The business of writing is one of the most important topics for authors, but many authors like to ignore its existence. I visited with Steve Laube of the Steve Laube Agency, who knows a thing or two about the business side of writing.

Why should authors pay attention to the business side of writing?

Steve Laube: Any time you’re dealing with money, you’ll be dealing with taxes, the I.R.S., and the tracking of your revenue. And it can be as simple as whether or not your expenses can be deducted as part of your writing life or whether you make billions of dollars, it’s something you have to pay attention to.

Everyone says, “I just want to be a writer.” That’s fine. But if you get paid for it, you have to account for it.

Thomas Umstattd, Jr.: There’s the matter of taxes that you must pay attention to, including deductions. As you mentioned, not every author qualifies for every deduction. Whether you’re considered a hobbyist or a professional author isn’t a matter of your personal opinion when it comes to tax law. If you’re classified as a business, like a professional author, then writing-related expenses—such as attending a writer’s conference, hiring an editor, or paying for a cover designer if you’re self-publishing—can be deducted from your taxes. However, if the I.R.S. considers you a hobbyist, those expenses aren’t deductible.

There’s also a lot of bad advice circulating, like the idea that if you make a profit three years out of five, the I.R.S. will give you a pass. From my understanding—and I’ve spent a lot of time discussing this with my dad, a C.P.A. who has worked with authors for decades—there’s no such “safe harbor” rule. Instead, the I.R.S. looks at nine factors collectively to determine your status. Many people think they have to meet all nine, but that’s not the case. The I.R.S. evaluates them together, weighing each factor.

Factors the I.R.S. Uses to Determine Whether Writing is Your Hobby or Business

You can find the list of criteria at IRS.gov.

Criteria #1: Do you carry out activity in a businesslike manner and maintain complete and accurate books and records?

We begin with the fun topic of bookkeeping. Some authors do it well, and others do it poorly.

What tips do you have when it comes to bookkeeping?

Steve: One of the first things you should do, if you’re serious about your writing and have revenue coming in, is to separate your writing income from your household income and expenses. The only real way to deduct expenses is by accounting for your writing revenue separately. For example, if you’re a teacher with a regular paycheck, and your spouse (if you’re married) also has income, and all that money goes into a single bank account along with your writing income, it becomes difficult to distinguish which part is from your writing, which is from your teaching, and which is your spouse’s income. This also complicates knowing which expenses can be deducted.

When it’s time to do your taxes, whether you’re working with an accountant or using tax software, you’ll be asked specific questions about your income and expenses. Keeping clear, detailed records of everything is essential for accurate accounting.

I have three daughters, all of whom are independent artists, either as dancers or musicians. They’re all involved in the arts. A long time ago, they learned to keep good records, thanks to their dad’s help. Even my daughter, who is a performer, tracks expenses like her stage makeup, which she can deduct as a job-related expense. When she brings all her paperwork to her accountant each year, the accountant always thanks her, saying, “You’ve made my job really easy.” Plus, because she has organized records, the accountant often finds ways to save her money on various deductions.

Thomas: Making your C.P.A.’s job easier isn’t just about maintaining a good relationship with them; it’s also a way to save money. Most C.P.A.s charge by the hour, so if you provide your financial records in an organized and clean manner, they can reach the same results with less effort, ultimately reducing the amount of time they spend—and the cost to you.

Steve: Another common mistake authors make is throwing all their receipts and records into a shoebox and then panicking on April 14th, trying to do an entire year’s worth of accounting at once. Let me tell you, you won’t remember everything, and you’re likely to make mistakes. Ideally, you should do your accounting monthly. If that’s not possible, at least do it quarterly. Make it part of your routine as a writer, especially if you’re earning any income, even if it’s just $15 for an article you wrote in the local paper. If you buy a book on how to write magazine articles, that expense counts as part of your training and is deductible. There are many small deductions like that, and keeping track of them is essential.

