I’ve been filing a business write-off on my personal taxes. How do I close out the business on my tax return?
I am a writer who has filed business write-offs on my personal tax return for 5 years as per the law. I have not made profits in those years. I have been advised by my accountant that tax regulations do not favor my continuing to file business write-off because I have not made a profit so should close out the writing business. How do I go about filing my taxes now? Do I just ignore the past years write offs as thought they were never deductions?
July 1st, 2010 at 5:17 pm
Based on the business type you describe, writing, I would say that if you have not had a profit in 3 or more years, you probably lack intent for profit. Therefore, you can consider it a hobby. Hobby income is taxable. Losses from a hobby are not. So what you can do, is indicate your income received from writing on your Sched C and deduct all expenses you earned, but NOT MORE than the total income. This will “zero out” that income, but nothing more. You certainly DON’T want to just leave income off a return, because that’s illegal and will get you into trouble down the road.
If at some future point you DO have a profitable year (for example you sell your first big manuscript), you can then use all the “saved up” extra losses from the years you couldn’t deduct them and use them against the profits in the one big year.
If you have no income from writing anymore, then just DROP the Sched C and not do it anymore. You don’t have to go back and fix the prior years unless you knew that there was no profit motive back then, either.
–A Damn Fine Tax Advisor
July 1st, 2010 at 5:18 pm
As the other poster mentioned, if you have any income from writing, it will need to be reported, regardless of your write offs. Even if you just report the writing income this year without deducting any related expenses, there’s a fairly good chance that you’re going to be audited for one of the prior years. You’re going to need to prove that you had profit motive for operating this business. Truthfully, I think you’re going to have a really hard time proving that your writing was a real business and not a hobby, but that discussion is best left to you and your accountant.
November 6th, 2011 at 3:16 am
Wonderful blog! Do you have any suggestions for aspiring writers? I’m hoping to start my own website soon but I’m a little lost on everything. Would you suggest starting with a free platform like WordPress or go for a paid option? There are so many options out there that I’m completely overwhelmed .. Any recommendations? Appreciate it!