Writing - Business or Hobby according to the IRS?

Tax season is almost over for 2012 but it is never to late to start planning ahead to 2013.  I know this isn’t a very exciting subject but it is a very necessary one.  I am not an accountant nor do I profess to have the knowledge to give tax advice.  What I am sharing below I found on the IRS web site.

I am a new author and have just published my first book.  Unfortunately, since my expenses are more than my income, my writing could be considered by the IRS to be a hobby and not a business.  I know I am in the business of writing books.  I have already sold quite a few and plan to continue selling my books.  It is just like any other start-up business, it will take time for my income to outpace my expenses. 

This is an excerpt from the IRS web page:  "In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit."

To read the full article, visit the IRS web page and read the article entitled: Business or Hobby? Answer Has Implications for Deductions.

The IRS will presumes that my writing is for profit if I makes a profit during at least three of the last five tax years, including the current.  For a new business like me, this means that you don't have to show a profit for your first two years.

If I qualify for this presumption, it means that the IRS (not me) has the burden of proving if my writing is a business or hobby, if the issue comes up in an audit.  One way for me to reduce your chances for an audit, is to file Form 5213, Election to Postpone Determination as to Whether the Presumption Applies that an Activity Is Engaged in for Profit.

Form 5213 lets you officially elect to have the IRS wait until the first five years are up before examining the profitability of your business. Form 5213 should be filed within three years of the due date of the return for your first year in business. However, if you haven't filed the form and you are audited by the IRS, you can file the form within 60 days of receiving the IRS notice, as long as your three-year period has not expired.

Further information is available in IRS Publication 535, Business Expenses

As always, I hope to hear from you.  Let me know if you have any suggestions as to what you would like to see for future posts.