Thomas: One tip I always give to authors that makes managing finances easier is to create a separate bank account, which is usually free. Simply go to your bank and say, “I’d like to set up a separate account.” Then, direct all of your writing-related income to that account. For example, if someone pays you for writing an article, and you deposit the check using your phone (which is how most people deposit money these days), you can select the account specifically set aside for your writing business. You should also use this account to pay for any writing-related expenses. By keeping these transactions separate from your personal finances, you simplify your bookkeeping.

While there are ways to untangle mixed finances with specialized bookkeeping software, keeping everything separate from the start makes things much easier. Personally, I use two different bank accounts and two different credit cards. If I’m making a business purchase, I use the business card; if it’s a personal expense, I use the personal card. I’ve found this method to be a very effective way to keep everything organized.

Steve: That’s exactly how I do it for the agency, for the Christian Writers Institute, and even for Enclave Publishing. Each one has its own entity, and each has its revenue and expenses tracked separately from my house, so the household revenue and expenses are not mixed in. It keeps me from having to figure out whether or not that payment was a mortgage payment or rent at the office.

Thomas: Most banks will provide you with at least a debit card when you sign up for a new account. I’m not suggesting you sign up for multiple credit cards, especially if you’re just starting out—that would be overkill. However, if you’re someone like Steve Laube, running six different companies, that might be helpful. For bookkeeping, I personally use two different software programs: one for my business and one for my personal finances. For my business, I use QuickBooks and FreshBooks. I’m not a huge fan of QuickBooks Online, but that’s what I use. If I were starting over, I’d probably choose Xero, as I have many friends who use it and speak highly of it, though I haven’t tried it myself.

For my personal finances, I use Mint, a free service at Mint.com. It’s primarily a budgeting tool, but it’s also useful for bookkeeping. It allows my wife and me to have real-time conversations about our budget. Every time we use one of our cards, the transaction is automatically categorized. For example, a grocery store purchase is added to the food budget. It’s a huge time saver and makes budgeting much easier.

You’ll find a variety of tools for tracking your revenue and expenses. Some cost around $10 a month, while others, like Mint, are free. The trade-off with Mint is that you’ll see a lot of ads, particularly for credit cards, as that’s how they make their money. They use your spending data to target you with these ads. So, it’s up to you to decide whether you want a free service that monetizes your data or a paid service like QuickBooks Online or Xero, where your information remains private.

Criteria #2: Do you put time and effort into the activity to show you intend to make it profitable?

Do you intend to be profitable? I think this is an important topic to discuss because at Christian writers conferences, I often hear authors say, “I don’t care about the money. I just want to make a difference in the world” or “I just want to impact people’s lives.” But that mindset overlooks the value of tax deductions.

I also believe that mindset reflects a non-biblical view of money. It assumes that getting paid for your work somehow makes it less spiritual, righteous, or meaningful when the Bible teaches the opposite. The Bible isn’t silent on this topic. Paul addressed it directly. He referenced an Old Testament passage that says, “Do not muzzle an ox while it is treading out the grain,” meaning the ox should be able to eat from the grain it works with. Paul used this analogy to say that if God cares this much for oxen, how much more does He care for people?

So, yes, it’s not only okay to get paid, but it’s also okay to want to be compensated, both to take care of your family and to further your work. If you’re not focused on making a profit, how will you afford marketing, maintain a website, or cover all the other costs of being a published author?

Steve: Well said. The challenge is that the I.R.S. definition of a business can be very subjective, so you’re somewhat at their mercy when they evaluate your work. They tend to assume that if you’re making any kind of revenue, you intend to make a profit. You can claim that your work serves other purposes, and that’s fine. If you don’t want to make money and prefer to give it away, there’s nothing wrong with that.

However, the I.R.S. is mainly trying to prevent people from using a “fake business” as a way to write off personal expenses and avoid paying taxes. For instance, if your business made $22 last year, but you’re claiming $59,000 in deductions, that would raise a red flag. Their goal is to close loopholes that allow people to misuse business expenses as a tax avoidance strategy.

