Notes for IRS Recordkeeping 101
By Deborah K. Frontiera
How many cookies can you “snitch” from the cookie jar before somebody notices? It’s tricky knowing how much you can deduct for your writing business without sending “red flags” to the IRS. Deborah K. Frontiera’s daughter, a CPA and her “tax expert”, has taught her a lot over the years about what records to keep, what you can deduct and how much, when you need to fill out 1099s, etc. She’ll share these tips on how to keep all your ducks in a row with interested UPPAA members.
BIO: Deborah K. Frontiera has been a member of UPPAA for many years. While she does not live in the U.P. full time (she still lives in Houston, TX 9 months of the year) that’s where her heart is. Two of her books are entirely U.P. and her book of nature poems is “mostly” U.P. The rest all have at least a “hint” somewhere. She files sales tax in both Michigan and Texas. She’s been UPPAA’s newsletter editor for several years.
Simple partnership with DBA (Doing Business As) or LLC—your choice, but have One of them. Have a separate checking account with your business name on it.
Business Liability Insurance—if you can afford it, it is a good thing to have. The “bigger” you are, the more necessary.
If you do a lot of little things, or you want to see where the most/least of your business income is coming from, then do this. At the end of the year, you can see what you want to work on. Categories can include:
- Wholesale sales
- Retail sales
- Honorariums (from speaking engagements)
- Payment for articles sold to publications
- Royalties received
- Services: if you do freelance editing, critiquing
- “Work for Hire” type things—other than editing and critiquing
- ???? depends on you
Have a column for each item/title you sell or distribute. Record the number of each at the beginning of the year. Columns across the form can include:
- Sent to
- Received from
Total at the end of the year and hopefully reconcile with what you had at the beginning. You’ll also need to figure the retail value of your inventory and the “cost” of what you have on hand.
Columns may include:
- Cost of sales/production
- Bank fees
- Computer expenses and supplies
- Internet access
- Interest expense
- Membership dues and subscriptions
- Mileage (at end of year)
- Office supplies
- Parking and tolls
- Postage and p.o. box rent
- Printing and reproduction
- Supplies other
- Trade show
- Travel (motel, air fare, bus tickets, etc.)
- Legal fees
- Royalties paid out
Damaged, lost, stolen books are reported under Returns/Discounts/Allowances at their full retail price! You were “deprived of any income” from that book. Books given to organizations for promotion/advertising/review are deducted under “advertising” or “contributions” also with full retail price. Pay Pal fees, credit card swipe fees, etc. are “bank fees”.
Home Office Expenses:
Mortgage payment, home insurance, utilities (water, electric, home security, heat), telephone, internet, property taxes
Figure the total square feet in your home. Figure the square footage of your office area—separate room or “separated space” in another room. Office Sq. Ft./divided by total = percent you use for all. Total of each expense for year X % = deduction for that part.
A notebook for clip board IN YOUR CAR/TRUCK should include these columns:
- Odometer beginning
- Odometer ending
- Total miles for that trip
Total all the miles for a particular calendar year and multiply times the rate the IRS is allowing for that year. (2015 was around $ .58)
This is MUCH easier than keeping track of all the individual purchases of gas, oil changes, repairs, insurance, etc.
I YOU receive the money from the customer, it is a retail sale and you MUST report/collect sales tax. GET appropriate forms from your state and KEEP IT WITH YOU whenever you do retail sales.
Keep it simple: have a little sign displayed that reads: Sales Tax Included in the Price. Round your book prices to the nearest dollar—keeps from having to give out pennies, nickels and dimes and quarters.
At the end of a sale, take total of money brought in. Total X .94 = Retail total. Difference between that and the total is the tax you collected. (MI is 6%, hence the .94 above, or whatever the rate for another state). Track and file monthly, quarterly, yearly according to the requirements of a particular state.
Discounts: If your retail price is $17.95, and you decide to sell books at a festival for $15, then 2.95 X number sold = total discounts and you put the amount in the appropriate column of your expenses.
A book store, distributor, gift shop, etc. is the entity taking in the money, the amount you receive is a percentage of the price: this is a WHOLESLAE and you do NOT collect or report sales tax.
To 1099 or not to 1099:
If you pay over $600 to any one person or vendor for services, fill out a 1099 for those entities at the end of a calendar.
E.I. N. Vs. Social Security Number:
If you are still pretty small, you can continue to use just your social security number. If you begin to have substantial income from your small writing business, there are tax advantages in having an Employer Identification Number (EIN).
In all the years I’ve been selling at festivals, I’ve only been asked ONCE to show my Sales Tax form. But I met a vendor in Texas who said he didn’t have one, was asked to show it and was FINED $250.00 for not having one on site!
The odds of being audited are small—because we are all not small businesses but tiny ones, in IRS terms and not worth their time—but it is possible to be selected randomly. If you get audited: Make sure you have receipts for EVERYTHING you claimed as a deduction for that calendar year.
Big Red Flag:
LARGE losses several years in a row—out of proportion to your income.