If you’re like many writers, you’re reluctant to call yourself a businessperson. After all, what you do is research and report, not crunch numbers. But Julian Block, a New York-area tax attorney, member of the American Society of Journalists and Authors (ASJA) and author of the “2004 Tax Guide for Freelance Writers, Artists and Photographers,” says if you don’t plan ahead and think of yourself as a businessperson, you could end up paying Uncle Sam more than is necessary.
“Writers often start with the notion that ‘this is all so horribly complicated … how will I ever understand?’ It’s possible to acquire sufficient understanding of the rules so that, if you use a paid preparer, you won’t blindly rely on them to take care of you,” he said.
Let’s face it, there’s a certain amount of the procrastinator in most writers. Block recommends tackling the subject of understanding taxes much as you would a story assignment. “Acquire enough background knowledge so you can assess whether the person you’ve hired has properly filled out your return and taken advantage of breaks available,” he said.
There are many ways to do that, but most involve planning. “It’s not just a matter of getting your return filled out and submitted by April 15,” said Block. “There are steps you can take each year to save taxes in 2004 and get a head start for 2005.”
Ah, yes, but where to start? These darned tax rules and regulations are a moving target. The answer? Get professional help to maximize planning – and savings.
“There’s a common misunderstanding among people who are salaried and desire to be freelance/self-employed, that all they do becomes tax deductible,” said Block. The reality is whether you’re an employee or self-employed, something only becomes deductible because a provision in the law says it is, or because it’s an expense that you incur for business reasons.
Certainly the rules have been liberalized in recent years. Now you can take an immediate deduction for as much as $100,000 of equipment. “Let’s say you’ve left your salaried job to become a freelancer. On the outset, there are modest amounts of incoming receipts and immodest amounts of expenses for computers and other office equipment. Your first year expenses may be more than your receipts.
“The general rule is that Sec. 179 deductions – as they are known in the code – cannot exceed your net profit from writing. If your net profit was $10,000 for the year, your 179 deductions for equipment cannot exceed $10,000,” said Block.
If you or your spouse also has salary from a job, you can qualify for a larger deduction. “For example, Karen’s equipment outlays of $30,000 are for a business with net taxable income of $10,000. She has no salaried income, but her husband does. Because Karen files jointly, she needs just $20,000 of his salary to qualify the business for a Section 179 deduction of $30,000,” Block says.
Other breaks for freelancers include:
• Ability to deduct 100 percent of your medical insurance premiums (including qualifying long-term care coverage) for yourselves, spouse and dependents.
• Allowable operating costs if your car is used for business – gas, oil, tires, repairs, license tags, registration fees, insurance, garage rent, lease payments, parking fees, tolls and depreciation. An alternative to writing off actual expenses is using a standard mileage rate (37.5 cents per mile for tax year 2004) that encompasses depreciation, as well as insurance and other car expenses.
• Writing off a portion of your home expenses if you have a room used exclusively and regularly for your business.
Similar to a lot of other things in life, when it comes to getting tax help, you get what you pay for.
Block, who is no relation to H&R Block, says that mass outlets are good for relatively simple returns. But if your return is simple, you also can purchase the tax-preparation software and use the tutorial, then have an accountant review your return before filing.
If you require advice on planning, then you need to hire someone with more sophisticated financial knowledge, such as an accountant (not necessarily a CPA), an enrolled agent, (someone who has worked for the IRS and passed rigorous testing, but who is not a CPA) or an attorney.
“This will cost more than H&R Block, but you will receive better advice,” says Block. He suggests asking other freelance writers whom they are using.
Avail yourselves of free IRS publications. “You can’t beat the price and they are helpful. Most are written in fairly understandable English.”
Block particularly recommends Pub. 910, “Guide to Free Tax Services,” which summarizes what the publications cover, identifies the many IRS materials and services available to you, and explains how, when and where to get them. They are obtainable by phone (800) TAX-FORM, fax or the Internet (www.irs.gov).
• Don’t wait until the end of the year to assemble your information. Do it monthly. “Keep a running tally of income and spending for business reasons. If you track it as you go along, there’s less chance that you’ll overlook deductions,” he said. Financial software such as QuickBooks or Quicken can make that task even easier.
• Keep a tally of your income so that it matches with 1099s from publishers.
• Sign up for adult-education courses on taxes at your local community college or community education programs.
Spending a bit of time on taxes each month cannot only save you money, but may lead to a better night’s sleep.
This column is not meant as a substitute for financial advice. Please discuss your circumstances with your financial adviser. To order a copy of Julian Block’s “2004 Tax Guide for Freelance Writers, Artists and Photographers,” send $9.95 for an e-mailed copy or $14.95 for a postpaid, printed copy to Julian Block, 3 Washington Sq., #1-G, Larchmont, NY 10538. You can contact Block at firstname.lastname@example.org.
Wendy Hoke is a freelance writer/editor covering small business, education, lifestyle and personality profiles. If you have suggestions for SPJ’s new National Freelance Committee or would like to volunteer, please send your ideas to co-chairs Wendy Hoke (email@example.com) or Dawn Reiss (firstname.lastname@example.org).