Thomas: In The Tax and Business Guide for Authors, we discuss several tax court cases involving artists and authors, and this issue of profit intention is a significant one. One famous case involves an artist who created art for 40 years, losing money in 39 of those years—possibly even all 40. Although she never made a profit, she did sell her art and had one big gallery show that brought in a lot of money, though it didn’t cover all her expenses. Despite the losses, the court found her intentions genuine. Simply failing to make a profit doesn’t mean you’re committing fraud.

We contrast this with the case of an author who vacationed in France every summer, claiming he was writing while there. However, his books weren’t set in France, and it was clear he wasn’t there for research. He was simply trying to write off his vacation. Since he couldn’t prove a profit motive, hadn’t been published, and wasn’t seriously pursuing his writing, he lost his court case.

When you examine who wins and loses these cases, it’s clear that you want to model your actions after those who win, demonstrating a genuine effort to profit from your work.

One way to demonstrate that you have a profit motive is by creating a plan. For indie authors, this is called a business plan. For traditionally published authors, it’s called a book proposal, and they’re almost identical. Believe it or not, I had this realization while putting together my first book proposal years ago for a project I submitted to Steve Laube. Interestingly, I had the unique distinction of being rejected by Steve Laube twice on the same proposal.  

While working on my business proposal for my writing, I was also taking an entrepreneurship class in college, where I was putting together a business plan. As I compared the two, I realized they were almost identical. The main difference is that a business plan includes a financial section, which a book proposal doesn’t, while a book proposal has sample chapters that a business plan lacks. Other than that, many of the sections are even titled the same.

A business plan can call for losing money in the early years. That’s exactly what Amazon did. Today, they are one of the wealthiest companies in the world, but for the first 10 or 15 years, they lost money every year. In fact, in the late ’90s or early 2000s, they had a profitable day or month, and Jeff Bezos actually apologized to the shareholders for it. He said they weren’t growing fast enough and promised to fix it, making it clear they wouldn’t be profitable again for several years.

Losing money was part of their business plan because every penny of revenue they generated was reinvested into growing the company. It’s not that they weren’t making money—they were selling books—but they used all of that revenue to keep expanding. Their goal was to become a Goliath in the market, and they succeeded.

Now, Amazon is very profitable, but the profit motive was there all along, even during the years of loss.

Criteria #3: Was the taxpayer successful in making a profit in similar activities in the past?

Thomas: This is where having previous books or articles published can be a big advantage. If you’re a professional editor or author or have written articles that have been published, you can use that track record to demonstrate your success. It shows that you’ve moved beyond being a hobbyist and are now operating as a professional.

What tips do you have for authors to help them demonstrate they have a track record?

Steve: It all goes back to your bookkeeping. If you have records showing your efforts, you can support your case. For example, if the I.R.S. claims you’re running a business, and you’re saying you’re still a hobbyist, you can provide evidence that you haven’t done much in the past but have been building toward a professional career. Attending writers’ conferences, taking classes, and subscribing to relevant resources all show you’re progressing toward becoming a business. The key to demonstrating this is having clear, organized records.

Thomas: From a business perspective, that’s considered research and development. And the government loves encouraging research and development.

Steve: It’s perfectly fine if you’re just testing the waters and say, “It’s going to take me five years to figure out this complex world of writing and publishing.” If you’re attending conferences regularly and taking relevant classes but haven’t submitted anything yet, or if you’ve submitted work but faced rejections, you’re still making an effort. Even if you haven’t made any money yet, they’ll understand as long as you can show you’re actively working toward your goal.

The bottom line is don’t try to game the system and write something off like the fellow who went to France. You can’t book a cruise and write for six hours on one day of your trip and write it off as research. You’re essentially pretending to run a business to avoid paying taxes, using your hobby as a cover.

