenses, plus any living expenses while you were on business and any other business-related expenses. • 50%-75%; deduct only the business percentage of your transportation and other costs. Number of business days and # of personal days • Less than 51% on business, cannot deduct any of your costs. • Conventions – 100% expense. Cannot deduct family expense
  11. 11. Retirement deductions • SEP- IRA: max contribution is 25% of self-employed wages (or W-2 if you are a s corp or c corp) OR $53,000, whichever is lesser. • iRA - $5500 contribution limit under age 50, $6500 for age 50 or older • If you put away $5K, each year for 20 years with an annual investment return of 8%, your $100K will be $247K in 20 years (about $194K if you are in the 25% federal tax bracket) • To qualify for full deduction, you must either 1. Not be eligible to participate in a company retiremement plan or 2. If you are eligible, you must have a AGI of $61K or less for single, $98K or less for married. If it’s between $61-71K single or $98-118K married, there’s a partial deduction. If agi is higher than $98K for single or $118 for married, then no deduction at all. • Roth IRA
  12. 12. Employing your children • Depending on amount – you can avoid income taxes. • No Social Security tax when you hire your child who is 17 or younger and you can deduct the salary as a business expense. • ONLY if you operate as a sole proprietor • EXTRA: Have your child contribute to a Roth IRA and create a nest egg
  13. 13. It is NOT a hobby! • The IRS doesn’t allow deductions on hobbies. So, if the intent is to make an eventual living out of writing, you should do most of these items: - Keep business records, either on an accounting software program or on spreadsheets. - Separate checking account for transactions related to writing. (This not only proves business intent, but will make it easier to track income and expenses.) - Attend classes and conferences to improve your skills. - Advertise and network. - Vehicle expenses – log of mileage (calendar works well). - Obtain any required licenses and insurance. - Give your business a name. - Chart future projections and plans to turn the activity into a profitable enterprise.
  14. 14. Organization! • Adding a business bank account (using the same bank as your personal account is probably the easiest) • QuickBooks Self-Employed actually automatically calculates estimated payments. They have a handy feature that has marital status, annual W- 2 income (which you would add spouses if you are married), estimated itemized deductions, etc). At the moment, it’s $5/month (usually it’s $10/month)
  15. 15. Estimated payments • Guide to ES payments : http://www.irs.gov/pub/irs-pdf/f1040es.pdf AGI in 2015: - Itemized Deductions - Multiply 4000 * number of exemptions - Subtract above from AGI - Figure tax using 2015 Tax Schedule - Multiply Tax by 90% - If more than $1,000, required to pay estimated taxes - Divide by 4 for quarterly estimate payments
  16. 16. Estimated payments • The IRS says, you must pay 100 percent of last year’s tax liability or 90 percent of this year’s tax or you will owe an underpayment penalty. If your adjusted gross income for 2015 was more than $150,000, you have to pay more than 110 percent of your 2016 tax liability to be protected from a 2016 underpayment penalty. • If you receive an advance, estimating those expenses and knowing what the net result will be at year end. Typically, I try to tell everyone to SAVE 20% of it for taxes (if there is uncertainty about next checks for rest of year, I would hold off on sending any to IRS unless you know what you are expecting.
  17. 17. Estimated payments • If you make an estimated payment by January 15 of the next year for the last year, and only that one, you can erase any penalty for the fourth quarter, but you still will owe a penalty for earlier quarters if you did not send in any estimated payments back then. If your income arrived after August 31, you can file Form 2210 to annualize your estimated tax liability, and that can reduce the charges. I live by the notion that I would rather owe than have IRS keep my money. IRS doesn’t pay you any interest.
  18. 18. Always remember to talk to a tax advisor or professional if you are unsure of applicability. Any questions?

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