Thursday, July 3, 2008

Cooking the books

Yesterday, I was talking to one of my artist friends who does pottery. And she started talking about how she needed to call up her tax advisor (tax preparer) and ask them some questions. It turns out that because of her new job, she is going to have less time to do pottery this year. So she is considering just cutting back and just making enough pottery to keep her two regular customers (both metaphysical [new age] shops) happy. No more craft shows, no looking for new customers, etc., basically going from a business to just a hobby.

Now, I understand doing that. It is a shame, but I do understand how one's day-job can overwhelm oneself, forcing one's own business to the backburner.

What I don't understand is something that she allowed her tax preparer to do. Turns out that she has been taking every deduction possible, and has not made a profit ever in the seven years that she been running the business, have never made enourgh to pay self-employment taxes, and the IRS might turn out declaring her business a hobby. And why has she allowed her tax preparer to claim every deduction? Because she is always hoping for a refund.

Can anyone say back taxes?

I foresee nothing but trouble here for her. The IRS is a wild beast when it smells the possibility of prying money out of someone's hands.

And this is why I have kept my writing as a hobby for so long. Over the last couple of years, I have claimed the income, but not the expenses; not that it made any difference, I haven't made enourgh to owe taxes even without taking any deductions.

Last year was the first year that I claimed my writing as a business. Why? Because of a couple of things. One, it looks like it is going to be my sole source of income for several more years. Two, the college wants to know why I have no income. And three, even at the end of December, I knew that I was going to have income this year, and there was a good chance that it was going to be more income than last year.

But unlike my pottery friend, I don't have enough income on the table to need a refund (paid no taxes), so I cooked the books. Slightly. I actually did not take all the deductions that I could have. Why? It allowed me to claim a profit which is the IRS line that determines if you are involved in a hobby or a business.

And it is not against the law not to use all your deductions. Otherwise, a whole bunch of writers would be in jail because it is something that most writers do at the beginning of their writing career. Make a hundred dollars and only claim ninety-nine dollars of your expenses out of the hundreds of dollars you spent on supplies and research; it looks like a profit and the IRS doesn't care.

And it is either show a profit occasionally or admit that it is actually a hobby.

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