Thomas: If you want to write off a cruise, a better approach would be to set your book on a cruise. That way, everything you do on the cruise becomes part of your research. You can take notes on the experience, document what the cruise is like, and capture lots of photos to use when writing scenes later. For example, if a character gets shot on the Lido deck, you’ll want a photo of the deck to accurately describe it in your book. This approach is much more legitimate and less of a loophole.

People often enjoy their work, but the fun should be a side effect, not the focus. The key is having a clear profit motive behind the trip.

A Businesslike Activity Authors Should Implement: A Budget

Creating a budget is a key business activity and a way to demonstrate that you have a profit motive. You can plan to lose money in the early years, for example, because you’re investing in research and development, but the plan should also include making money in the future. Budgeting is not only a sound business practice but also an important Christian principle. Jesus spoke about counting the cost and shared a metaphor about someone who started building a tower but ran out of money halfway through. People mocked him because he didn’t plan ahead. Don’t be that person. Count the costs before starting something and create a budget.

Having a budget doesn’t mean you can’t spend money, but it helps you take a broader view. For example, if you decide to attend one writers conference, it might mean you can’t afford to attend another, or if you want to attend both, you may need to do a certain amount of editing work to cover the costs. Budgeting forces you to make these decisions before the money is spent rather than after.

Steve: In other words, be intentional about this business because writing is a business. If you forget the business aspect, you can get yourself in the deep weeds later on because you just weren’t being careful or intentional about it.

At what point does an author need an L.L.C.?

Thomas: When should an author establish an L.L.C. for their writing business?

Steve: L.L.C. stands for Limited Liability Company. The idea behind it is to create a legal separation between you and your business. For example, the Steve Laube Agency L.L.C. is a separate entity from Steve Laube personally. So, if someone gets upset with the Steve Laube Agency and decides to sue for $1 billion, they wouldn’t be able to take my personal assets, like my house. They could go after the agency’s assets but not my personal assets. While an L.L.C. doesn’t offer perfect protection, it does provide an important layer of legal protection, which is one of its main purposes.

An L.L.C. is also a place where you can hold your copyrights and intellectual property. In the event of your death, these assets would pass as part of the L.L.C. to whomever you designate rather than being distributed individually. This helps prevent disputes like “Sally wants the rights to this book, and Charlie wants the rights to that one,” which can create a mess. Look at what happened after the deaths of artists like Michael Jackson or Prince, who died without a will or estate plan, leaving their families to fight over the various parts of their estates. An L.L.C. can help avoid such complications.

Thomas: Compare that to Tolkien or C.S. Lewis, who had good plans. Tolkien granted his son, Christopher Tolkien the authority to manage these copyrights on his behalf. C.S. Lewis did the same thing with his stepson, and they’ve managed those estates well.

When you leave no plan, you’re guaranteeing that the management of your estate will be done poorly. Having a plan doesn’t mean your heirs will execute it, but it makes it much more likely that they will.

Steve: If you have no plan for your intellectual property, which is everything you’ve ever written, what are your heirs going to do with it?

I know of an author with around 70 books in print, and I asked him recently if he had a plan for managing his rights—whether he knew which books were out of print, if the rights had reverted, and if he’d converted them into ebooks. After a series of questions, he admitted, “I have no idea.” I pointed out that he had no plan for the future, and since he’s in his late 70s, it made him realize he needed to start addressing this.

I imagine very few authors have a paper chart or list, separate from their computer, kept with their personal documents, that informs others where their unpublished works are stored. Imagine if you pass away, and your family has no idea about your unpublished works. Suddenly, the estate falls into their hands, and your final book, which you were working on when you passed, becomes a million-dollar bestseller. What about the unpublished works still sitting on your computer? Do they even know what or where those works are?

Think of Harper Lee’s To Kill a Mockingbird. She was at the end of her life when suddenly this sequel appeared. Tolkien had two or three fragmented pieces that have been finished and published under his name.

Thomas: Most books become “orphaned,” meaning no one knows who owns the copyright. This is unfortunate because if someone discovers your book years later and wants to turn it into a Netflix series or republish it, they won’t know who to contact, and they can’t legally move forward without the rights.

