Why?Well, during an audit you will have to substantiate your income and/or expenses to the IRS. Yes, it is actually possible, even legal, to start your writing business without any income and claim your expenses. We’ll talk more about this in a later blog and why and when this would make sense.
Regardless the circumstances tax payers must always be prepared to justify what is listed on their federal (and even state) income tax return. For most tax payers much of what is on their federal income tax return can be computer verified because the IRS requires entities such as employers and financial institutions to report their transactions that are listed with your Social Security Number (SSN) in advance of individuals submitting their income tax returns for processing. This means that when a tax payer receives a Form W-2, the information contained on this form has already been electronically sent to the IRS. The same is true for interest earned from banks, mortgage interest paid to banks, etc. This is third-party verification so at the IRS has a greater level of confidence that the information is correct when any tax return is filed and the numbers match up.
With a Schedule C (Form 1040) this is not typically the case. It is true that some income is reflected on Form 1099-Misc and indeed most published authors do receive Form 1099-Misc from their publishers or companies such as Amazon if they self-publish, but not all income received by writers is documented via this form. There are cash transactions such as when writers receive money for speaking engagements, or the cost of attending a conference is waived in exchange for speaking, that are below the Form 1099-Misc reporting threshold. Writers also sometimes sell copies of their books outside “normal” channels and may even receive cash when they do so and writers are obligated to report these cash transactions to the IRS when they prepare the federal income tax. These transactions should also be reflected in their yearly record keeping of their writing business.
It’s critically important to keep thorough records of any writing business related expenses that occur throughout the year. There is no third-party verification of expenses deducted on a Schedule C (Form 1040) that is sent to the IRS so the only way that the IRS can truly verify that your expenses are legitimate is to actually conduct an audit of your books – no not the ones you publish, but the ones you keep to record income and expenses.The Burden of Proof is on the business owner to prove income and expenses. To better understand what this means the following is included from the IRS website:
BURDEN OF PROOF: The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them. Generally, taxpayers meet their burden of proof by having the information and receipts (where needed) for the expenses. You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses. Additional evidence is required for travel, entertainment, gifts, and auto expenses.
For more information on record keeping refer to IRS Publication 583, Starting a Business and Keeping Records which is a must read for all writers who have started or will start their writing business to understand what the IRS requires when creating a record keeping system.Just wait until we talk mileage records and what counts and what doesn’t as business miles!