For example, my great-grandfather wrote an autobiography, and if I wanted to republish it, I wouldn’t even know who holds the copyright. He has two surviving children in their 90s, but once they pass, the situation will become more complex. His grandchildren could inherit the rights, and as time goes on, 10 or 20 years from now, a dozen or more people might have a potential claim to the rights. It only gets more complicated with time. Current copyright law extends 70 years after the author’s death, meaning it could involve three or four generations of management. If you begin with chaos, it will only grow as each new generation is added to the mix.

What are the downsides of having an author L.L.C.?

Thomas: Depending on which state you’re in, an L.L.C. might expose you to additional taxes.

Steve: Agreed. One of our daughters and her husband tried to set up an L.L.C. in California, but it was so expensive that they decided not to go through with it. The process was difficult, with many hoops to jump through, and they simply couldn’t afford it. I don’t remember the exact cost, but it was several hundred dollars.

In contrast, here in Arizona, where I live, it costs around $50, and all you have to do is take out an ad in a local business publication to announce your business entity. It’s that simple. Every state is different, so before you start the process, research what your state requires. If you’re in another country, like Australia or Canada, you’ll have your own specific laws to follow.

Thomas: I recommend using LegalZoom to set up your L.L.C. They have a step-by-step guide, and they help contextualize it for each state. It’s very affordable. However, they have all of these unnecessary extras they try to sell you that make the price much higher. You don’t need an embossed stamp with your L.L.C. on it. If you can ignore those offers, LegalZoom does make the process a lot easier.

I’ve gone through the process of creating two L.L.C.s—one with an attorney and one through LegalZoom—and I actually preferred the documentation I received from LegalZoom. Many accounting or law firms use L.L.C. documentation that’s been passed down for decades, and I found it outdated. For example, it included instructions for doing board votes via telegram, along with a lot of unnecessary legal jargon and archaic Latin terms. LegalZoom was much more modern and user-friendly. In some of their packages, you can even consult with a lawyer, which made the process very straightforward.

Steve: I’ve created five different L.L.C.s in my lifetime, and once you’ve done it, it’s not that hard. Just make sure you walk through the process and fill out everything appropriately.

For one of the LLCs I created, I included a comma after the business name before “L.L.C.” That comma became part of the official name. Later, when I tried to access information, I left out the comma, and they told me the entity didn’t exist. I insisted it did because I had the paperwork right in front of me, but after five or six rounds of back-and-forth through mail and calls, I finally got someone on the phone who asked, “Did you include the comma in the paperwork?” Turns out that was the issue. It’s a small detail, but it can be that specific, so be careful and keep accurate records of everything you’ve done.

Thomas: We’re spoiled by Google’s search engine. We forget that government search engines are about 20 years behind Google. Even Bing is way ahead of what you get with your local state.  

To find out whether the I.R.S. considers you a business or a hobbyist, check out the remaining criteria from the I.R.S. website.

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The Tax and Business Guide for Authors

In this course, you will learn 

  • 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.
  • Receive an indie business plan template. Learn how to easily create a business plan for your independent publishing business.
  • Learn about a simple tool that will help you make more money as an author while helping make you become more audit-proof.
  • Learn how to start making a writing income even before your first book comes out. Making extra money helps you qualify for tax deductions!
  • Learn whether or not you need to form an LLC. We will also share a cheap and easy way to form an LLC when the time comes.
  • Learn about 19 different tax deductions authors can take advantage of.
  • Learn how to reduce your chances of being audited by the IRS.
  • Learn how to avoid common mistakes that often get authors in trouble with the IRS.
  • Tax court cases for your CPA.  
  • Use coupon code “podcast” to save 10% or click the link in the show notes to activate the coupon code automatically

The course is taught by Tom Umstattd, a C.P.A. with over 35 years of experience working with authors, and his son Thomas Umstattd, Jr, founder of Author Media and host of the Novel Marketing podcast. 

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